Gold and the Value of Money

 

Hello there, this is tradingpedia.com and we continue our series dedicated to gold from where we left. Gold as an investment shows how gold performs against the important currencies around the world (JPY, CNY, INR, CHF, CAD, AUD, GBP, USD, EUR). Gold gained 10.3% on average every year since 2001, so in the last 20 year.

The Power of Gold as an Investment

If we consider that after the month of May 2020 gold made a new all-time high, then it tells you much about the power of gold as an investment. This is a very interesting argument in our series dedicated to gold as we made the transition from gold as an investment to gold as a hedge against inflation.

Gold is a hedge against inflation, and this is why investors favor gold in a portfolio. Rarely you have one year when gold underperforms fiat currencies. As you can see, there are barely a few red months when that happened.

The Value of Money

The value of money is a very important concept also used in finance – it refers to what households prefer to do with their money. For instance, when households earn their income, one part is consumed today, and the other part is being saved for future consumption. Also, if you want to take a loan then you will pay interest for it – the cost of money. But if someone proposes to you either a million dollars today or the same amount but in tranches, most people will choose the million dollars today because the value of money differs in time.

The same is valid to gold and inflation relation. The value of money differs or changes in time. One dollar in 1970s had one value, one dollar today has another.

As we see in this table, these are facts, not inventions. Both the EUR and the USD, in two decades lost on average 10% a year. Therefore, in order to avoid such a depreciation, you will need exposure to gold.

Therefore, adding gold to a portfolio is one thing to diversify it. But also, if the household earns in one currency, say, dollars, then many households choose to invest some dollars to buying gold, and this table shows why.
Because of it, the disposable income decreases by as much as the currency depreciates. Gold protects against such depreciation, offsetting it.

This chart shows how gold performed when compared to other fiat currencies. We much give credit here to Incrementum for this chart and others used in this presentation. These are some fiat currencies since 1900. We see here the Deutsche Mark, the Reichsmark, the Euro represented by the ECU – all lost in value against gold.

What is the most valuable fiat currency? If we look, the Euro seem to the one. As you can see, the world changes quite fast. We can look back at the Deutsche Mark, the Yen, the Reichsmark, but there is one gold than stood the test of time.

Conclusion

I would like to end this video with mentioning that all examples used here are meant to be simple, so that everyone understands how to use gold in a simple and efficient way. It does not mean an endorsement of gold. It only has educational purposes so to understand simple concepts about investing in gold.

Have a great day – bye, bye.