How Is Physical Gold Protecting Your Wealth?

In a recent editorial, Julian Phillips (GoldForecaster) analyzed how physical gold is preserving purchasing power. Basically, it is all related to the fundamental objective of currencies which were meant to protect wealth.

Outside the reach of the U.S. dollar lie a host of currencies all founded on the same principles as the U.S. dollar. Each of them displays different and variable values, but currently each –before the coming changes to the global monetary system –are in some way dependent on the U.S. dollar. How? Well, in today’s world as U.S. interest rates started rising, the prime impact of this interdependence was seen in the “Carry Trade’s” activity. Traders (primarily the banks) have taken advantage of the low European and U.S. interest rates and borrowed in either the euro or the dollar and invested in the emerging world at very much higher interest rates. Provided Euro and dollar interest rates stayed low, and emerging world interest rates remained high, the profits were easy and reliable. The danger in such trades is the changeability of exchange rates. If emerging nation exchange rates fell then profits are wiped out quickly.

This is where the monetary benefits of gold come into play. “Locals usually have access to local gold markets without going through banks. Where they use banks they have a reasonable pricing of gold too, unless the government imposes taxes or duties. In general, gold is free of taxes such as VAT, so it can act as a currency hedge, particularly against your own currency.”

The monetary aspects of gold are being rediscovered in a growing number of countries. Julian Phillips points to India and South Africa as two primary examples:

  • India saw its gold price 2 years ago at Rs.71,350 when the Rupee cost Rs.44.08 and the dollar price of gold was 22% higher than today at $1,618.65. Today, with gold lower at $1,324.35, in the Rupee it is now Rs.80,136 12.3% higher and the Indian Rupee  at Rs.60.375 against the U.S. dollar.
  • South Africa saw its exchange rate falling against the U.S. Dollar in the last nine months. It has gone from R6.80 to R9.9 (a 46% rise in income to the mines there) against a fall in the gold price of 24%. This translates into a gold price rise of 22% in the Rand.

That is exactly how gold offers a hedge against local currency depreciation even with a falling gold price! It is this function to which analysts and experts refer when they talk about gold’s historic role in preserving wealth and purchasing power.

Make no mistake though. These two countries are not the only ones to reflect this wealth protection facet. “The buying power of all currencies when taken back in time reflects a massive fall. When a country targets any level of inflation they are targeting a loss in buying power, and this is what gold protects against over the long-term.”

Receive these articles per e-mail

Subscribe for the free weekly newsletter and receive 3 papers about physical precious metals investing