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Gold and currency depreciation

Over the last two decades, essentially, since the ‘Brown bottom’,(a reference to Gordon Brown, the UK chancellor who took the decision to sell off most of the UK’s gold reserves at the historic low price) of the gold market in 2000, gold has had a strong upward bias in every currency.

While some of the yearly changes reinforce the perception of high volatility in this asset class, the average return and more importantly the annualised return are surprisingly constant across different currencies. You can make a clear observation that for developed countries’ currencies, the gold appreciation is around 8% p.a., while emerging market currencies, favour considerably more.

While stock markets have seen two significant crashes, (2001-2003), (2007-2009), in the last twenty years, gold has really only suffered one, in 2013. This has been an era of consistent monetary expansion, driven by the ‘maestro’ central bankers of Greenspan, Bernanke and Yellen and their counterparts throughout the world. Whether it was the Y2K concern, the internet bust, the great financial crisis or general debt accumulation, the excuse by the authorities to supply money at declining interest rates, zero rates and action bond purchases has been non-stop. It should be seen, as no surprise that the real reserve currency of the world, gold, restricted by physical capacity to mine rather than merely print, has risen in this time. Of course, a better way of looking at it, may well be that all currencies, continually oversupplied by desperate central bankers, are losing their value and continue to do so.

An interesting analysis that the table suggests we should demonstrate is to show the average gold appreciation/currency depreciation for developed markets by a linear slope line at the average 8.2% yearly rate, measured against the actual increase/decrease in that currency.

If we look at Gold in USD versus the average growth of 8.2% we can see that it has been above the average line for much of the long period, significantly so in the 2010-2013 time frame and currently is slightly above the line reflecting the actual average annualised rate of increase for the USD as 9% rather than 8.2%.

If we look at all the currencies in the same way on a single chart, we can make assumptions that currently gold in CHF, AUD and EUR is ‘cheap’, while gold in GBP terms could be considered ‘rich’. We can also see how much more tightly gold in AUD and CAD terms, (the other dollar currencies), hug the average line, compared to gold in USD terms.

Finally, the most important observation for gold in every currency term is that it is clearly either cheap or fair to the long-term average growth rate of 8.2%. The hugely expansive monetary policy that has been in place globally since 2000 continues to be with us, in fact, with GDP slowing across all economies, with debt increasing at never before levels outside of world wars, this low interest rate policy appears to with us forever, as we edge towards the next global crisis. Gold remains an obvious choice to guard against currency depreciation in whichever country you reside and an insurance policy for when the crash happens. Unfortunately, time is running out. Protect your wealth by purchasing gold via Glint.