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Why gold is the original inflation buster

gold bars

Glint’s chief business development officer Mel Ragnauth explains how gold protects your money from inflation and how it can help grow your wealth

Money is being debased now more than ever in history. RPI inflation is running at 4.1%, but certain elements of the inflation basket, particularly food prices, are rising much more quickly than that.  Holding savings in the form of gold offers protection of purchasing power in a way that cash does not.

In a nutshell, this is because gold will retain its value during the good times and increase in value during the bad times as people rush to a safe haven.

Out of the vault and into your hands

For the last 7 years, financial assets have performed extremely well and gold has declined in value – it’s been in a ‘bear market’, while shares have been in a ‘bull market’. However even during this period, saving monthly in gold, you would have been no worse off than holding cash.

In the current low interest rate world, savers need to find a way to fight the effects of price inflation. Inflation is an incredibly elusive concept. On one level, it is fairly simple to understand: As the amount by which the cost of goods and services rises over time. But on another level it is very difficult to pin down, this is because cost rise at different rates and inflation generally happens gradually, often in fits and starts.

I remember that in my childhood I used to buy a packet of crisps for 10p. I know that the same packet of crisps costs roughly £1 now. However, I’ve no idea what the price of a packet of crisps was last month or last year. Because we don’t ‘feel’ it everyday millions of people, through no fault of their own, do nothing about it. This means they are leaving their hard-earned savings in bank accounts which pay interest at less than the rate of inflation. As a result this money is eroded little by little everyday.

Searching for an Inflation Buster

In an environment where money is devaluing due to inflation people have moved their money into assets such as property, stocks in companies or fine art. But all of these assets are illiquid, meaning they cannot be used as money.

There is one hard asset that is both a hedge against inflation and can be used as money: gold. It is real and it is scarce and, over time, it protects you very effectively against the negative impact of inflation. Gold was used over the centuries as money for just this reason and now it has been reintroduced as the global currency by Glint, who have made it possible to spend gold anywhere in the world via the global electronics payment system (full disclosure).

Reliability in uncertain times

As I mentioned though, gold has been in a bear market, despite this though you can still benefit from it by saving regularly into gold. Although the gold price does move, the regular saver can smooth out any volatility by moving money each month into gold. This means you’ll be able to build up a secure savings pot in something that has always kept its purchasing power and that will retain its value whether you spend it next week, next year, or pass it on to your children or grandchildren.

Out of the vault and into your hands

To illustrate this we have looked at how you would have fared if you saved £100 per month into gold from the date of the market peak in August 2011 until now: the period of the gold bear market.

As you can see in the graph below, even during a seven-year bear market, making regular savings in gold would have kept pace with making regular savings in cash.

gold sterling

In the graph above, we have picked the worst possible point to start saving. Any other point you could choose, going back as far into history as you would like, gives you a better outcome! Even though it has been in the doldrums, saving regularly in gold has been as effective a store of value as saving in cash.

What if you took a different period? To show how gold can out-perform cash and other assets, look at what happens when we widen out the timescale to include a crisis.

Below we have looked at the same chart, but now going back 20 years. Again, this chart assumes that you invest £100 into gold per month, every month, regardless of price. This time, instead of having £24,000 in cash, you would have £50,000 worth of gold.

gold over 20 years

So not only does gold keep its value even if the gold price isn’t doing much, but it also out-performs cash in the long-term: by more than double in the last 20 years. It’s the original inflation buster, because as cash gradually erodes in value over time, gold maintains its purchasing power, making it the perfect long term savings vehicle.

If somebody told you that you could save your money into an account which has increased by more than 8% per annum on average for the last 10, 20 and 50 years, then I am sure you would be interested.  Well, that is exactly what gold, the inflation buster, has done.

Mel Ragnauth is the the chief business development officer of Glint

Out of the vault and into your hands