The Gold Bug – tezbid

The Gold Bug

Posted by Amit Bhandari on

Zimbabwe, 100 Trillion

One of the first banknotes I picked up as a collector was the 100 trillion dollar banknote of Zimbabwe – practically worthless when it was printed; this note is now valuable as a collectible. This note is the best known instance of hyperinflation in the twenty-first century. While an outlier, the 100 trillion note highlights a major risk of fiat money – loss of value – which is far more common than we think. This note also helped me appreciate the traditional Indian love for gold – often criticized by economists and finance professionals. I also have in my collection gold and silver coins which are over 500 years old – and continue to hold their value.

Last week, Egypt ‘devalued’ its currency by nearly 40% against the US dollar – in other words, the Egyptian pound lost 40% of its value. In addition to higher prices, this is also a big hit to savers and investors – who will see a large part of their assets wiped out, overnight. Such one-way movements in fiat currencies are quite common. In December 2023, the Argentine peso was devalued by 54% against the US dollar. These devaluations were just reflections of market reality – the currency had already lost its value, the government acknowledged it after a long gap. In countries such as Pakistan and Turkmenistan, the official exchange rate is a farce. A large number of governments around the world feel that they can dictate exchange rates. When reality hits, savers and investors suffer.

Gold, Sovereign, Coin

The other big risk for savers is inflation – the Turkish lira for example, has lost 80% of its value against the US dollar over the past five years. Many of the advanced economies including the US and Germany have witnessed 8-9% inflation during 2022-23. The US Government has outstanding debt of $34 trillion – chipping away at this number steadily via inflation is always a temptation. This was the usual experience for Indian savers during the 1970s and the 1980s, when inflation was routinely in double digits. Holding gold was a much better bet than keeping money in the bank – where it would get taxed twice – inflation and income tax on interest income. Gold is immune to inflation and governments and central bankers hate it.

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