Even after adjusting for inflation, gold has done its job as a store of value

Personal Finance / analysis

Over the long run, gold still holds its purchasing power value, outstripping inflation in NZ dollar terms. But it can cost money to hold it, it gives no income, and converting it back into local currency comes with costs too

26th Oct 23, 1:05pm by David Chaston

With the gold price approaching US$2000/oz, investors who have had the traditional commodity in their portfolio for some time will be quietly satisfied.

For New Zealand investors, the satisfaction will be double because the declining local currency has pushed this value up to a record high.

But the nagging question is; is this keeping up with inflation?

It needs to because gold costs [fiat] money to store, and holding gold delivers no income. The only advantage is the gain in the price (just as the key 'cost' is the fall in the price). After inflation, gold is not at a record high for New Zealand owners.

Things have turned out relatively well for long-term New Zealand gold holders, just perhaps not as well as they might have assumed, when Consumer Price Index inflation is also taken into account.

The chart above tracks the gold price in NZ dollars on a daily basis, revealing the relative volatility in the price. That volatility can be enhanced by the exchange rate, although the gold price in US dollars can also be volatile especially when the US dollar is weak.

Stepping back from that volatility can also be useful.

	CPI		NZD gold price		Inflation-adjusted gold price
Reference dates	Index	change	NZD	change	NZD	change

24-Oct-23	1253	62%	$3,366	465%	$3,366	249%
06-Oct-22	1186	53%	$3,029	409%	$3,200	232%
18-Aug-20	1047	35%	$3,042	411%	$3,641	278%
24-Oct-18	1024	32%	$1,895	218%	$2,318	141%
24-Oct-13	968	25%	$1,611	171%	$2,085	116%
04-Jul-11	944	22%	$1,797	202%	$2,386	148%
24-Oct-05	793	2%	$661	11%	$1,043	8%
03-Jan-05	774	0%	$595	0%	$964	0%

Over the past year, the gold price in NZ terms has risen almost twice as fast as inflation, proving it has been an inflation hedge in that period.

Over the past five years, the gold price in NZ terms has also risen twice as fast as inflation, again proving it has been an inflation hedge in that longer period.

Over the past 10 years, the situation has been the same. But if you held gold for an even longer period you have done very well - but the gains (like the earlier ones) will have all been unrealised if you didn't sell. And you may have had holding costs.

This analysis isn't comparing gold with other alternate asset classes, although most other non-financial asset classes come with varying degrees of liquidity risk, which doesn't apply to gold (it can readily be sold, even if transaction costs are often steep).

The charts below do not adjust for inflation.

Precious metals

Select chart tabs

Source: Kitco

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29 Comments

by Ollies1 | 26th Oct 23, 1:24pm 1698279896

Notice the two obvious spikes around GFC (2008) and Covid (2020). I find it bizarre that people find security in a shiny bit of metal during times of economic uncertainty, but I guess the numbers don't lie! (But perhaps they expose a shared delusion us humans have about the real value of things)

by rastus1 | 26th Oct 23, 2:12pm 1698282729

Oh dear, what a comment.

by huttman | 26th Oct 23, 2:47pm 1698284842

wake up and smell the roses. the money can be printed as long as central banks wish, but no one can magically create as much gold.

this is not gold more valuable, this is when money is worth less than yesterday.

by J.C. | 26th Oct 23, 1:58pm 1698281895

Nicely done David. Probably a good place to start with comparisons is gold vs cash. F'more, the CAGR does match that of NZX50 over the longer term - even from 2005.

Now, over to Mike McGlone.

Gold Giving Ground to Digital Alternative as Bitcoin ETFs Emerge - Declining holdings in exchange-traded funds linked to gold vs. the rapidly expanding Bitcoin network and soon-to-be-launched US spot ETFs may signal that the digital asset will replace bullion. Our bias remains bullish on the metal, notably in the case of a US recession, but Bitcoin's recent divergent strength vs. stocks and bonds exhibits maturation and diversification.

@BBGIntelligence

by Zwifter | 26th Oct 23, 2:15pm 1698282947

Bitcoin is useless mate at least gold is used extensively in industry and its a vital component in the semiconductor industry which makes pretty much everything around you work. Bitcoin could disappear tomorrow and most people wouldn't even notice its gone.

by J.C. | 26th Oct 23, 2:49pm 1698284976

You're going to have to relay this insight to Mike McGlone, senior commodity strategist for Bloomberg Intelligence who created their commodity dashboard BI COMD.

On gold for industrial purposes, l recommend Sumitomo Metal Mining. Used to own it. You could only buy it in lots of 1000 share units. Not a stock purchase for pretenders.

by Zwifter | 26th Oct 23, 2:50pm 1698285011

People that are pro the Bitcoin Ponzi have already joined the cult and have vested interest in spruiking it to its final death. Please don't compare Bitcoin to Gold, its just embarrassing.

by J.C. | 26th Oct 23, 3:11pm 1698286316

I didn't. I quoted Mike McGlone. It's his comparison. Mike is bullish on gold.

by Baywatch | 26th Oct 23, 3:05pm 1698285902

1.31 trillion and no one would notice...geez mate you need to stop embarrassing yourself over and over.

by Baywatch | 26th Oct 23, 3:09pm 1698286199

Bitcoin is digitally native, unlike gold and cash. Gold and cash can only be transacted with offline, unless they are willing to rely on a trusted/centralized third party (at which point they lose the property of being self-custodied and censorship-resistant). Bitcoin can do that online and across borders. It’s a digitally-native money-like bearer asset.

That’s why it’s so polarizing. At first glance, Bitcoin and other cryptocurrencies seem silly and without intrinsic use. But when you go down the list of attributes and compare bitcoin to fiat currencies, it is better in most ways other than volatility. It has no industrial use, but the simple concept of a wide network effect of uncensorable transactions wrapped around its strict monetary policy with no leader, makes it an interesting form of global internet money that has rapidly grown in value since inception. It reached 100 million users faster than the internet or smartphone usage did, and became the fastest asset in history to touch a $1 trillion USD market capitalization from inception. https://www.lynalden.com/gold-and-bitcoin/

by J.C. | 26th Oct 23, 4:01pm 1698289266

Good explanation and reference. But this is wading into unchartered territory for normies. It's not necessarily easy to rationalize.

by Lanthanide | 26th Oct 23, 6:01pm 1698296517

100 million users eh?

What's your definition of a user? Is it a bitcoin wallet? Because many humans have multiple wallets. There are also many automated systems that create wallets for short term use and that aren't necessarily associated with any human.

Is a "user" someone who actually transacts with bitcoin, or merely someone who owns at least 1 satoshi?

by Gold Kiwi | 26th Oct 23, 6:04pm 1698296652

Little industrial demand is one of the reasons why gold still makes good money and silver doesn't make good money (in the industrial age). Gold has close to zero industrial demand (as a percentage of its total demand), since other modern materials can be substituted for it. In a major financial crisis (bigger than 2008), central banks could simply revalue their gold holdings at $50k/oz (or whatever number fits) to cancel the debt and it would have no detrimental effect. In fact, the euro currency was designed with this possible scenario in mind. As to how they'd do this, they could simply announce that the ECB will buy gold on market at $50k/oz and that then becomes the market price.

The ECB recommends that all eurozone countries hold at least 15% of their official foreign exchange reserves in gold and the ECB has a claim on this gold The ECB's claim on the gold reserves of the eurozone countries is set out in the Treaty on the Functioning of the European Union. Article 283 of the Treaty states that "the Member States whose currency is the euro shall hold for the account of the ECB a minimum of 50% of their gold and foreign exchange reserves." The value of this gold is marked-to-market on a quarterly basis and appears on line one on the ECB's balance sheet.

"German Central Bank Doesn’t Rule Out Gold Revaluation"

https://thegoldobserver.substack.com/p/german-central-bank-doesnt-rule-…

by Gold Kiwi | 26th Oct 23, 5:41pm 1698295319

One big problem with gold in NZ is when you sell it, you're taxed on the nominal gain at your individual income tax rate, even if the real gain is zero. Just making up some numbers here, but let's say you invested $50k in gold bullion. After several years of high inflation, you then sell the gold for $75k. Even if the real gain is zero (that original $50k is worth $75k in today's money), the IRD expects a cut of that $25k nominal gain, so you could in effect end up with a real loss due to the income tax. In countries with a capital gains tax, the capital gains tax rate is usually less than income tax. In Australia, you get a 50% CGT discount if you owned the asset for more than one year.

by J.C. | 26th Oct 23, 5:59pm 1698296352

In Aussie, PMGOLD is treated as a “CGT asset”. The CGT asset is the option itself and not the Underlying Parcel (that is, the gold). Therefore, no tax is payable on physical settlement. On cash settlement, yes. But it can be optimized as non-resident.

by Gold Kiwi | 26th Oct 23, 9:09pm 1698307792

PMGOLD might fall under the same category as the "units issued by an Australian mint" referenced on page 9 of this document:

https://www.taxtechnical.ird.govt.nz/-/media/project/ir/tt/pdfs/questio…

by Lanthanide | 26th Oct 23, 6:00pm 1698296457

That's fine, but as the graphs in this article show, gold has increased in value by a fair bit more than inflation, over a decent number of years.

by Gold Kiwi | 26th Oct 23, 6:09pm 1698296988

But as the article also points out, the gain isn't so rosy if Consumer Price Index inflation is taken into account. I expect stocks would perform much better in that respect. I still own some gold in case the shit really hits the fan.

by J.C. | 26th Oct 23, 6:38pm 1698298698

CAGR since Oct 2007

Gold - 8.9%

NZX50 - 7.7%

by Gold Kiwi | 26th Oct 23, 6:45pm 1698299105

Thanks, now deduct 33% income tax on your gold "profit." No tax on the NZX50 capital gain.

by J.C. | 26th Oct 23, 7:16pm 1698301013

Thanks, now deduct 33% income tax on your gold "profit." No tax on the NZX50 capital gain.

There is no "income tax" on gold.

If you're talking about CGT, then it will depend on factors suggest as jurisdiction, etc. For ex, CGT on PMGOLD held in Australia as non-resident and held for >12 months is 14%.

by Gold Kiwi | 26th Oct 23, 8:08pm 1698304136

https://www.taxtechnical.ird.govt.nz/-/media/project/ir/tt/pdfs/questio…

by CN - new | 27th Oct 23, 12:34pm 1698363267

Thank you for sharing. Very interesting.

What is the relevant taxing provision?

Section CB 4 provides that: CB 4 Personal property acquired for purpose of disposal

An amount that a person derives from disposing of personal property is income of the person if they acquired the property for the purpose of disposing of it.

Amounts derived on the disposal of gold will therefore be income under s CB 4 if the gold was acquired for the purpose of disposal.

All that is required is that the property be acquired for the dominant purpose of disposal.

In most cases, gold purchased in bullion form will be purchased for the dominant purpose of disposal

For example, describing property as being acquired as a long-term investment, a hedge against inflation, for portfolio diversification, or as a store of value outside the monetary system is not sufficient to negate a dominant purpose of disposal. The person’s underlying motive should not be confused with their purpose. The key question is whether the person’s objective in acquiring the gold is to be achieved through a course of action that will involve disposal at some point, such that, as a matter of fact, the person’s dominant purpose is one of disposal. If a taxpayer asserts that they did not acquire gold bullion for the dominant purpose of disposal, the onus is on them to satisfactorily show that.

by Gold Kiwi | 26th Oct 23, 8:17pm 1698304635

As far as Australian CGT goes, non-residents only have to pay CGT on "Australian real property," which includes real estate, mining rights and leasehold interests in real property.

by Gold Kiwi | 26th Oct 23, 8:19pm 1698304746

The same applies to "temporary residents," which includes New Zealanders living in Australia on a special category visa, which is what you get automatically when you enter Australia.

by Audaxes | 26th Oct 23, 8:58pm 1698307120

Gold: The Collateral of Last Resort

by J.C. | 26th Oct 23, 9:33pm 1698309233

Yes indeed.

Quote:

"The financial system, which had evolved over five decades to rely on unsecured funding, was suddenly forced to have an existential level of interest in collateral. The problem was, and remains, that there was hardly enough collateral to back the funding that supported the level of economic activity that then existed, let alone the sustainable expansion of it."

by Adam B NZ | 27th Oct 23, 10:51am 1698357102

Given the current state of the global economy and deteriorating geopolitical situation, Gold should be a crucial part of any investors portfolio in my opinion.

by BlackKrim | 27th Oct 23, 2:59pm 1698371953

Gold is tangible- you can hold it in your hand. It will become increasingly more difficult to mine and refine as it is a depleting resource. Also, as energy demands spiral (upwards) don't expect that there will be much more produced if spot price doesn't not go up accordingly, there won't be if the margins available for the businesses that do it!. So, with monetary expansion going on, why wouldn't you hold some in a portfolio? BTC might be a speculators dream (and ultimately are still a bunch of zeroes and ones), precious metals I believe should be viewed as INSURANCE.

I expect at some point there will be either a huge increase in the premium, or spot price HAS to follow suit.