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07 April 2021

Savings & Gold

Savings and Gold
By Dane Viljoen, Troygold 

I am shocked by how government intervention and the sheer size of government have grown in the last 15 years. South Africa is no longer a potential capitalist miracle, as I had hoped it would be, along with places like Hong Kong, South Korea, Singapore and others.”

This might sound all too familiar – a common condemnation by many of today’s pundits, lamenting the ruling party’s inability to deliver, specifically on economic growth, since the turn of our democracy.

This, however, is an excerpt from a newspaper article detailing the visit to South Africa of famed economist, Friedrich von Hayek, in 1978 – some 41 years ago, when apartheid was in full force. Today, 25 years into our democracy, much the same can be said

Back then, roughly R250 could buy you an ounce of pure gold.. today, you’d need about R25,000, a loss in purchasing power of about 99% in the South African Rand.

So how does this happen? And what should you be doing to protect yourself and your wealth?

Savings, Investment & Production
Savings form the cornerstone of a growing economy. To elucidate, let’s consider the following analogy…

There were three men on island, namely Adam, Bob and Charlie. All three men fish by hand and catch one fish each per day, enough to sustain them until the following day when they head into the surf again. In this scenario, you would find them consuming that which they produce in this case, a fishy meal each day.

One day, Adam gets an idea for an invention that might enable him to catch more than one fish but when will he have time to build it? He spends all his waking hours working to produce food to sustain himself. There is also no assurance that his invention will work.

Adam works up the courage and decides to take a chance on his idea. He tells the others he will forego fishing for one day and devote his time to manufacture a device he calls a net. Despite dissent from his fellow island goers, Adam proceeds. He foregoes fishing for the day and goes hungry, but actually succeeds in making his net.

The next day, using his new invention, Adam is able to catch two fish he eats one and saves the other for future consumption. Adam’s genius resulted in something quite nifty – economic growth.

The island’s economy grew by 33% – from three fish a day to four, plus one net. To have achieved this economic growth, Adam had to forego consuming in the present in order to produce more in the future. As such, he had more real goods, in the form of fish, to consume each day.

Not surprisingly, Bob and Charlie want nets too but are unwilling to go hungry while they build them. Instead, they ask to borrow Adam’s net on days when he isn’t using his net, but he turns them down. They then ask him to loan them fish while they build their nets, to which he responds with a proposal to lend them fish with interest for every fish he lends them they must pay him back two. Bob and Charlie accept Adam’s proposal and the men continue to build their nets

As you may guess, the result is that the island’s economy grows from 4 fish a day to six a 50% percent increase in production.

Adam’s fish savings, and his willingness to not consume more fish per day, allows for investment to occur to manufacture two new nets, and for the total production of goods (fish) to increase greatly. 

The Individual
So, in a nutshell: save > invest > produce > consume. This is how an economy grows.

From an individual’s perspective, the equation is similar but can be ordered as: produce > save and consume > invest, repeat.

Accordingly, our daily toil means us selling our goods or services to the marketplace of consumers, and in turn, we are given economic reward.

Usually, this is in the form of the money unit within that economy: currency like Rands, Dollars, and in certain civilisations in history this even included salt, sea shells, cattle etc.

This economic energy, or reward, is either saved, or consumed, but generally a combination of both.

As individuals, the ultimate end of all production is consumption, and there are certain monthly staples that need to be consumed. If there’s a surplus remaining over and above that consumption, then that economic energy is saved.

Those savings can then be invested in projects or assets that contain risk of loss, in order to produce again new goods and services being created for society.

The real goods and services produced from the investment are then available to be consumed and enjoyed by everyone, raising the general standard of living for all in society.

It can then be deduced that the foundations of economic growth are savings.

‘Saving requires us to not get things now, so that we can get
bigger ones later.’ Jean Chatzky.

As long as there is savings and investment, the economy, as well as the individual’s wealth, should continue to grow.

Savings Eroded
What could possibly go wrong in our island utopia?

Let’s say that Adam, Bob and Charlie didn’t want to save. In this case, there would be no saved fish to sustain them while they pursue other activities. The economy would stagnate as the island goers will have to revert to fishing all day and living a subsistence life of day-to-day toil for mere survival.

Or what if Adam, Bob and Charlie were prevented or discouraged from saving somehow? Ultimately, by far the biggest danger to the accumulation of savings is the slow and insidious erosion of our purchasing power and savings through inflation.

When the currency supply is inflated (read: created out of thin air), society’s savings are eroded and lose value. The central authority uses its monopoly power for issuing currency to expand the currency supply in circulation and, in doing so, all existing currency units
already in circulation are devalued.

One can then no longer rely on the purchasing power of one’s savings being maintained, and as such, people elect to rather consume their savings in the present by spending on real goods and services instead of saving. 

Gold Cannot Be Printed
Gold, however, can be a valuable protective tool amid a distorted recessionary environment and one of continuous inflation. But how?

Gold is the ultimate store of value, or rather, store of SAVINGS. It has a 6,000 year track record of being the perfect store of a society’s savings, because it’s value cannot be eroded…read: it cannot be print, like Rands, and the supply increased at government’s will.

If gold is easily accessible to society, and anyone can quickly and conveniently convert their paper currency savings into gold savings, and not Rand savings, then the integrity of the savings pillar in the growth equation remains sound.

At Troygold, we aim to do just that… with real gold, in your pocket.

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