In Argentina, the price of gold rose about 28% in the first month of this year. In the meantime, the price of gold in euro’s and dollars rose about 5%. The big difference is the result of a devaluation of the Argentine currency, the peso. The devaluation is unfortunate for savers, because they saw the real value of their savings decline. The gains are for the debtors, whose debts in real terms went down by the same amount.
Argentinians who converted their savings into gold were barely harmed by the devaluation of the currency. While the money in their pocket lost some value, their gold didn’t. The price of gold in Argentina rose to such an extent that the holders of physical gold kept the value of their savings. On the first of January, the price of gold was 7.860 Argentine pesos. On the 30th of January, the price was 10.104 pesos. One day before, on the 29th, the goldprice was just 8.981 peso. So in just one day, the goldprice rose by more than 10%!
The graph below shows the goldprice in six different currencies: the Russian ruble, the Argentine peso, the Turkish lira, the eur, the Indian rupee and the Sout-African rand. As you can see most of the emerging market currencies lost value compared to both the euro and gold.
Goldprice in five emerging market currencies (Source: Goudstandaard.com)
Gold as a hedge against devaluation
Gold is often cited as a good hedge against inflation, but it would be more accurate to state that gold is a hedge against a devaluation. Sudden drops in the value of a currency are a nightmare for savers, but not for those owning physical gold. Gold stores value in an environment with currency devaluation, while the relationship between gold prices and inflation is not so clear.
Last year, Venezuela devalued their bolivar by 44% against the dollar. Those holding the currency lost purchasing power in dollars, but the gold would still buy them the same amount of dollars as the day before the devaluation.
Up until now, currency crises are related to banana republics and third world countries. That’s why people living in those countries value gold differently than in Western economies, where the precious metal is just an investment opportunity. Gold as a speculative hedge when the stock market goes down, which has to be sold as soon as the stock market picks up again. We beg to differ…