The Tale of 31 years of Change.
On 11 February 1990 the eyes of the world turned to South Africa. Nelson Mandela stepped into the sun as a free man, his fist raised in triumph. It was a symbolic moment. A moment that would change South Africa forever. It seems like a lifetime ago since that moment was etched into history, and our beautiful country has since experienced many more moments of change over the 31 years that followed.
Some have been dramatic, such as the end of apartheid, our first democratic election, and the more recent Covid-19 lockdowns and restrictions. But others have been more subtle, slipping by almost unnoticed as a part of our daily lives. While it is the big moments that tend to stand out in our memory, it is often the small changes that have the biggest impact on our lives.
So, what has happened since that memorable day? And more importantly, what has happened to your wealth during that time?
The Difference between Money and Wealth
To answer that question, it is important to first understand the difference between the amount of money you have, and your wealth. If your money is tied up in FIAT currencies or Rand-based investments, it is subject to currency fluctuations and devaluation. If you had a million Rands in 1990, your wealth would have been much greater back then than if you have a million Rands today.
A decline in a currency’s buying power is by no means isolated to specific countries or South Africa. It is a global phenomenon, to which no currency is immune. Looking at the graphic below, you can see that even the mighty US Dollar, the world’s most traded and primary reserve currency, is not immune.
A simple illustration of the decline in buying power over the past 31 years would be to look at the petrol price in South Africa. In February 1990, R1000 would have bought you 2040 litres of petrol. In December 2021 the price of 95 unleaded inland breached R20 per litre. Today, R1000 will buy you 49 litres of petrol. While there are many factors that have caused this staggering difference, the fact remains that 2040 litres of petrol today will cost you R41 391. This illustrates the difference between the amount of money you have, and your wealth.
R1000 vs R41 391 for the same amount of product. To have the same wealth you had in 1990, you will need significantly more money in 2021.
Rand vs Dollar
So how can you protect your wealth in the long-term?
We will start of by looking at the performance of the Rand against the Dollar over the last 31 years. The Rand weakened from R2,59 to the US Dollar in 1990, to an average of R14,72 in 2021. This translates into an 82.4% loss in value. If you take the annual average, in 1990 R1 Million would have been worth roughly US $386 100. Today, that same R1 Million is worth only US $67 934, 17,6% of what it was worth in 1990.
The Effect of Currency Devaluation over 30 Years:
As an exercise, let us assume you had not placed that R1 Million under your mattress, but rather in a fixed bank account over 30 years. Using the best interest rate currently available (10,6%), that would have returned R8 392 057 at the end of the thirty years, or US $570,112.
While this might sound great, it is essential to look at the true value of your money, and not simply at the amount of money you have. Over those thirty years, you would have increased your wealth by US $189,884, or R2 795 092. A grand total of 179%, or 5,96% per annum.
Gold Price in US $
If we now take a look at the average annual Gold price over that same time, we can see that there has been an increase of 396,44% over 30 years. Gold has climbed from and annual average of US $362,34 per ounce in 1991 to US $1798,80 per ounce in 2021.
The importance of Putting Your Money into Physical Gold.
When talking about Gold, it is important to remember that we mean physical bullion – a tangible asset capable of weathering both the physical and financial onslaught of time.
Today, R1 Million will buy you 54,44 ounces of Gold (on the year average spot price). In 1990, R1 Million would have bought you 1065,57 ounces of Gold (also on the year average spot price). Simple mathematics tell us that had you invested that money in Gold in 1990, your Gold bullion would now be worth R28 214 520. That translates to US $1,916,756, an increase of $1 530 656 or R22 531 256. Effectively, your wealth would have increased by 2153,13%, or 69,45% per year.
Yes, the value of precious metals fluctuate, but looking at the graph above, there is a clear upward trend that continues as time goes by.
You Don’t Need R1 Million to Protect Your Wealth
In 1990 R1 million was a LOT of money. Even today it remains a milestone amount. The truth is that not many of us have a million Rand to invest. But that is the beauty of taking your money out of Rands and putting it into physical bullion. Had you bought just R1000 worth of bullion in 1991, you would still have enjoyed the same 2153,13% increase in your bullion’s value over those thirty years.
R1000 would have translated into R 28 214 today. In contrast, the R1 million used as an example for the fixed account was to allow for the maximum return on investment. For smaller investments, banks generally offer significantly lower interest rates.
Looking at the decrease in buying power and value of the Rand over the last 31 years, it becomes clear that while the massive historical events may bring about great change, it is the small, often ignored changes that can have an even greater impact on our everyday lives.