Mona Darling- Kidhar hai Sona???

Posted On Monday, Aug 11, 2014

It was a bizarre Sunday for Ravi.

That morning, his milkman came to deliver a packet of one litre milk. “Oooo, what is this?” he asked. “The packet is so much smaller than usual”! To which the milkman replied that they have decided that “one litre” should no more be “one litre” as it is normally known,- it will be less than that. Somewhat stunned but blaming his sleepy state, he forgot about it.

Later that evening, he picked up a “size 42” from a branded shirt retailer, and another one from of his favourite brand. His birthday was nearing, hence the shopping. Reaching home, he tried out the shirts, and was stunned to find out that the latter shirt was way smaller than usual, way more tight and the sleeves way shorter than what “size 42” specifications indicated. Calling up their customer care, he was told something strange; that they had changed their measurement metrics. According to them an inch is no more an inch as it was known earlier but had become smaller.

While his head was already spinning his daughter came to him puzzled and said that the stationary shopkeeper gave her a ruler which was longer than usual. “How can that be?” asked Ravi in astonishment. A ruler has to be 12 inches long or 30 cm long. It cannot be more or less. She said that the shopkeeper informed her that they have changed the definition of inches and centimetres and therefore rulers bought from his store would be longer.

He was aghast by the events of the day. Had the world gone crazy while he wasn’t looking? How could we ever measure anything? He could only visualise this disastrous or hilarious situation. For instance, imagine a promise to deliver 9 ft high (under a new definition of ft) rooms, for an apartment purchased, might mean the size of a few inches (as conventionally defined)!

Ravi then wondered, ‘if the measurement of everything is changing, what of the savings I have locked up in the bank? “How is wealth measured? Will the way my assets are valued change? ”

The thought of this was so upsetting that he jerked awake from his sleep and was relieved to note that things hadn’t changed….

So what is the point of this dream? Can it become reality?

Well, if standards and benchmarks are changed, then it could actually lead to bizarre situations like the one described above.

We have physical assets and financial assets and we seem to be using currency to describe wealth. But is paper currency stable? Can it be a benchmark? Looking at history, paper currency has definitely failed this test of being a benchmark. There is no standard. And that is the problem.

We can say the price of milk and vegetables has gone up or we can say that the value of currency has gone down. But if currency is a benchmark, then how can it change? In actuality, currencies are a relative value game. When one currency rises the other falls because the rise or fall depends on the relative strength vis-à-vis the other.

For many decades, the US dollar has been the world’s reserve currency, the one by which all others are measured, and the currency most used for international trade. We have a long history of reserve currencies which reflects an interesting fact that the position of a country as a super power of the world (and whose currency acts as a reserve currency) tends to rotate in a natural cycle of around 100 years.

Will it be true with the U.S dollar this time around?

SupremacyFromToNo. of Years
Source: HKTDC, compiled by Quantum AMC
*U.S Dollar still remains the world reserve currency. No. of years calculated upto 2013.

There is no nation that has remained in power forever, or one that has had a strong currency at all times. However, there is something that has been considered precious and as a store of value since time immemorial – Gold.

Digging deeper into financial history and some history of civilisations, we could conclude that Gold has been a better benchmark and has stood the test of time as compared to paper currencies, whose supply can be increased at the whims of a government or its monetary authority. Can we, ordinary citizens, trust such whims? The attractiveness of gold is because of its scarcity and unlike the supply of paper money, central bankers cannot increase the supply of gold at will. Remember, more the supply, lower the value.

On its own, a paper currency has little value. If all the currency in the world, dollars, rupees, pounds etc gets burnt down, what will remain would be the real assets such as properties and gold. Gold was widely accepted, and has for years served, as a monetary unit. Gold has fulfilled the role of having transaction value and has proved to be an excellent store of value; thus serving as a benchmark for measurement of assets including currencies.

Central banks see printing money as an easy option to solve economic problems and this leads to currency debasement. When two countries simultaneously undertake policies to debase currencies, there would not be much change in their exchange rates vis-a-vis one another.

But, the fact remains that their currencies have lost value in real terms and the best way to know how a currency has been performing is to see it against gold.

Chart: How many grams of Gold it takes to buy Rs. 10,000
Grams Of Gold
Source: Bloomberg data

As you can see it took 647 grams of gold to buy Rs.10,000 INR in the year 1973 – 74 (ie 0.0647 grams in exchange for one rupee) and today (year 2014) it takes just about 4 grams of gold to buy Rs. 10,000.(ie 0.0004 grams in exchange for one rupee) Therefore we can say that Gold has appreciated or alternatively we can say that INR has depreciated by more than 99% over the last 40 years. That’s a staggering rise in the value of gold or a devastating fall in our currency.

If the above statistic holds true for the next 40 years, wouldn’t be wise to have some gold??

Knowing the benefits of holding on to Gold, our forefathers rightly insisted that we always have some amount of gold with us. And they were right;, would you want to leave paper currency as wealth for future generations, or use it as a buffer against turbulent financial times? Think again. Who knows what is in store by this blind faith we have in paper currency?

Invest in GOLD as a bulwark against wealth erosion.

You cannot deny people from buying protection, so even in older days when importing gold was a problem, smuggling was rampant. It was rampant because there was real demand for gold by smart savers. Given the recent news on smuggling, it is possible that movies will now again be based on smuggling, like they did earlier where they showed villains smuggling gold. Remember old Hindi movies? One of the iconic villain said “Mona darling, kidhar hai Sona?”.,He may have referred to actual gold or referred to the price of Gold when he said “kidhar hai Sona”!

To conclude, if you are looking at building wealth for the long term, allocate a part of your resources to that timeless store of value – Gold.

Data Source: Bloomberg

Above article is authored by Quantum.

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