Can Interest on Gold Outpace Inflation?

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Yield.

It’s on the tip of every investor’s tongue, but it’s much harder to find than it used to be.

In the long ago era of the early 1980’s one could simply open a savings account, purchase a CD or US 10-year notes, and earn between 7% to 14%.

The idea of earning 14% on government debt seems the stuff dreams are made of.  Interest rates are at zero, near zero, or negative across much of the developed world.

One of the many problems with falling interest rates is that it becomes near impossible to outpace inflation with your capital. This question becomes all the more relevant in light of the recent bout of transitory inflation we’re facing. How can you generate a yield that will beat inflation?

We’ll revisit that question in a bit. First, we need to talk about that four-letter word: gold.

Gold – To Yield or Not to Yield?

As interest rates continue to hover near historic lows, investors sense something amiss in the monetary system today. Many have turned to gold as an answer. They view gold as a safe-haven asset, protecting them from falling rates and currency debasement.

While gold can be a means to protect your capital, others view it as nothing but a shiny, dead lump of metal. A game you only “win” through buying low and selling higher to net more dollars than you started with. Warren Buffett epitomizes this viewpoint.

A growing minority view gold as real money, and dollars as something else.

For much of the last century, buying gold worked as Warren Buffet described: you pay people to dig it out of the ground only to pay others to put it back in the ground and stand guard. Gold did nothing productive and offered no yield, though its price in dollars rose considerably.

The Reemergence of Gold Interest Rates

In 2016 something changed – gold offered a yield again. We say “again” because back when gold was legal money, it had always offered a yield. Only when it was banished from the monetary system, did interest on gold dry up. Since Monetary Metals started paying interest on gold again, one-year gold leases have generated yields between 2%-4.5% per year, paid in gold (and silver too).

A Yield on Gold to Outpace Inflation

Let’s revisit our question from before: how to outpace inflation? With CPI touching 5.4% in July of this year some might look at a rate of 2%-4.5% interest on gold or silver and say, “Neat concept, but aren’t I still losing my principal to inflation?”

This is the classic error of comparing apples to oranges. Is a 2% interest rate on gold the same as a 2% interest rate on dollars?

We think not. A little history lesson to explain what we mean.

Inflation Erodes Yield Purchasing Power

In 1970, the average price of an ounce of gold was approximately $36 per ounce and the yellow metal was still intrinsically linked to the value of the USD. The median home price was $17,000, while the median household income was $9,870. Priced in gold, the average cost of a home was 472.22 ounces of gold and the average household income was 246.16 ounces of gold.

Consider that for a moment.

In 1970, assuming no expenses, many families in America could purchase a home with savings amounting to just two years of the average household income.

Fast forward to 2020.

Last year, the average price of an ounce of gold was $1,770 but no longer linked to the paper notes we call “money”. Median home prices in 2020 were $358,700 and the median household income was $67,521. Priced in gold at $1,770 per ounce, the average home price in 2020 was 202.65 ounces of gold and the average household income was 38.14 ounces of gold.

Priced in gold, home prices have fallen by more than half.

That’s great! Until you realize that household incomes have fallen 86% over the last 50 years when priced in gold.[i]

Wow.

That’s what happens when you take the money (gold) out of “money” (dollars).

Exhibit A: A classic case of dollar fixed income fatigue. The patient shows symptoms of utter exhaustion from trying to build wealth in dollars. It’s a real problem many investors suffer from. Thankfully, there’s a cure – Monetary Metals Gold Fixed Income.

A Yield on Gold to the Rescue

To paraphrase J.P. Morgan’s famous quote, gold is money, and everything else, including dollars, are credit.

Over the millennia, an ounce of gold has always remained an ounce. While over just two centuries, the dollar has been twisted, distorted and tortured so many times and is a mere shadow of what it once was (i.e. a note redeemable in a specific weight of gold).

Put it this way, would you rather earn a 2% yield denominated in gold or 2% in a piece of paper that has been perennially losing its value year after year, decade after decade?

The choice is yours.

[i] For those who want to explore the causes and consequences of that phenomenon, we refer you to Keith’s research series on Yield Purchasing Power. Needless to say, inflation takes its toll in more ways than one.

Additional Resources for Earning Interest on Gold

If you’d like to learn more about how to earn interest on gold with Monetary Metals, check out the following resources:

The New Way to Hold Gold

In this paper we look at how conventional gold holdings stack up to Monetary Metals Investments, which offer a Yield on Gold, Paid in Gold®. We compare retail coins, vault storage, the popular ETF – GLD, and mining stocks against Monetary Metals’ True Gold Leases.

The Case for Gold Yield in Investment Portfolios

Adding gold to a diversified portfolio of assets reduces volatility and increases returns. But how much and what about the ongoing costs? What changes when gold pays a yield? This paper answers those questions using data going back to 1972.