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Currencies and Gold

Facts about currencies and gold
Facts about currencies and gold

Facts

  1. Currency (fiat) is a medium of exchange. Fiat currency is a tool to make transactions between our production/time and goods/services.
  2. Fiat currencies have no value in themselves and must be stable to function optimally.
  3. Gold is an element/raw material and thus has an "intrinsic value".
  4. Like all elements, gold is unique and has unique properties.
  5. Gold is gold, and is a constant while the price of fiat currencies changes depending on the market conditions.
  6. Gold does not pay interest because it has no counterparty risk.
  7. The value of fiat currencies always returns towards their "intrinsic value", which is zero. For example. the USD has declined more than 97% in constant gold terms since 1971-08-15.
Calculation Example

Two people buy gold with different starting currencies

Date of purchase: 2022-01-01
Rate: 9.1 SEK/USD
Gold price (USD): $1,801/oz
Gold price (SEK): SEK 16,389/oz

Person 1: Buys gold for SEK
Starting capital: SEK 100,000
Buys Gold: 6.10161022 oz (= 100,000/16,389)

Person 2: Buys gold for USD
Start: $10,989 (=100,000/9.1)
Gold price: 1,801 USD/oz
Buys Gold: 6.10161022 oz *(=10,989/1,801)

Date of sale: 2022-10-25
Rate: 11.15 SEK/USD
Gold price (USD): $1,648/oz
Gold price (SEK): SEK 18,375/oz

Person 1: Sells gold for SEK
Capital: SEK 112,118
(=6,1016 x 18,375)

Person 2: Sells and exchanges to SEK
Capital: $10,055 (=6,1016 x 1648)
Exchanges to SEK: 112,118 SEK (=10,055 x 11,15)

Buying gold, or a share, in SEK or USD (or other currency) has no effect on the final result of the change in value. Both person 1 and person 2 in the example above have 112,118 SEK after finishing the trade.

Thus, both people have the same purchasing power at the starting point as the ending point, regardless of the currency they traded in. So you never have to think about whether you should buy gold or a share on the Swedish, American, or Canadian stock exchange (or any other stock exchange). Thus, it does not matter if you e.g. buys Lundin Mining on the Stockholm Stock Exchange in SEK or on the Canadian Stock Exchange in CAD.

Looking at the percentage development of the invested amount is wrong if you look at the change in the gold price in USD (-8.5%) and SEK (+12.1%). In order for it to be correct, the different exchange rates at both the time of purchase and sale must be included in the calculation of the development of the investment.

Weaknesses of depositary platforms'

Today, the depository platforms' systems cannot handle the percentage calculation correctly (in the case of securities that are traded, are listed, in a currency other than SEK) as they use the current/day's exchange rate for both daily value and purchase value. Thus, person 2 above would see a percentage development on his investment of -8.5% when in fact it is +12.1%. This of course creates confusion for ordinary investors when they follow the development of their investments. The reported value in kroner in relation to the invested amount in SEK gives the right percentage for the development of the investment. It becomes even more difficult for the platforms to calculate/show correct percentage development if you as an investor have made several different investments at different rates in an instrument.

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