Somebody posted this on Facebook. Here’s my reply to him:
This is a wonderful example of purchase power vs currency. We used to be on the “gold standard” until this very year, 1972. What happened when we came off it to the value of our currency?
1972: Big Mac $0.65 , Oz of gold $63.84
2016: Big Mac $3.99 , Oz of gold $1060.00
Big Mac is 6 times more money. Gold is 16 times more. Over 45 years, that means the big mac has increased in cost 7.4 cents a year. Gold has increased by $22.14 a year vs. that dollar in your hand.
If you had won a million dollars in the lottery in 1972 and buried it in the back yard as savings, it would have bought 15,664 ounces of gold that day. If you dug it up today, it would buy 943 ounces of gold. ($1m divided by 63.84 and 1060)
If you took $1m worth of gold into McDonalds you could in 1972 buy 1,538, 461 Big Macs. If you held that gold until today and did the same, you could buy 4,161,363 Big Macs. By contrast, if you had paper $1m from 1972 in your hand, you could have bought the same 1.5m Big Macs that day, but if you dug up that money today you could only buy 250,626 Big Macs. ($1m divided by 65 cents vs. 3.99)
So what have we learned here?
If you buy gold and leave it sit in a drawer untouched, it will buy you triple the amount of physical goods in 45 years. It triples in purchase power.
If you leave paper money sit in a drawer for 45 years, it takes 600% more of it to buy the same thing.
If you put your paper money in the bank, in a great savings or investment plan, it has to make a certain amount of annually compounding interest to remain at purchase power. What percentage rate must your savings account have to ensure you can buy the same number of Big Macs today as you could with that same money in 1972?
To buy same amount of gold in 2016 as you did in 1972, it’s going to have to increase by 16x over 45 years. $1 over 45 yr at 6.4% annual compounding interest is $16.30. So your investment has to generate 6.4% interest to keep pace with gold.
If you want to be able to buy the same amount of Big Macs in 45 years as you could in 1972, then your savings account needs a 2.75% annual rate. This will multiply your money by 3.4x over 45 years, keeping pace with the increased cost of the Big Mac.
How much interest does your savings account rate right now? 1 or 2%? If you’re getting less than 3% on your savings account you’re bleeding purchase power every year it sits there. “Saving” my ass. I’m “bleeding” money.