Gold vs fiat money: what is the best way to keep your savings?
We have already published in our Golden Way blog a detailed review and comparison of gold and cryptocurrency as two potential assets for investment. But what if we compare precious metal with such a liquid and convenient investment as money itself? Let us explore the pros and cons of such a decision!
What is fiat money?
First, let's define the term: what is fiat money? In fact, it is any currency backed by the government. That is, U.S. dollars, British pounds, Russian rubles or Ukrainian hryvnias - all this is fiat currency. But electronic currencies, crypto and other monetary alternatives issued in a decentralized way are not fiat money.
Why is saving in a currency convenient?
It is quite usual for us to have a deposit in a bank or keep a certain amount of currency at home, whether it is the national currency of your country or one of the world's major currencies. Why are people attracted to saving in fiat money? First of all, it is convertible. Just take out a bundle of cash from an account or a safe deposit box, and you can buy anything you want. In the case of U.S. dollars or euros there is also an advantage in the quotes game: buy currency while the dollar is cheap and sell it when its price goes up. This approach is practiced by many of our compatriots. But is everything so smooth with fiat money? Of course not.
Disadvantages of investing in fiat currency
Any modern person has at least heard of the concept of "inflation". Unfortunately, this process accompanies all world currencies. Sometimes inflation is the result of a crisis or economic collapse, other times it is man-made and controlled by central banks. But in any case inflation is a depreciation of your savings. And it is inevitable in the long run.
As a result it turns out that if you bought currency for the notional $100000 today, in a couple of years you will find out that in fact your savings are worth much less. What are the risks of investing in fiat money, and can they be avoided by investing in gold?
- Any fiat currency has its own rate fluctuations, and it is not a fact that at the time you need to use it, the rate will be beneficial for you. Fluctuations in the value of gold are not that significant, and in fact it has been rising slightly (and sometimes even more) in recent years.
- The value of fiat money is affected by the politics and economics of the issuer state. If you invested in the currency of a country that is mired in an economic crisis, it is likely that your assets will plummet in value. Gold today is not tied to a particular country in terms of price, moreover it provides stability to most countries' economies (famous gold reserves).
- Usually the currency of one or another country is in demand only in its own country. Even U.S. dollars or euros used in most other countries will have to be exchanged and lose interest for conversion or pay a fee for the exchange transaction. Gold is in equal demand all over the world.
- The value of fiat money goes down if the government turns on the printing press and increases the money supply. Gold is the ultimate resource, and that makes it even more valuable.
In general, fiat money has only one big advantage over gold: It can be spent here-and-now. But there are many pitfalls along the way, whether in the form of fluctuations in exchange rates, conversion rates, or the political situation in the world. Gold is an eternal value, and is much better suited for long-term accumulation. Just look at the price fluctuations of gold over the centuries, and you will see that you cannot find a more stable asset.