Aug 102008

Last night I stumbled into a conversation with a co-worker (who works for DMP UK) on the real-world effects of inflation and how it effects savings.  We discussed what savings we’ve done over the last several years and I veered into a tangent about why I prefer to immediately invest my savings in precious metals (gold and silver) rather than hang onto individual bills (mattress account), keep the money in the bank, or invest in the stock market.  As often happens when discussing economics I felt like I held my own fairly well, but I still felt seriously lacking in the specific knowledge department.  So, today I devoted a few hours to fact checking my assumptions.

I decided to compare the results of various savings methods on a $100 gift made to me as a newborn in 1969.

  • According to the Federal Reseve Bank had I simply held on to that $100 bill it would now only be worth roughly $17.70.  In other words if a new bicycle cost $17.70 in 1969 that same bicycle would now cost $100.00.  Hmm, that doesn’t sound like a very wise choice.
  • If my $100 was put in a standard passbook savings account, earning 2% interest for the last 39 years, compounded annually, then I’d now have a whopping $216.47.  Makes me glad I cashed out my childhood savings account when I did.
  • If, instead of being given cash, I was given a $100 U.S. Savings bond (which would have only cost the gifter $75) then today I could redeem that bond for $540.04 according to Treasury Direct. Hmmm…  So much for the standard baby gift of years past.
  • According to the Institute For Measuring Wealth if that $100 had been put in play in the stock market (in a DJA Portfolio) it would be worth$1,504.70 today.  Wow, so the market almost tripled the government’s return.  Not too shabby.
  • Based on data from Kitco I could have bought 55 ounces of silver or 2.4 ounces of gold with my $100 bill in 1969 which would now be worth $874 and $2075 respectively today.  I had no idea the growth in gold prices was so much more than the growth in silver prices! If someone can explain (or at least verify) this in the comments I would be most appreciative.
  • Returning to to the Institute For Measuring Wealth I find that if I’d put the $100 in an automatically renewing one-year CD I would now have $2,208.41.  We have a winner!

I must admit that I’m surprised by the results.  I was absolutely positive that gold was going to come out the clear winner (it would have barely passed the CD option when gold was at its highest point ($1011/oz) in March, netting a total of $2426.40) with silver handily grabbing second place.  Instead we end up with the following order-

  1. Certificates of Deposit – $2,208
  2. Gold – $2,075
  3. Stock Market – $1,504
  4. Silver – $874
  5. Savings Bond – $540
  6. Savings Account – $216
  7. Cash – $18

Of course, should the long-predicted complete economic crash rear it ugly head any time in the near future, then precious metals are the only thing that are going to hold their value.  Besides I like the semi-liquidity of actually being able to hold my savings in my hand.  If I drop my savings into a financial institution and it goes under then I end up with nothing.  So, I’ll stick with buying metals for the time being, though I think I’ll try a little harder to focus on gold, rather than silver.

  2 Responses to “Looking At Long-Term Investment Results”

  1. This is in what order I would put what you have listed.
    1.Gold (inflation proof)

    2.Silver(inflation proof)

    3.Stock Market (DJIA) from 1969 til 2007 total average 7.03% growth rate.Include 2008 probably worse.

    4.Certificates of Deposit (example didn’t reveal interest rate) From 1969 til 2007 inflation average is 4.66%, doubt the interest of CD was higher than inflation)

    5.Savings bonds (inflation eating away at profits)

    6.Savings account (normally interest earned is below inflation rate,actually losing money)

    6.Cash (worse idea possible because of inflation alone)

    Invest in Bullion!

  2. Hi Kevin!

    I’m working on investing i nbullion, but inflation’s eating away at my revenue so quickly it’s getting harder and harder.

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