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The four major South African banks will pay you around 5% interest per year on a typical 32-day fixed deposit. So, a deposit of R100.00  will grow to a whopping R128.00 after five years. It is an interesting exercise to put this into the context of the silver-versus-Rand debate.

The spot price of 1 troy ounce of silver in January 2005 in South Africa was about R44.00 (incl. VAT). In 2011, when silver peaked, it was about R365.00 (incl. VAT). But let’s ignore the peak, since even seasoned investors miss such price explosion peaks. Today (09 May 2014), after a year-long price consolidation in 2013, the same troy ounce of silver costs around R225.00 (incl. VAT). That is almost 500% growth over a nine year period.

Rewind to 2005, take that R44.00 spent on ounce of silver and put it into a saving account. Fast-forward to today. How much has that R44.00 earned in interest? Even applying a generous 8% interest rate per year over nine years, the balance would have increased to just under R90.00 (excluding the numerous fees). Tongue in cheek, Kints said it best: ‘A dollar here, a dollar there. Over time, it adds up to two dollars.’

A disclaimer may be in order. I am by no means advocating not having a savings account that represents some liquidity in the case of emergencies. I am simply saying that saving currency (i.e. colourful pieces of paper declared to have value) is a poor facilitator of inflation protection. Ultimately, the intrinsic value a R100.00 note is worth the cost of the ink and the paper it is printed on.

So, permit me to return to interest rates paid by banks on your savings and compare the 5% interest you receive with the inflation figures of selected products between January 2012 and January 2013 (National Agricultural Marketing Council-Food price monitor report):

  • Grain Products: Spaghetti 8.63%; Loaf of White Bread (700 g) +10.03%; King Korn (1 kg) +10.93%; Cake Flour (2.5 kg) +15.28%; Medium Fat Spread (1kg tub) +24.97%
  • Meat and Dairy Products: Eggs 1.5 dozen +13.44%; Whole Chicken (Fresh per kg) +12.01%; Milk Full Cream (2 Lt) +14.20%; Milk Low Fat (2 Lt) +15.62% Tinned Tuna (170 g) +23.94%.
  • Fresh and Processed Fruits and Vegetables (per kilogram): Onions +15.76%; Pumpkin +24.57%; Cabbage +28.16%; Tomatoes +30.49%; Oranges +36.30%; Lettuce +73.27%.

Notwithstanding that the above are the products which have experienced the highest rate of inflation, and that the official CPI was 5.4 % (between January 2012 and January 2013), the point is non-the-less painfully obvious: it is better to buy Spaghetti and sell it one year later than to put money into a savings account.

Though becoming a spaghetti trader is seemingly sound advice, is there a better option that requires less storage space? More seriously, what can an average working man do to preserve the value of his hard-earned currency?

Personally, I think that one way to ensure preservation of wealth against inflation is to purchase something that cannot be inflated into oblivion, it cannot be printed, and is priced well below its intrinsic value, namely, physical silver bullion. The economic fundamentals for physical silver point to much higher prices in the medium to long term and if history is anything to go by, silver investors and stackers are in for an exciting ride. As Eric Sprott said, ‘this is the decade for silver.’