Posted On March 13, 2017 By In Featured Writers With 1834 Views

Nixon Shock & Nasi Lemak

By: Ian Tai

Nasi Lemak for RM 15.90, anyone?

Last week, I was strolling in a shopping mall with my dad. Both of us decided to have an early dinner as we were hungry. We walked to the nearest restaurant which sells local food. To my dad’s surprise, we found that a plate of Nasi Lemak is priced at RM 15.90 in that restaurant.

‘That’s crazy. Why would I pay RM 15.90 to have Nasi Lemak?’, my dad exclaimed. He continued, ‘Do you know? Many years ago, when I was a school boy (some 45 years ago), I could have Nasi Lemak with just 40 sen. Charging RM 15.90 for a plate of Nasi Lemak is just simply daylight robbery.’

A Rude Awakening for Us …

Beyond Nasi Lemak, as Malaysians, the financial challenges ahead of us is tough. Our financial future is at stake. To name a few, they include:

a. 5 years ago, the exchange rate for USD is RM 3.00. Today, it is RM 4.45 a dollar.

b. A year ago, I was paying RM 1.60 a litre for RON95 petrol. Today, it is RM 2.30 a litre.

c. Why does a double-storey house in Subang Jaya cost nearly RM 1 Million today?

Clearly, the Ringgit has depreciated in value. Some feel angry and thus, choosing to play the blame game. Meanwhile, there are many who feel helpless and have accepted their fate.

The Root Cause of Our Problem

Fortunately, if you are reading this article, there is still hope. I’ll share the real root that causes inflation. Or, should I say the continuous fall in the value of Ringgit? It is a deeper root far beyond prolonged budget deficits, ballooning national debt and even corruption.

It’s called the Nixon Shock.

Once Upon a Time …

In 1945, the US Dollar became the reserve currency of the world as the United States had the most amount of gold after World War Two.

The official price for gold was US$ 35 an ounce. The value of the Dollar was backed by gold as the Dollar acts as a claim check to gold. Most nations (if not all) held most of their reserves in US Dollar instead of gold.

The exchange rate for British Pound was pegged at US$ 2.80 a pound. Thus, gold price was fixed at £ 12.50 an ounce.

In 1967, Bank Negara Malaysia issued the Malaysian Dollar. It was valued at M$ 8.57 a pound. Thus, gold price was fixed at M$ 107.13 an ounce.

1 Oz of Gold = US$ 35 = £ 12.50 = M$ 107.13

The Nixon Shock

In 1971, US President Richard Nixon took the US Dollar off the gold standard.

The value of the Dollar was no longer backed by gold. It became a fiat currency. Gold price floated freely as a commodity.

Indirectly, most currencies (if not all) have lost their backing against gold. This includes the British Pound and thus, affecting the value of the Malaysian Dollar as it too became a fiat currency.

Uncontrollable Money Printing

Since 1971, we do not need gold to print money. Treasuries globally print as many notes as they desire. In 2016, the United States has decided to stop counting the amount of US Dollars circulating around the world. Today, the supply of US Dollars is as good as limitless.

Meanwhile, in Malaysia, we had RM 760.3 billion circulating our economy in 2006. By 2016, the amount has increased to RM 1,642.4 billion. It is a compounded growth rate of 8.0% per year over the last 10 years. That was how quick the supply of Ringgit grew.

Before & After the Nixon Shock

Before Nixon Shock,

 

  1. Gold price was fixed at US$ 35 an ounce.
  2. Money supply was controlled.
  3. Inflation is negligible.

 

After the Nixon Shock,

 

  1. Gold price fluctuates daily.
  2. Gold is trading at US$ 1,227 an ounce (March 7, 2017).
  3. Money supply is out of control.
  4. Inflation is rampant.

 

The aftermaths of the Nixon Shock is best illustrated below:


Source: Macrotrends.net

 

How about Gold in MYR?

In 1971, gold price was fixed at M$ 107.13 an ounce. Today, gold is trading at RM 5,454 an ounce. It is 51 times the price of gold in Malaysia some 45 years ago.

Do you remember the Nasi Lemak that we’ve talked about earlier?

In 1971, my dad had his Nasi Lemak for 40 sen. Today, 45 years later, Nasi Lemak costs RM 15.90 in a restaurant located in a shopping mall. It is nearly 40 times the price of Nasi Lemak in 1971 which is nearly identical to the rise in local price of gold over the 45-year period.

 

 

Year 1971 2017 Multiples of
Gold (oz) US$ 35 US$ 1,227 35
Gold (oz) RM 107.13 RM 5,454 51
Nasi Lemak M$ 0.40 RM 15.90 53
Gold /

Nasi Lemak

 

268 plates

 

343 plates

 

+28.0%

USD to MYR M$ 3.06 RM 4.45 +45%

So, why buy gold?

  1. Gold has proven to have sustained its value over the long-term.
  2. In 1971, 1 ounce of gold was worth 268 plates of Nasi Lemak. Today, the same ounce of gold is worth 343 plates.
  3. Both the US Dollar and the Ringgit have failed to sustain their values over the long-term. This is evident as you need more currencies (either in both US Dollar or Ringgit) to buy your plate of Nasi Lemak.
  4. Nasi Lemak is just a fun illustration. You may test it out with oil, stocks, and even properties. The results should be similar.
  5. In the future, as money printing persists, it is impractical to keep our Ringgit in the bank over the long-term without investing it or converting it into something that holds value (such as gold).

Regards

Ian Tai

 

 

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About

Ian Tai

Ian Tai is an ACCA Graduate and has been investing in Gold & Silver since 2010. Inspired by a quote made by Donald J. Trump, ‘What’s the point of having great knowledge and keeping it to yourself?’, Ian’s mission is to share his knowledge and research to anyone who is interested in achieving financial security and preserving wealth specifically on investing in precious metals. Ian has also written several books on his passion of precious metal investments. The first one, Silver published in 2011 speedily climbed its way to be the 7th bestselling book in Finance category in October 2012. He has recently written a book, entitled, Gold marking his appearance as a local English author but also marks his debut Chinese-speaking booktalk at BookFest.

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