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The Right Side of Compound Interest

By Sarel Oberholster BCom cum laude, CAIB(SA) and Peter Dawe LLB (Hons) (London)

Everybody who has ever borrowed money knows about compound interest. It never sleeps. It does not take a day off to rest or take a vacation to recharge its batteries.

Every day it ticks over and if you have a mortgage you see how the monthly interest takes back almost the full amount of your monthly payment. There is a good reason for this.

Bankers have absolute respect for the power of compound interest. They know that it is essential that your payments must exceed the interest, because the outstanding amount will begin to accumulate any shortfall and soon it will overwhelm you. Compound interest is the reason behind all the data on “arrears”. Debtors in distress are those with arrears of more than three months – yes, compound interest is already a looming threat in only three mouths. In six months the bankers move the debt into the bad debts section. 

Compound interest grows and grows and needs only time. On loans it gets out of hand in a very short time.  However the retirement industry is built on compound interest. It is the trunk of the tree that grows into our retirement annuities. We want it to grow straight up, reaching for the blue skies. The core contributors of compound interest to retirement savings products are government bonds, mostly long term government bonds, which contribute compound interest over long periods. Governments are forever on the wrong side of compound interest.

Just look at the elegant use of compound interest in retirement savings products. We need the income when we no longer produce an income. We need a good measure of certainty that the nest egg will be there when we need it. We need a reliable growth effect to achieve the objectives of a reliable retirement savings product.  This can only be achieved with compound interest.

Compound interest can be greater or less, depending on the level of interest rates, but it is ever-present as the time value of money. Mrs Compound Interest is the loving wife of the investment world. Lady Capital Gains is the temptation and the Marilyn Monroe of the investment world. Hit a home run in a bull market and be dazzled by the spectacle of Capital Gains. She needs but a little time to shoot the lights out, but she is a fickle mistress. She will take you to the cleaners just as fast. Everybody who has ever invested has loved the steady if somewhat boring reliability of Compound Interest and has danced wildly with Capital Gains or sulked in despair with Capital Losses.

The ultimate capital gains investment medium is commodities. Miners are forever locked into a fatal attraction relationship with Lady Capital Gains and live or die by the price gains or price falls in the commodity that they produce. She takes them on a roller-coaster ride to breath-taking highs and then dumps them into desperate scrambles for survival. Sadly, when they borrow, they borrow from steady and relentless Compound Interest and she cares little for the whims of Capital Gains or Losses. Miners are in the depths of despair when they are on the wrong side of both Capital Gains and Compound Interest.

PurePlay® Instruments have been designed to swap a very tiny portion of the exposure of miners to capital gains for a disproportionate portion of compound interest. The secret lies in time.  Lady Capital Gains runs hot and fast and glamorous but expends herself in the process. Compound Interest is the ultimate ultra distance marathon runner. The miner sells off less than 10% of its Reserves, which is usually sufficient to displace all the debt that it has. The benefits of not having to pay away compound interest will over time far outpace any potential benefits it could have had from capital gains.

PurePlay® Instruments place the miner on the right side of Compound Interest without being unfaithful to Capital Gains.       

Patents and Trade Marks

The Intellectual Property of PurePlay Holdings (Pty) Ltd is protected by world-wide pending Patents.

Trademarks awaiting registration are PurePlay™, Nature’s Vault™, As Good as Gold™ and Sp☼t True Value™.

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