Those who lived through the 70’s remember a few things. A lost decade for the stock market, unemployment, inflation, warehouse stores and generic products. High gas prices. We still have the warehouse stores and high gas prices.
I feel ready to post My Gold Manifesto. To start lets say what’s wrong with gold as the monetary salvation of the masses, which how gold functions in Chindia. The poor love gold most of all.
We are all going to be a lot poorer if history serves. The process of raising the standard of living by means of printing money is way too simplistic and doomed to failure. Joyce called it “Impovernment of the booble, by the bauble, and for the bubble..” Booble is a perjorative for public fealty to self defeating mechanisms, bauble means in general consumer products. McLuhan called it “The Gadget Lover..”. Bubble is the central bank policy of inflating of assets to achieve economic growth. Impovernment is a portmanteau made of two words, impoverish and government. The phrase mirrors the Gettysburg address by Lincoln
In the 1980’s USG began deficit spending in earnest, and when the backing of gold to the dollar was dropped that allowed unfettered expansion of the money supply, through credit creation, often done with no buyers on the other side of the transaction – hence the bond vigilantes left town. The process of placing debt off balance sheet was achieved through Federal Reserve policies, often called monetization, and bonds were a pass through of sorts.
Financial institutions bought the bonds on margin (sometimes as little as ten percent,) and used the proceeds from that collateral – backed with the full faith of the USG to speculate in stocks. Turning those bonds into real collateral wasn’t difficult as we would never renege on the principal on that debt. That promise was unchallenged until Donald Trump questioned that guarantee in his campaign.
Some third world countries have gone through economic crisis where they did have to cut the value of their debt. And right now some of the worst offenders, Turkey and Argentina, sell bonds denominated in US dollars, and must buy dollars in the open market in order to pay the interest. At times these dollars get scarce, and therefore expensive and that drives the value of the dollar higher.
What’s wrong with gold? Should the global monetary base contract, Jay Powell comes offering you a five for two tens, then the intrinsic value of money will increase. The relationship between the dollar and gold would reverse, and the inverse of the rising value of PMs relative to the dollar. PM’s would lose value and dollars would increase value, intrinsically….. Yes but isn’t the dollar at all time highs? Yes it is but that’s the forex, the market of currencies relative to each other, and the US dollar, or debt, is commonly called the cleanest dirty shirt in terms of debt. That dollar in your wallet is a liability, and any wise person would divest themselves immediately.
PMs have kept their value, the analogy is a dime made with silver which I believe ended with the Roosevelt dime. I have a Mercury head dime on my desk .which in 1965 if you had three of them you could buy a gallon of gas, if you have three of them today, you can still buy a gallon of gas. Rather than reapplying the gold standard the US may choose to engage in more competitive devaluation, and that would mean real pain to bond holders as well. Since those methods are often met with counter devaluations, the process of deflation goes on slowly and beneath the radar. Meanwhile Central Banks have been buying gold, and that seems to portend well, unless in a global currency meltdown they sell those holdings to try to balance their books.
On another side the crypto currency technology offers the planet a chance to bypass currencies and central bankers altogether but such transition periods are historically volatile. Should Bitcoin become the coin of the realm it has to evolve into “electronic barter”. It should be a transaction currency only, you use it to translate whatever you want to sell into units of whatever you want to buy. When you are done you don’t put the bitcoins in a wallet, you buy something else which you feel certain WILL hold its value, and that might be gold and silver, or should be. The possibilities of crypto are far reaching, the total elimination of “blood money” as it is sometimes called, and the use of sanctions by governments to punish other governments. The obstacle to crypto is the current central bank system, which would be made obsolete. Already that sort of financial hegemony is coming into question, if something better came along, that would acerbate the transition.
Gold may not work in that window where the current financial system fails and the central bankers do not yield to the new technology. It would be a new Dark Ages for financial assets, but so be it. Next the rest of My Gold Manifesto, which has none of the cliched reasons for owning gold. I would much rather be selling a loaf of bread for a piece of gold, and not the other way around.
One quick take is that the usual advice on the subject is to place 5% of your portfolio assets in precious metals, and that number is really low, and even a modest upgrade would cause a fair amount of buying pressure and cause a rise in prices. There are other supplies of gold in the universe and some wag has said that if a giant asteroid does strike earth, we will all be rich!
Duck and Cover 