One of the stories gold bulls like to tell is the decline of the US Dollar as the world reserve currency. This story usually runs along the following lines: The US is overspending massively, thus the US is a debtor nation. Debtor nations don’t last forever, thus the US is heading for collapse. When countries collapse, their currency becomes worthless. Since gold has never been worthless in the history of modern civilization, trade Dollars for gold now so you’ll preserve value heading into that uncertain future.
That’s it in a nutshell, isn’t it? When the cow excrement hits the rotating blades you want to hold on to the value you’ve created in the past. And you want whatever the best form of money is. And because gold has always preserved its value well during such crises, you should choose gold. Simple. Gold will protect you against the collapse of your country.
The modern reality is more complex than that. In today’s world, there is more than one country, and countries don’t all collapse at once. When one country collapses there are other countries still standing, and that provides a framework of support that can be used to set your country up again. New deals can be signed, loans can be made with international money, banks can be restarted and linked into the world banking network – it’s pretty amazing. We’ll see with Venezuela how quickly this can happen, once the question of who’s in charge there is settled.
Plus there’s the inconvenient fact that gold is difficult to fractionalize. That means a hunk of gold is often worth more than you need for a purchase. Imagine wanting to buy a single shopping bag of food in a time when the local currency is worthless, and you are holding your bar of gold. How do you shave off “the right amount” for your purchase? Even a dime-sized gold coin is worth hundreds of dollars today, much more than your typical food purchase.
So the reality is that gold is indeed a great store of value, but there are still issues with using it directly as currency. What we really need is currency we can both fractionalize and trust – thus the idea of gold-backed currency. Or, as it’s better known, a gold standard.
Your Gold Enthusiast is not saying this is the best answer, however. It is possible to be a gold bug AND realize there is a better solution than going to 100% gold-backed currency. What we are looking for is currency whose value we can trust, and it doesn’t have to be 100% gold backed. All that’s needed is a good percentage of gold backing. Whether that’s 25% or 50% or even 10% we don’t know, we’ll leave that to others to debate while we spin some numbers and do some pondering.
What we do know is that the US is heading deeper down the rabbit hole of debt. That’s not good. And especially it’s not good that two of the other superpowers in the world – China and Russia – are digging themselves slowly out of their own debt rabbit holes, AND accumulating gold. They are putting their currencies in positions of superior economic strength compared to the US Dollar.
And the rest of the world is watching.
Both countries are also forming trading alliances with other countries that are not based in US Dollars. China has both their own gold- and petro-dollar based trading contracts. Russia has been trading natural gas with other countries for years as well. And let’s not forget the EU, which has the purpose of making trade between member countries possible without relying on external currencies or markets.
This is all leading to a new multi-polar world, where there are several large superpowers (if you will). Just 10 years ago the US could say it was the world’s biggest superpower. Now China is a viable contender for the crown, and while Russia is much smaller than the US or China it has positioned itself as a rising economic superpower.
While the EU is currently caught up in the Brexit battle with England it is also not out of the discussion – just distracted at the moment.
Your Gold Enthusiast is watching all this happen and is fascinated by the idea of a multi-polar world. It is a step closer in evolution to everyone getting along, so that is good. There are still borders and differences, but wars are increasing being fought with sanctions and tariffs rather than shooting, and that’s a step in the right direction.
Right now the US Dollar is still the #1 currency in world transactions. It’s dominance is shrinking however, and we may yet see the day when gold prices shoot up in US Dollar terms as it already has in many other world currencies.
Another writer wrote this very good article about this possible multi-polar world, looking at whether it could be backed by gold. You’ll have to read it to discover his answers, and his discussion is well worth understanding. Because of all the variables I don’t think anyone can make exact predictions; what we’re after is the direction things are likely to go, and where the decision points are that tell us if we’re right or not.
Why does all this matter? Because as time passes the future has a way of becoming the present – and then we’re living in it.
The Gold Enthusiast
DISCLAIMER: No specific securities were mentioned in this article. The author is long the gold sector via small positions in NUGT, JNUG, a few junior miners, and covered calls on part of the NUGT position. He has no plans to trade the shares in the next 24 hours.
About the Author
For 30-plus years, Mike Hammer
has been an ardent follower, and often-times trader, of gold and silver. With his own money, he began trading in ‘86 and has seen the market at its highest highs and lowest lows, which includes the Black Monday Crash in ‘87,
the Crash of ‘08,
and the Flash Crash of 2010.
Throughout all of this, he’s been on the great side of winning, and sometimes, the hard side of losing. For the past eight years, he’s mentored others about the fine art of trading stocks and ETFs at the Adam Mesh Trading Group