So much is happening in finance now that keeping your mind around it is more than a little complex. We all tend to think: “If it does not affect me right now, then I do not need to be concerned.” or “There is nothing I can do about it anyway.” These assumptions are wrong and can lead us down a very uncomfortable financial path.
In a series of articles, I will tackle each one at a time and then draw some conclusions about the whole mess. No matter what we hear from the press and the FED, we must understand the underlying facts and conclude individually.
Specifically, I am going to examine the following questions in these five articles:
- What is happening with gold, and how is it relevant to markets?
- What is happening with inflation and debt, and how might that play out in the coming months and years?
- What is happening with the dollar and its status as the world’s reserve currency?
- What is happening with digital currencies and privacy concerns?
- What is happening with global exchange and the risk of global default through currency manipulation on the FOREX exchange?
We now live in a world where the complexity of global finance is beyond the understanding of most of us. Financiers and governments like it that way. Protecting your finances now and into the future is your and my responsibility, so building some knowledge of proposed worldwide changes is essential.
A Little Background on Gold
I get asked and read more on this topic than any other, primarily how gold has performed against stocks. This is a complex question because timeframes and missed opportunities matter. I also believe that the price of gold is manipulated, but to what extent? This is an incalculable amount because the processes by which it is controlled are not transparent.
There is the London Gold Fix mystery, which drives me crazy. The London Bullion Market Association electronically convenes fourteen members twice daily to establish the price of gold until it meets again. In theory, this only applies to more significant sales of gold and derivatives, but it sets a starting point for other market-driven pricing. These members can establish the price at whatever level they believe is fair. Although influenced by outside market pressures, this is one of the factors that artificially holds the price of gold down. But this is one of the gold traditions established in 1919 and is unlikely to change. If complete free market pressures were brought to bear on gold, the price relative to fiat currencies would be much higher based purely on the explosion of money in circulation. The “players” in this game have much to gain by holding the price down. The fourteen representatives are from China, the United States, Great Britain, the Netherlands, and Canada. Within these countries are multiple representatives in banking, coin sales, miners, suppliers, and traders.
What is happening with gold?
There is a supply and demand component to determining the price of gold, but these are minor factors. The industrial users of gold have an incentive to hold the price down, while the miners have the incentive to be sure the market price exceeds the cost of extraction. While the price of mined gold is essential, the amount of newly mined gold pales compared to the existing stocks of gold in central banks and gold held by individuals.
Gold is still a “safe haven” for most of us, and holding some gold seems right in times of uncertainty. It may not pay dividends or interest, but it will never be valueless, is the theory espoused by many. If the “times of uncertainty” are significant, we should all hold some gold. Since World War II, there has been no time of greater uncertainty, and this has been reflected in the price of gold over the past three weeks as the conflict between Israel and Gaza made front-page news.
But how much gold to hold, if any, is driven by your age, financial condition, investing risk appetite, and investing time horizon. In other words, the same factors that drive all personal investment decisions apply to gold. You must decide how much appetite you have for any asset where you have price manipulation, just like stocks or real estate.
The price of gold has risen as the Israeli conflict goes into full swing. Last month, gold sold for roughly $1,850 an ounce, and as I write this, it is back above $2,000. As the wars in Ukraine and Israel drag on, the price should creep higher, probably to new highs. As the reserve currency, our dollar should weaken relative to gold because we are printing money we do not have to support those nations at war and pay the interest on our debt.
If the price of gold in dollars does not continue to rise, it is only a confirmation of manipulation and not a free market at work. This alone makes investing in gold as a short-term asset complex. There is a more extensive discussion about the BRICS consortium, gold accumulation, and Russia and China that we will tackle in another article.
The Long View
The long view is for those of us who hit our peak earnings in the early 2000s. This view has the most relevance in the world of investing and, at the same time, covers the other two time periods.
In the long view, from 2000 until today, gold remains the only asset that outperformed all the markets and growth in the national debt. Despite what we hear on talk shows, there are many headwinds for the next few years. But markets move much faster today, and only after all these events play out will we know whose view is correct. We see little that would cause gold to drop below $1,900 or go much higher than $2,000. Letting gold’s price completely float would reveal the true extent of the decline of fiat currency value. Less manipulated, or at least more transparent, are stock markets, and a lot that can cause the various stock markets to falter.
Since we last updated this chart, the trajectory of gold and the markets has remained unchanged. The little dip in gold prices during September and October showed up, but the recovery in gold prices quickly reestablished the trends.
The price of gold relative to the January 2000 price still outperforms all other assets and more than kept pace with the national debt and the money supply. But few had this foresight and bought gold in 2000, so this chart is academic and a little sorrowful for most of us. In some ways, this chart best illustrates the missed opportunity for Baby Boomers. Only the NASDAQ comes close to gold’s performance, which is only because of the “Magnificent Seven” tech stocks.
The Medium View
Our Medium View of Markets says just the opposite of the Long View. Gold rose from 2010 until today but did not exceed market growth in other areas. But the connection to the National Debt is still apparent. The FED’s attempts to shrink the M2 Money Supply are also evident in the chart. Still, without severe corrections in the National Debt, the gold/National Debt connection likely continues upward.
Starting points for these calculations also matter. In 2010, the DOW had dropped from its 2008 high of 13,000 down to 10,000, so for these calculations, the markets are at a low starting point, thus making their growth seem stronger when in fact a major portion of this was recovery not growth. Calculating from the 2008 highs would make the charts look more like the long view.
The Short View
Our Short View of markets looks more like the Long View since prices were not depressed in 2020. Gold outperformed all the markets and was correlated to the National Debt. Unlike the Long View, gold is lagging the National Debt, and if we believe gold will maintain some premium and the debt will continue to rise, then gold will outperform the markets in the short term. How much is always the question and unanswerable since gold prices are only partially free to float?
Not even the “Magnificent Seven” stocks could push the NASDAQ above the 2020 levels. To a lesser extent, our consumers still live from COVID handouts and rising personal debt. But this will hit a wall, forcing either a significant correction or more handouts. Those bragging about stock market performance in 2021 are singing the blues today unless they were clairvoyant and only bought the “Magnificent Seven.”
National Debt
The National Debt will grow rapidly and almost uncontrollably without some severe change in Washington policy. Since the onslaught of COVID, we have marched down a road that parallels Socialism with tax breaks for those who want them and free money for all who will take it. This trend can only result in much higher debt, currency erosion, massive interest payments on our debt, much higher taxes, higher interest rates, or some mixture of these.
This puts enormous pressure on the FED to keep raising rates and borrowing more. Without correction, we look like a third-world country in a debt/death spiral where we finance our ever-increasing debt through ever more borrowing. We have the world’s largest gold reserves, but only because of World War II and not by policy. Congress has spent and deficit-financed so recklessly in recent years that even with the largest gold reserves as a psychological backdrop, it may not be enough to keep confidence in the dollar from eroding further.
We are constantly reminded that the National Debt only matters once it does; at that point, it is too late.
Central Bank Issues
Central Banks have held gold for its stability and purely psychological reasons for millennia. While it does not directly connect to any modern currency, Central Banks seem to have this affinity for it and connection to it that even they cannot explain. Canada has complete faith in their fiat currency and holds no Central Bank gold. The United States has the largest gold reserves, a holdover from the gold standard days and World War II. My best guess is that it just “feels right” for the United States, with the World Reserve Currency, to hold the world’s most significant quantity of gold.
The big question with central banks and gold is who is doing what and why? With the world addicted to fiat currencies, why would any central bank want gold? The answer is complex and wrapped in global financial mystery. China and Russia want to dethrone the US Dollar as the reserve currency, and they are doing everything they can in markets to make this happen.
The BRICS consortium is pushing for additional membership, and just this year, they have expanded their membership and participation to at least forty-one countries. These countries now represent about one-third of the world’s GDP, so our government sluffing BRICS off as a sideshow is beginning to look like their “inflation is transitory” miscues. The past two quarters have seen gold purchases by central banks skyrocket, with consumer purchases supporting consumption through jewelry and investments.
China has been one of the largest holders of US Treasuries (debt) for decades and has shifted to gold. They are steadily reducing their Treasuries holdings and replacing them with gold in Mainland China and Singapore. The US Treasury has been almost as good as gold and convenient in transacting business for decades. But with our Congress on a massive spending spree and the dollar devaluing relative to gold, gold looks to be a better haven to them. China can build its gold reserves quickly by banning exports, increasing purchases, and increasing mining capacity. Essentially, they are holding the price of gold down artificially, dumping Treasuries, and using the proceeds to buy gold. This can only hold down the value of Treasuries and make financing our debt more difficult. The London Gold Fix may be pushing down the value of Treasuries as a byproduct of holding down the price of gold.
Russia is following a similar path but with a twist. Our sanctions on Russia led them to drastically reduce their Treasury holdings and substitute gold as their underlying reserve asset. But in Russia’s case, they are using oil money to buy gold, and with nations around the world addicted to oil, they can sell either openly or through black markets. They are also moving toward the Yuan as a currency and partnering with China to disrupt the US economy and support wherever possible.
US Banking Issues
Our banking issues are directly tied to the sum of all these factors. As consumers and corporations reach their debt limit, a recession or depression always follows. A recession will slow consumer spending, tax revenues, and eventually inflation. It will also delay any stock market recovery and force our National Debt higher.
More seriously, a slowdown in the economy will bring more bankruptcies and defaults on office rentals. Banks are carrying massive unrecognized losses on bonds and cannot absorb more losses in other areas like loans. Banks will likely raise credit standards significantly to compensate for these challenges and clamp down on all lending.
Collectively, poor money management by individuals, banks, and corporations leads to an erosion of confidence in the dollar. This hurts markets, pushes up gold, and emboldens our enemies.
Why Does All This Matter
This matters because we live in a connected world where mistakes in any area of the economy have implications everywhere. We also live in a new world where economic problems appear quickly, and responses are generally tied to centuries-old solutions. Decades ago, our financial issues took place primarily on our shores. Today, our challenges are interconnected to all economies, and some nefarious players want to supplant our system of government with their own. These often see capitalism as a threat to their ability to control their people, and they seek to destroy it and us. It matters for our children and grandchildren, and we owe it to them to leave our Country and the world in better shape.
At the risk of becoming redundant, we will repeat this opening at the start of five articles with links so you can find them all when you bump into one. I work very hard to keep our articles under 1,500 words, but with some of these topics, that will not be possible, so please bear with me on these if they get longer.
Resources Used in This Article
Forget FAANG, Meet the ‘Magnificent Seven’ Stocks Surging in 2023, by Mallika Mitra for money.com, Nasdaq.com, June 16, 2023.
Gold Demand Trends Q3 2023, by World Gold Council, gold.org, October 31, 2023.
The Global Debt Bomb: Debt + Derivatives = Over 1 Quadrillion Dollars, from This $233 Trillion Bomb is Set to Blow, dailyreconing.com, by James Rickards, April 10, 2018, goldsilver.com, reprinted April 11, 2018,
The London Gold Fix: A Brief Guide, by gainesvillecoins.com, coinweek.com, August 3, 2022.
Who Really Controls The Gold Price?? The Answer is Quite Surprising, by SRSrocco, Gold-Eagle.com, April 28, 2017.
