All this discussion gets us back around to gold. Gold is not an investment that fits many people because it produces no income. A retired couple with substantial gold holdings may starve for lack of income. But gold has a very valuable role to play in the preservation of wealth when used as a part of anyone’s overall investment strategy. This is something Central Banks know, and some are making moves to protect their core assets.
China and Russia have been making large purchases of gold over the past few years to ward off the effects of inflation and to strengthen their position on the world stage. Both want a new reserve currency with either the Yuan or a basket of currencies replacing the dollar. Both see our Congress pumping out money in a frenzy that they know cannot be sustained and provides an opportunity for them to propose alternatives.
If we look at the period from 2000 until the end of 2022, we get a bleak picture for the dollar. The response to the pandemic contributed greatly to the issues, but the issues have been bubbling up for decades. Congress and the Fed have a fondness for changing their measurements in ways that are confusing for the public. Here are just a few:
- Inflation (Consumer Price Index)
- Core Inflation (the CPI less food and energy)
- Personal Consumption Expenditures Index (PCE)
- Core PCE (PCE less food and energy)
- Producer Price Index (PPI the wholesale inflation)
And then within all these there are different government agencies and private sector companies publishing their own measures. The confusion is both intentional and nonsensical. We have become a nation where there are no facts, just pick the index that fits your narrative and expound away.
Let us look at something a little simpler. When the Fed looks at the money supply it uses two measures: M1 and M2. The Fed plays the same game and changes the definition from time to time so that the measures more closely align with the Fed’s goals or desired outcomes. The numbers have become so large that looking at the big picture and not the detail works for this discussion.
Looking at just these six numbers we can learn a lot about how we got into the mess we are in today.
- M1 – Cash and other assets that can be quickly and easily converted to cash held in banks. Think of it as checking accounts, coin, and currency that is always available.
- M2 – All the money in M1 PLUS savings accounts under $100,000. This adds to M1 all the money that can be converted to cash, just not as quickly as the money in M1.
- National Debt – The cumulative excess of Federal Government Expenditures beyond Taxes collected.
- Spot Gold Price – The amount in US dollars you would receive for one ounce of pure gold if you walked into a dealer and sold it.
- DOW Jones Industrial Average – An index of thirty prominent companies that fairly represent the overall stock market. The companies change infrequently, but they do change as companies tend to reflect the overall market more fairly.
- S&P 500 – An index of 500 largest U.S. companies based on market capitalization.
If we use December 31, 2000, as a starting point for each of these then we can measure the change on a relative basis. For example, if gold sold for $200 at the end of 2000 and sold for $1,000 on December 31, 2022 we would say it has an index of 5 (1000/200 = 5) Said another way, an ounce of gold would cost five times as much in 2022 as it did in 2000.
With just these six measures we can begin to understand at a very high level what has happened to our economy and just what a hole Congress has now dug for the taxpayers. On a percentage basis, only gold has increased in value more than the national debt and money supply.
For every $1 worth of gold in 2000, will now be worth $6.85.
For every $1 in debt the nation had in 2000, it now has $5.43.
For every $1 invested in the stock market, one now has $3.07.
The trend lines for M1 and M2 are easily misinterpreted because the Fed redefined M1 in 2020. The new definition was a result of a change in Bank Regulation D making savings deposits easier to withdraw. Before 2020 M1 must be estimated to establish comparable figures. We can illustrate this problem more clearly with the chart below. M2 is always larger than M1 in raw numbers because M2 includes all M1 plus other liquid savings.
What is disturbing in this chart is the raw growth of M1 and M2. The root cause of inflation has been and still is “too many dollars chasing too few goods.” When you couple the massive increases in the money supply from fiscal (Congress) and monetary (The Fed) policies with the supply shortages created by the Covid supply chain issues, then there is a 100% guarantee that inflation will result. When we have politicians so deceitful as to label an Act as the “Inflation Reduction Act” when anyone with more than an ounce of common sense knows it does the opposite, it is time for a new leadership.
We can just begin to see the reduction in money supply as the Fed raises rates and M1 and M2 start to decline. However, to return to the 2020 level, the Fed would need to withdraw roughly $7 trillion from the world economy and reestablish the trend line from 2019 and before. This cannot be done without triggering either a worldwide recession or depression because of our reserve currency status. In essence our Congress has put the world on a financial drug binge, and like most addictions, withdrawal is unpleasant and life changing. Domestically there is another challenge revealed in the first chart. To bring down M1 and M2 the Fed must raise interest rates and stop inflation. Doing this pushes up the national debt line to unsustainable levels. The Fed (and we by extension) are in a familiar “Catch 22” where the needed action produces the even more undesirable outcome, more debt.
When the pandemic hit the response at the Federal level was to shut things down and throw money at everyone. It is difficult to second guess the first response because pandemics are unforeseen, and few people alive today lived through the Spanish Flu Pandemic of 1918. But subsequent financial actions were not needed and have touched off massive spending, debt, and inflation. It also delayed people returning to the workforce and exacerbated support payments in the form of unemployment insurance. With no new taxes all of this fell to either increasing our national debt or just manufactured money by the Fed.
Our enemies are watching how Congress, the Fed, and President react to this crisis and unfortunately right now we are failing miserably. The only way out of the mess is to freeze spending, continue to raise interest rates, drastically reduce social programs, and raise taxes specifically targeted at the deficit. Congress and the Fed have shown neither the willpower nor bipartisan leadership needed to solve these issues!
The United States has the largest gold reserves in the world, a holdover from World War II not a planned action. According to the World Gold Council, at the end of 2022 the largest gold reserves among nations are:
United States | 8,133.46 tonnes |
Germany | 3,355.14 tonnes |
Italy | 2,451.84 tonnes |
France | 2,436.75 tonnes |
Russia | 2,298.53 tonnes |
China | 2,010.51 tonnes |
Switzerland | 1,040.00 tonnes |
Japan | 845.97 tonnes |
India | 787.40 tonnes |
Netherlands | 612.45 tonnes |
BRICS Consortium | 5,351.47 tonnes |
On the surface this looks fine, but the dollar must have built into it the confidence to remain the world’s reserve currency. With massive deficits and a fifty percent increase in dollars in circulation in just four years, others are eyeing the dollar as a relic of a safe currency. Our enemies see opportunity in this doubt and are massing gold and other hard assets to signal resilience in their currency. Gold is no longer a relevant backing for currencies, but large gold reserves send signals about central bank focus, currency stability, political stability, and soundness.
In 2022 central banks around the world bought a record 417 tonnes of gold. Who was the largest buyer? China of course. This follows a thirteen-year trend with central banks around the world as net buyers of gold. In modern history the last time this trend happened was the 1950’s.
Why would central banks buy gold? Fiat currencies are dependent on several key things being in place to hold their value. A ready supply of currency for trade, a stable political environment, a stable economic system, and a standing army are all prerequisites for a successful reserve currency. In our world right now, the United States looks shaky for the first time since World War II. There are too many dollars in circulation, our politicians are largely ineffectual, and our military stockpiles are being drained to support Ukraine, and our economy is in some ways on life support with high inflation and excessive debt.
Gold still has a stability factor where it is universally accepted, holds value, and a safe place to “hide” while the world shakes out. There is also a value factor that is not discussed very often. If I can buy something with a stable or increasing value, with something that has a declining value, I win. Countries such as China and Russia are now trading excess dollars for gold on a large scale. Gold is easily used in exchange and adds a stabilizing factor to central bank holdings, and bypasses artificial constraints in disputes between nations. Foreign Central Banks can read the same charts we see here and see the same weakening economic picture for the U. S.
It is time for tough decisions at the Federal level to set us on a better course. A course that will preserve the best of what we have while charting a sound fiscal course for the future.
This article and series were completed with the collaboration of freeman.
Research Source Materials
Saint Louis Federal Reserve Economic Data (FRED Database), stlouisfed.org, Various Dates, tables, and Charts.
World Gold Council 2022 Year End Report, http://www.gold.org, December 31, 2022.
Various Sources of broadly disseminated Market data and Central Bank data..
Three Part Series
This article is the third in a three part series on economic stability and the usefulness of gold in this environment. The full series can be seen here.
