The Next World Reserve Currency Will Be Gold
The US Dollar (USD) has fatal flaws as the world reserve currency while gold is the soundest money.
You don’t hear the USD called King Dollar anymore as its reign of power is diminishing. It held that position because America has the biggest military and economy in the world. While the current default argument is that it is the least dirty shirt amongst the fiat currencies.
The fatal flaws are readily apparent for all to see. Insane spending by politicians have caused the Death Spiral of Debt, brought to a theatre near you by the Fed’s Free Money Era after the 2008 GFC.
Gold has no government printing press devastating its purchasing power and no government can issue debt against it. For millennia that has spanned throughout human history, gold has been the soundest money and still is.
Back when former President Nixon put the final nail in the coffin of America being on the Gold Standard, he said that it was a temporary action. Temporary has turned into lasting for over 50 years.
While plenty of presidents since him, both on the left and right, have set the stage for a return to the Gold Standard, first outside the West followed by inside the West.
Nixon’s Treasury Secretary made a statement that has been somewhat lost in the annals of time. He said that USD is "our currency, but your problem" which should never be forgotten. When it comes to economics, it is one of the most arrogant things ever said.
Former leaders of the Fed have tried to one-up it by arguing that America could never default on its debt because it has the printing press of the world reserve currency.
These comments by the former President, former Treasury Secretary and former Fed leaders are all being to be tested. They were born from excessive pride and are being challenged in real time and ultimately will die on the vine.
Calling for the end of the dominant world reserve currency is obviously a big call that will be met with derision from many. But it is backed up with compelling evidence and an assumption.
At the time of other fiat currencies losing their world reserve currency position, it certainly wasn’t conventional wisdom that many predicted would happen.
The experiment of floating fiat currencies has led to devastating devaluation of the purchasing power of the USD and for every fiat currency. Meanwhile, gold is making record highs against every fiat currency and shining as the soundest money.
The world going off the Gold Standard has led to dire economic consequences. It allowed for insane spending by politicians and prolific money printing forcing a return to the Gold Standard. Giving politicians a perceived unlimited credit card and a wide open printing press for their fiat currencies.
The economies of the world have been built on debt with nothing more backing of it than a promise to pay. By politicians and central bankers that have created over $300 trillion of debt worldwide, using their IOUs that aren’t worth much more than the paper they are printed on.
America has the world’s largest economy built on debt that has recently broken above $35 trillion. It is on its way to possibly reaching $37 trillion by the end of 2024. The two presidential candidates have earned their badges of dishonour when it comes to being in office for insane spending.
I was shocked when annual deficits reached $1 trillion, that then turned into $2 trillion and whoever wins the presidential election will do their best to have them reach $3 trillion annualy. Some believe that $50 trillion of debt is at least 10 years in the future.
I wholeheartedly disagree and see it reaching $50 trillion by the end of the next president's 4-year term. Regardless of which candidate wins.
Earlier I mentioned an assumption, which is that politicians can’t help themselves from devastating overspending as they believe they have an unlimited credit card. They are spending junkies that are given their drugs by the Fed and other central bankers. In the West they will oppose a return to the Gold Standard because it puts restraints on their ability to indiscriminately spend.
The Death Spiral of Debt is not complex economics, it is basic math and simple logic based on the assumption that spending junkies will keep spending. I wish they would prove me wrong, but they won’t.
The $50 trillion number is built on the debt reaching close to $37 trillion this year and then $3 trillion plus, annual deficits for the 4-year term of the next president. They won’t stop spending like drunken sailors while the debt servicing is consuming a big chunk of the annual income from taxes.
I’m certainly not an esteemed economist but I am adept enough at math to see that two plus two equals a Death Spiral of Debt.
Milton Friedman is an esteemed economist who talked about the reality that inflation is caused by government spending. That lesson has been lost by far too many people in power.
Case in point are the “economists” at the Fed who saw the inflation as transitory and never took credit for their hand in causing it and foolishly thought they could fix it. Instead it has been persistent, who woulda thunk it.
That is what happens when you leave the people in charge to drive the car they drove into the ditch. They are failing horribly in their dual mandate on price stability and maximum employment, but refuse to admit it.
Shedding full-time jobs while increasing part-time jobs does not make for a strong jobs market. The health of the jobs market is the most important indicator of where the economy is heading. To understand what is really happening, one needs to look beyond the headline numbers.
The Fed and politicians would have you focus on the headline numbers that are nothing more than smoke and mirrors. The Fed will say that the jobs market is still strong. And the current politicians in the president’s party are just as bad by promoting they are great at creating jobs.
By trying to have folks focus on the headline number they are trying to hide the reality of how bad it is when a worker loses a full-time job and takes on two-part time jobs to make less money. Sure they can say one job was created but it is not an economically strong situation, don’t ask the Fed or politicians, ask the workers, they will tell you the truth.
The fatal flaws of the USD as the world reserve currency are there for everybody to see. The 2008 GFC led to the Free Money Era, which led to runaway inflation and the Death Spiral of Debt.
Raising rates aggressively to fight the less than transitory inflation has weakened the jobs market. The persistent inflation has caused the Fed to keep rates where they are, and is causing the costs of servicing the debt to go through the roof. And putting too much pressure on the real jobs market. They are killing the workers.
A few things are on the immediate horizon. One of those is that the Fed will be entering a rate cutting cycle that will likely start at the September Fed meeting. When they do, and by how much still remains to be seen. But, a rate cutting cycle is coming as they move back toward the Free Money Era.
Secondly, we will see in the rate cutting cycle that the Fed will get back in the business of increasing their balance sheet.
Thirdly, the next president will dramatically increase the debt, both candidates are spending junkies and will make the Death Spiral of Debt much worse. Bigly.
I certainly can’t be a good economist unless I give you the on the other hand analysis.
The other hand is gold which is by far the soundest money.
The path to gold returning to be the world reserve currency is happening in real time. It recently passed the Euro to become second only to the dirty shirt of the USD. Holding dirty shirts is not a good strategy for investors or consumers.
As the BRICS nations are returning to the Gold Standard, the price of gold is making a series of higher lows and higher highs while the USD is doing the opposite. One is in a powerful bull market and the other is in a troublesome bear market for the USD bulls.
These two trends are going to drive gold much higher and investors shouldn’t be surprised that they are taking shape prior to the Fed entering a rate cutting cycle.
With gold, the BRICS nations central bank buyers are hoarding on for dear life (HODL gold edition) while the people of China and India are the ultimate Golden Hand HODLers of gold.
Until recently investors in the West haven’t joined the party. But, they are now buying physical gold from retailers like Costco and the funds are flowing into the gold ETFs.
These various buyers are taking a lot of physical gold off the market as they Hoard On for Dear Life with Golden Hands.
The only thing that could make this scenario better is if the gold miners sat on gold instead of dirty shirt currencies. They would take even more physical gold off the market, send a signal that they believe that gold is the best store of value and by far the best way to combat against the evils of purchasing power devastation.
The gold price doesn’t need the gold miners to sit on gold, it is doing great with the other believers of its power to safely protect wealth and combat inflation, by hoarding. It would put fuel on the fire of the powerful gold bull market with the added benefit of juicing up their balance sheets.
Equally as bullish for gold, is that the supply from mining has peaked and is starting to decline. The miners aren’t replacing what they mine from their old mines, there aren’t enough projects in development to help replace the old mines and the explorers are unloved and struggling to make discoveries that can then be put into the development stages or be taken over by bigger companies.
The supply chain is broken from decades of neglect that will take decades to fix. There are a lot of structural problems that will insure that the gold supply chain will stay broken.
There is a people problem in mining as there just aren’t enough from prospectors to boardroom of miners. It is hard work, made worse by the ebbs and flows in its price, while technology companies offer cushier working conditions and higher pay.
The well known jurisdictions have been picked over with fine tooth combs for the past couple hundred years. Which makes exploration super challenging and why there aren’t nearly enough new discoveries.
The chronic under investment into exploration that leads to success is why the development cupboard is unable to replace the production from old mines.
The gold miners as a group have been relying on old mines for much too long which is why most struggle to increase production. Even while the price is powerful and goes against the conclusion in Economics 101 that suggests as the price goes higher so should the production. It isn’t, due to the structural problems plaguing the gold mining business.
As the BRICS nations return to the Gold Standard, they realize that gold is the soundest money and the best currency for international trade.
Although I am extremely bullish on gold, I believe that the best way for investors to profit from the powerful gold bull market is through the leverage they can get while paying historically discounted prices for ounces in the ground and ounces coming out of the ground.
The playbook for how investors can separate the wheat from the chaff in gold miners, gold mine developers and gold explorers is not overly complicated. One certainly doesn’t need to be a geologist to figure it out.
With gold miners, stick to those that are reporting records in free cash flow, increasing production and maintaining costs or decreasing them. For those that want a little more risk, the higher cost producers can show a shift from losing money or just scraping by to making money, and if they are making progress on increasing production and decreasing costs, all the better.
For the developers, watch where they are in the development window of the Lassonde Curve. The closer they are to the sweet spot when they transition from a developer to bringing a mine into production, the better. If you look at gold companies in development, many are trading at historical lows. They can offer excellent torque to the price of gold and are a place where major miners look for takeover targets.
When it comes to the explorers, because they are so unloved, you can find companies with important discoveries that should have them climbing well up the left side of the Lassonde Curve. Instead they are too close to the bottom of the left side of the Lassonde Curve and barely started climbing up it.
While gold is in a powerful gold market, the gold stocks still offer tremendous wealth creation opportunities as many haven’t joined the gold party yet.
I have recently reported that I see gold on a path to $20k within 10 years. The next important milestone is $3k and I think we will see that passed this year. The move to that milestone will bring a lot of generalist investors into gold and gold stocks.
All the best,
Allan Barry Laboucan
Disclosure
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