The US Dollar Is Not Too Big To Flail
When the US Dollar (USD) is described as the least dirty shirt in the pile compared to other fiat currencies, that is far from a ringing endorsement. But, that is about the only positive thing they can say. They try to make the case that it is too big to fail as the world reserve currency.
Yet, America is in a Death Spiral of Debt, with interest on the debt and the debt itself completely unsustainable. Politicians are incapable of reducing spending, so the Death Spiral of Debt is here to stay.
It boggles my mind that more investors don’t see these realities and conclude the only way to combat the Death Spiral of Debt is to return to the Gold Standard.
Why own the least dirty shirt of a currency? When gold is a much sounder currency. Gold is the best money compared to paper currencies that are constantly being devalued and destroying purchasing power.
Since 2001, gold has shined as a beacon of light to store wealth and protect against the ravages of inflation. Actually, you can wind the clock back to 1971, when America went off the Gold Standard, it has served its role at protecting investors against the decimation of purchasing power.
Sure, it has had its ups and downs over the decades, but nonetheless, an ounce of gold has gone up dramatically over the years while a dollar buys you around 10 cents worth of stuff it did when America was on the Gold Standard.
Going off the Gold Standard put the economic cycles into the hands of the Fed and allowed politicians to spend like drunken sailors. What they have done is create a Ponzi Scheme of debt kept in play with excessive money printing.
It first brought on the stagflation of the 1970s. Then Reagan came in with the country the largest lender and when he left the country was the biggest borrower.
Successive presidents since Reagan have continued the trend and instead of a few trillion in debt. Now, America is over $35 trillion in debt and the debt is nearing 130% of GDP. While servicing the debt is over $1 trillion and well on its way to $2 trillion.
Compounding interest is wonderful when you benefit from it and devastating when you have to pay it.
Biden announced that he is ending his campaign, when it comes to debt growth and devastating inflation, he was an abject failure. But, Trump was just as bad when it comes to debt growth. It looks like Trump will coast to an easy win, and then continue the insane debt growth.
The only way to put much needed controls on the Fed and rein in the politicians spending is to return to the Gold Standard. Politicians on both sides are like children spending on their daddy’s credit card thinking that it has no limit and they can endlessly print money to pay for it.
Past Fed leaders, and other economists, said the US can never have a debt crisis because they have the printing press of the world reserve currency. Investors should have paid more attention then and certainly should now.
All of the economic smoke and mirrors have put the US into a Death Spiral of Debt with less than 2% of their debt backed up with the soundest money, gold.
The only thing backing the debt is the proposition that the US can never default on the debt because it can just print its way out. This notion has led to devastating inflation that has killed its purchasing power, since the US went off the Gold Standard. It ramped up again after the Free Money Era after the 2008 GFC.
When it comes to the Gold Standard, I don't think enough political leaders in the West, investors, and market commentators, understand how crucial it is to back up the debt in a significant way with gold.
Currently, the global government debt is a little over $300 trillion. With only around 1% of that backed up by reserves of gold held by the countries that owe that debt. This is completely unsustainable.
At least the BRICS nations see the problem and have started to back up more of their debt with gold. But, it is still just a small fraction of their debt.
Meanwhile, as they have been trying to return to a real Gold Standard, they have driven gold to all-time highs.
They are just getting started and the rest of the world needs to do the same thing. When, not if, they all pile into gold it will cause gold to go multiples of its current price.
Additionally, as they build up more gold in their reserves, I am convinced we will see gold return to playing an important role in international trade for goods and commodities.
By relying on the USD or their domestic currencies for trade, they are using inferior currencies that are constantly destroying purchasing power. Meanwhile gold is at all-time highs against every currency and a much better currency for trade.
One of my favourite gold and silver miners has a remarkable free cash flow machine of a mine. It enables them to sit on a significant amount of gold and silver. This is done to protect them against inflation. Not enough gold miners do this, but they should.
I don’t think this is something only for miners, companies in every industry have to deal with inflation. They would be well served to sit on gold instead of currencies as it is the best protection against inflation. Will they? Probably not, but it certainly would help them combat inflation if they did.
The BRICS nations are already moving toward the Gold Standard due to the Death Spiral of Debt. They are likely to increase international trade using the soundest currency, gold, for that purpose.
Sooner or later, America and other countries in the West will have to do the same. America’s days of building its economy on debt backed by nothing more than promises to pay using the printing press of the world reserve currency are numbered.
If I’m right and the world starts backing up their debt more significantly with gold and using gold for more international trade, those that don’t will be displaced by those that do.
These trends are causing powerful demand for gold. Meanwhile, gold production has peaked and is in decline. I watch the pipeline of gold production very closely and the gold miners aren’t replacing what they mine.
There just aren’t enough new gold mines coming into production, nor enough gold projects in development, nor enough exploration successes. So the decline in production is going to be with us decades into the future.
Whether folks realize or not, there is a gold renaissance happening that will result in a return of the Gold Standard and gold to play a growing role in international trade.
This will cause physical gold demand to overwhelm supply and drive the price of gold multiples higher than its current price. I didn’t throw out a prediction recently that gold would reach $20k within 10 years on a whim.
The writing is on the wall for everybody to see, some will pay attention to it and prepare for it and be rewarded, others will ignore it and won’t. That is what makes a market.
All the best,
Allan Barry Laboucan
Disclosure
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