Return To Real #9 - Sep 7, 2022
Investment perspectives have become dominated by the macro.
Inflation? Recession? Stagflation? These are the questions every serious investor is pondering. It means all eyes are on the Federal Reserve and what they will do next. The Federal Reserve has truly become the only game in town.
The Fed is the most powerful central bank in the world. Because it’s our central bank and due to our selfish proclivities as a nation, we tend to view the Fed’s decisions only as to how they impact us here at home, without also recognizing that the Fed’s decisions also impact every nation in the world.
The main thinking today is that the Fed must restore faith in the dollar in its fight to end inflation. The argument is that inflation is a long term cancer that could overtake the entire organism, and why all measures must be taken to squash inflation now. The only way to do that is to raise rates to levels that are restrictive, force the unemployment rate higher, and squash demand.
This is the current narrative coming from the Fed.
For linear and short term thinkers, and for those who believe what the Federal Reserve tells us, this would mean it’s not a good time to buy gold. For those who understand the complexities of the monetary system and who can do basic mathematics it may mean the exact opposite.
It all boils down to the investment horizon.
In the short term, should the Fed follow through on their spoken hawkishness, especially while Europe is embroiled in an energy crisis and Japan keeps buying bonds, it is quite possible we will see the dollar continue to strengthen. As that occurs and the DXY rises we could see further short term pressure on gold prices.
For those playing chess for the longer term there has rarely been a better bet.
Gold is priced in dollars. When the dollar strengthens relative to the major currencies, gold prices often get pressured. However, once we understand that the US dollar cannot be permitted to rise significantly higher than where it stands today, then we can take the other side and feel great about timing. I believe that further dollar highs from here will wreck our domestic economy, put additional inflation pressures on our allies, and assist our enemies in achieving their aims.
History informs us that whenever the dollar gets too strong, interventions are put in place to weaken it. The Great Devaluation highlights this very fact. It was a dollar that had gotten too strong relative to gold that forced FDR to recall gold and then devalue the dollar in 1934. It was a dollar that had gotten too strong relative to gold again in 1971 that caused the Nixon administration to close the gold window so that the dollar could float and devalue.
We are at a similar crisis moment again today.
When people today hear me say I am more certain than ever and that I continue to expect the price of gold to exceed $5000 per ounce by the year 2025, too many get distracted by the big number. They are overly focused on recent momentum and diverging central banks, or label the concept a “pie in the sky prediction” rather than one based on logic and historical performance.
One of the first things I hear when I bring up 1933 and 1971 is that we are no longer on a gold standard, and therefore a devaluation against gold is not applicable. To those I say, If I told you in 2001 that the price of gold would increase by more than 3.5X by the year 2008 because the dollar had become too strong and needed to decline significantly for the benefit of the world, would you have believed it then?
This is precisely what happened. In 2001 the price of gold was $276. Seven years later in 2008 the price of gold hit $973.⁽¹⁾ I see a similar move coming in the next few years because I am focused more on the problem than the mechanism. The reality is that the dollar is at levels where it has historically become a wrecking ball. At these times in the past it’s been a great bet to buy gold because dollar weakness becomes inevitable and provides the only real long term solution.
Of course the only way to validate any long term conclusion is to measure its performance over time.
It has been four years since 'Gold Is A Better Way' hit bookstores. The graphics below demonstrate the quality of the prediction thus far. Notice that gold prices have outperformed the S&P 500, the Dow Jones, and Treasury Bonds. Spot gold prices have already proven a far better way thus far and have significantly outperformed the traditional 60/40 portfolio (which has returned a meager 15% over the last four years) model by nearly three to one.
This scoreboard, however, is a tally through the fourth innings of a nine inning game.
The bull run in gold which has turned sideways over the last couple years is poised to resume its tear higher in the very near term. It’s not only what has happened over the last four years that instills my high conviction. It’s what has happened that so few have focused on that indicates the large upside move in gold prices is still in the very early innings.
There are two main reasons for my extreme conviction today.
One is temporal and has everything to do with the problem of a strong dollar and the global monetary crisis we sit within at this moment. The second reason is more long term oriented. I call it The Great Devaluation.
We Are In The Midst
Of A Currency War
Americans have a tendency to think the world revolves around us, and why many at home have missed the real crisis happening around the world. The Great Devaluation is happening on the global stage and coming soon from the traditional media to a living room near you. What most Americans have missed until now is that we are a global system that is under serious pressure. It is one that will likely have deep knock-on effects here at home as we head into the fourth quarter of 2022 and will undoubtedly become front page news.
The world is suffering through tremendous supply side inflation.
The combination of supply chain breakdowns from Covid-19 and the war in Ukraine have resulted in runaway energy costs in Europe and food shortages throughout much of the Middle East and Sub-Saharan Africa. These issues will most assuredly become a feedback loop that negatively impacts the US economy.
we are a global system that is under serious pressure...
The looming crisis, which has been foreseeable for many months, has now entered into a crisis management phase. This weekend, Gazprom, the Russian state run gas monopoly, promised it would halt gas supplies through Nord Stream 1 until the “collective west” lifted sanctions against Moscow over its invasion of Ukraine.⁽²⁾
The announcement, which should be of no surprise to our readers, has been devastating for the currency markets. The British pound fell to $1.14, the euro fell to below par with the dollar to $0.99 and the Japanese yen fell to Y144. As this has occurred the U.S. dollar has screamed higher and sits at 21 year highs over 110.⁽³⁾
From the outset we have believed that the invasion of Ukraine was not about the territory of Ukraine. Rather, we believed the war was a mechanism to ultimately force a monetary reset. I made this case in our 2/22/22 report. I am certain this has long been the aim of Putin.
It’s not as if he has been shy about his intentions.
Back in 2010, while speaking at a conference in Germany and during talks with German Chancellor Angela Merkel, Putin said he was confident that the euro would stabilize and strengthen despite the sovereign debt crisis we were going through then. He forcefully made his point and said, “We should move away from the excessive monopoly of the dollar as the only global reserve currency.” ⁽⁴⁾
One year ago when Putin began building up Russian troops outside of Ukraine, we argued this was a signal that demanded to be paid attention to. While most dismissed the military buildup at the time as intimidation with no bigger purpose, we saw a different story playing out. We believed that Putin was seizing the opportunity to force inflation on the world.
This is exactly what has occurred since. Many are just now waking up to the ongoing global currency war which is exposing an even bigger sovereign debt crisis.
Beginning in March of 2020, in response to the coronavirus pandemic, governments of G7 nations printed an unprecedented amount of new money in an effort to stimulate their economies. The effort was facilitated by central banks employing a money printing spree where interest rates were manipulated to 0% through massive government bond buying programs.
During this time the Federal Reserve expanded their balance sheet from $4 trillion to over $9 trillion.⁽⁵⁾ The ECB expanded their balance sheet from $4.6 trillion to $8.8 trillion,⁽⁶⁾ and Japan added 50% to their balance sheet.⁽⁷⁾ Each of these governments stepped in and directly distributed money for furlough schemes or raising unemployment benefits. The massive onslaught of fiscal and monetary stimulus put far too much money into the system.
Despite the regular denials coming directly from the Governors at G7 central banks as they were pumping the system with newly printed money, these expansionary monetary policies are the root cause of the runaway inflation we are witnessing around the world.
Central banks were aware of what they were doing. They intentionally continued the monetary expansion for far too long, despite the drastic inflationary consequences.
They are also aware of who the losers of these policies are.
What Benefits Some Punishes Others
What do these actions have to do with Russia and the Ukraine?
It’s only until we recognize that loose and expansionary monetary policies of the last 15 years have benefited the west while simultaneously punishing the economies of the east, will Putin's agenda become more clear.
Consider first the US dollar.
Since February of 2020, the M1 money supply of the United States increased from $4 trillion in to over $20 trillion today. This means that 80% of the M1 money supply in U.S. history has been created in just the last two years. This action was the first official step of The Great Devaluation.
Since 88% of all currency transactions occur in dollars, the value of the dollar is of critical importance to the world. This is true for us at home, for our allies, and even for our enemies. Our dollar has become a weapon far greater than any army or nuclear missile.
Here’s where it gets confusing for some. One might logically expect that when a nation expands their money supply by 5X it would come with a significant devaluation of the currency.
More supply of dollars means a lower dollar value, right?
The answer depends. If we are talking about the dollar relative to real things, yes. If we are talking about the dollar relative to other currencies, no. It’s one of the unique features of controlling the monetary system and owning the title of reserve currency of the world.
While the G7 countries have dramatically expanded the money supply over the last two years, their central banks have also had a stranglehold on the level of interest rates. The bond buying programs of the Federal Reserve, ECB, and Japanese central bank have artificially suppressed interest rates lower than what they would be in a free market. This has effectively propped up the G7 currencies. This manipulation has forced countries with a positive trade balance such as China, Brazil, and Russia to accept the inflated currencies without getting a fair price in exchange.
As the G7 has manipulated the value of their currencies, it has punished export nations who are required to hold these currencies in reserve. This predicament is indicative of the end of a supercycle where the nation who controls the reserve currency is able to squeeze other countries through financial manipulation.
These supercycles ultimately turn in one of two ways, war or accord.
Enter the war in Ukraine.
The reasons for the energy crisis forced on the world today via Russia’s war in Ukraine are eerily similar to the reasons for the oil crisis we endured in the 1970’s.
The crisis then was the direct result of Nixon closing the gold window and allowing the dollar to fall. As the dollar became a fiat currency, it forced the Saudis to jack up the price of oil in order to continue getting a fair price. We note that these actions led to the last stagflationary era in the United States. The exact same scenario is playing out again today as export nations seek to offset our currency devaluation.
Consider the problem through the lens of an export nation. If the world were linear, a 5x expansion in U.S. dollars over the past two years could be offset by an export nation raising prices by 5x to offset the increased money supply. If the world were linear it would effectively produce an 80% devaluation of the dollar.
But the monetary system is not fair or linear. It’s complex and, most importantly, rigged for the benefit of those who control it. The successful globalization of the world economy has empowered the dollar to be the only real option, everywhere. The world needs dollars so badly that anytime we try and shrink the dollar supply we risk putting the world into recession. This power has become a weakness insofar as it may mean the Federal Reserve can never effectively tighten again. At least not under the current monetary regime.
There are three main components to understanding this logic. The first is how the dollar is measured. The second is the overall balance of trade amongst G20 nations, and the third is who wins and who loses under these expansionary monetary policies.
Let’s begin with the The U.S. Dollar.
The Dollar Index
The Dollar Index (DXY) tracks the price of the US dollar against six foreign currencies, aiming to give an indication of the value of USD in global markets. The index rises when USD gains strength against the other currencies and falls when the dollar weakens against other currencies. The DXY contains six component currencies: the euro, Japanese yen, British pound, Canadian dollar, Swedish krona and Swiss franc.⁽⁸⁾ The DXY is a weighted index and is made up of 57.6% euro, 13.6% Japanese yen, British pound sterling 11.9%, Canadian dollar 9.1%, Swedish Krona 4.2%, and the Swiss franc has a weighting of 3.6%.
The weighted index is made up of American allies.
This means that the value of the dollar is directly determined by our friends and is not an “open” market. This means that if the Federal Reserve wants to keep interest rates pinned at 0% and expand the money supply, so long as the other G7 nations do the same thing at the same time, we can dramatically increase the supply of dollars, euro’s, yen and pounds, without negatively impacting the overall value of the dollar index.
This effectively allows the west to freely print money with no negative recourse.
The three largest currencies in the DXY basket, the euro, the yen and the pound are all from countries that have taken on massive expansionary policies over the past several years. The coordinated monetary expansionary effort has forced countries with a positive balance of trade to accept the diluted currencies that they must then hold in reserve. This makes the global money system a force that is impossible for export nations to overcome.
Keep in mind that the only reason for the DXY to move higher or lower is when the policies of the G7 central banks diverge. This is what has occurred over the course of the last nine months.
The Federal Reserve began raising interest rates well before Europe and the Bank of England which each only began discussing tightening monetary policies in recent weeks. Japan has not followed suit at all and continues to run their bond buying program through today. As the Fed has been more aggressively hawkish, we have witnessed the dollar gain strength relative to our G7 counterparts.
The euro is down 16%, The pound is down 17% and the Japanese yen is down 22%.⁽⁹⁾
Source: tradingeconomics.com/euro-area/currency
Ironically this means that despite inflation at home of 8% and at forty year highs, Americans enjoy a currency that is actually stronger on the world stage by 19% over the last one year. This explains the subtle difference between a dollar versus real and tangible things, and a dollar versus financially inflated things.
Despite the massive monetary expansion of the last two years where the US debt has increased from $22 trillion to $30+ trillion, and while our balance sheet has more than doubled, the dollar has gotten stronger.⁽¹⁰⁾ The DXY has risen from 92 one year ago and today stands today above 110. The DXY stands at twenty one year highs of about 110 today.
Instead of an 80% devaluation of the currency due to our 5x expansion of the money supply in the last two years, we have actually produced a stronger dollar.
While this distinction hasn’t helped reduce the price of food and rent and gas and doesn’t matter to most Americans, it means everything for financial markets and the global balance of power.
Keep in mind that over most of the last 15 years the central banks of the G7 have run highly coordinated monetary policies. This has allowed the G7 to massively expand money supply without any G7 nation enduring any significant inflation.
Putin understands that the only way to create inflation is from the supply side.
Once that inflation is unleashed, and becomes a political issue, the only solution for central banks is to raise interest rates and tamp down demand. We believe that China understands this as well and why the Chinese have doubled down on their lockdown policies. The benefit for China to doing so is that it limits demand and keeps Chinese inflation muted.
Russia’s war with Ukraine puts critical food and energy supplies that the world needs to survive in jeopardy. Demand has exceeded the supply and as a result prices are rising. The war has caused central bank policies to diverge as each individual economy of the G7 is affected differently. The U.S. is in a far better position to raise rates than Europe who is suffering from the supply shortage. We see Putin’s actions as a chess master who recognizes the only way to break the back of the monetary monopoly controlled by the United States is to force apart the colluded efforts of the G7 central banks.
This has happened.
It’s why inflation is raging overseas and every hint of a Fed that will tighten more causes the dollar to rip higher and punishes the other G7 countries unable to follow suit. When the media suggests that Putin is an unhinged madman they are playing into a story that the west wants the world to believe, except it’s not accurate. Putin has been on record and actively engaged in finding solutions outside the dollar for over a decade.
Don’t forget that in February of 2014 Russia invaded and quickly annexed Crimea.
In response the United States enacted financial sanctions against Russia. These actions forced Putin and much of the autocratic east to rethink the monetary system that could be closed off at any time by the United States and could be manipulated to expand the currencies of the west so long as they coordinated with one another. Since then the BRIC nations (Brazil, Russia, India and China) have bound together. The BRIC’s are export countries who sell their inexpensive oil, natural resources, materials, and cheap labor to the modern west in return for dollars.
The level of the DXY has continued to rise and frustrate our enemies.
From 2006 through 2014 the dollar index spent the vast majority of that time at an average of 80. However, from June 2014 through March of 2015 the DXY rose from 80 to an average of 95, where it had mostly remained through March of 2020. Since 2020 the dollar has continued to surge even higher and today stands at 110.
When we consider that the dollar has risen from an average of 80 in 2000’s to highs of 110 today in the face of our expanding the balance sheet by 10x and while our national debt has risen 3x we begin to recognize that the United States and the west have a power today that is similar to Rome during the Roman Empire, specifically to Rome’s ability to remove silver from the coinage and force the citizens to use and accept it.
The Goldman Sachs Commodity Index (GSCI) is an index that measures the value of the commodity complex.⁽¹¹⁾ In 2011, the index stood at 750. Today, the index trades at 650 and is down roughly 15% in the last eleven years.
Does this make sense? How can it be that the price of real things has become so manipulated that commodities have lost 15% in the course of the last 11 years?
As we consider this problem through the eyes of commodity and labor producing nations like Russia, China and Brazil we recognize why a changing global order is inevitable. So long as the monopoly on the reserve currency and its value is controlled by the United States and her allies, there is no way to offset the monetary manipulation from producer countries, except through supply side inflation.
This is why the supercycle, which signals the end of a reserve currency, almost always ends in war.
The Balance Of Payments
The west has made what we see as a mortal mistake. It’s one that is now being exploited by Russia and China and is forcing a global monetary reset.
While the developed G7 nations have been able to prop up their economies with diluted currencies over the last decade through collusion, they have also become more reliant on critical imports of labor and energy from Russia and China and other exporters damaged by our financial manipulation. Europe, the United Kingdom, and the United States all run a negative balance of payments that have gotten worse in the last twelve months.
The main reason for this here in the United States is the surging dollar.
From 2015 through 2020, while the dollar index averaged roughly 95, the United States ran trade deficits of roughly $500 billion dollar per year. Today, and because of a super strong dollar, our deficits have doubled and are now $864 billion.
As the dollar has become artificially inflated it has incentivized businesses and market participants to import labor, materials, goods and services that would be more expensive to create at home. This reality weakens our nation as it eliminates our industrial capacity while we outsource our most important needs. It also means lower GDP at home and points to deeper and deeper fiscal deficits.
The positive that comes from inflated currencies is massive debt expansion. The negative is that they incentivize outsourcing and reduce productivity.This is Trump’s main argument why America is so weak. The only way to make America great again is to fix this ponzi scheme that rewards financialization and brings production back home and re-industrializes America.
Over the course of the last decade most of Europe has fallen into negative trade balances as well. The one exception during this time has been the financially prudent Germany, who managed to export more than they have imported for the last thirty years. That is until now. According to Bloomberg on Monday, Germany reported its first monthly trade deficit in 30 years.⁽¹²⁾ The shortfall in May for Europe’s biggest economy was $1 billion euros.
the dollar is too strong...
The trend is concerning, especially when we realize that our biggest allies have all fallen into the same negative balance of payments trap that we have. It would be one thing if the G7 nations had been investing in the industrialization of their economies and could redirect food and energy trade toward our allies. Unfortunately the opposite has occurred, Germany relies on more than 50% of their energy needs from Russia. The United States now outsources nearly a trillion dollars of GDP a year overseas. The negative balance of payments is a loss of new investment that could be made at home.
But the problem has now become a crisis in the United States. We have reached a negative balance of payments close to 5% of our GDP. This is a signal of true danger for the American economy. In the process of propping up our financial system with printed dollars, we have eliminated the middle class and have put our country at severe risk by becoming too dependent on other countries.
It’s why we now focus on the problem that will soon become front page news.
The dollar is too strong. It’s killing our domestic economy. It’s pushing inflation on our allies and it’s helping push together our enemies who have gotten stronger in the process.
What many gold bugs will find important, and one of the major predictions of The Great Devaluation, is the negative consequences that come with a currency that is too strong. Our extreme negative balance of payments in 1971 was the main catalyst that induced the Nixon administration to actively devalue the dollar against gold. Not coincidentally, it was a negative balance of payments in 1933 that caused FDR to recall gold and devalue the dollar.
It’s time once again for a coordinated response.
Winners And Losers
The more the west attempts and manipulates through sanctions and price controls the more we can expect for Russia to twist the supply chain knife. Europe has become far too dependent on Russian energy and now faces a tremendously harsh winter.
Gazprom announced on Monday that it was turning off the gas to Europe in response to the G7 leaders decision to implement a price cap on Russian oil.⁽¹³⁾ This policy decision has been very predictable.
In a speech on June 17th in front of the St. Petersburg economic forum and not televised before here in America, Putin explained it all succinctly.
Caught in the inflationary storm, many developing nations are asking: why bother exchanging goods for dollars and euros when they are losing value before our very eyes? Indeed the economy of imaginary wealth is being replaced by the economy of real valuables and hard assets. According to the IMF, today’s global currency reserves contain $7.1 trillion dollars and $2.5 trillion euros and this money is depreciating at an annual rate of about 8%. Moreover it can be confiscated or stolen at the whim of the U.S if it disapproves of something within a country’s policy. I think it has become a very real threat for many countries that keep their gold in and foreigh exchange in these currencies. According to objective expert analysis, in the coming years a conversion of global reserves will get underway. Reserves will be converted from weakening currencies into tangible resources like food, energy, commodities and other raw materials. Clearly this process will further fuel global dollar inflation.
– Vladimir Putin, 6/17/2022
Putin, as we see it, understands three main things.
1. As he turns off the gas he is forcing higher prices.
2. The only way for G7 countries to offset higher prices is for their central banks to raise interest rates.
3. As central banks raise interest rates they force their over indebted economies into recession.
It all adds up that Putin, despite the efforts of the west to squash him, is winning.
The more pain he can inflict on Europe through inflation and energy and food shortages, the more likely the west will need to bend to his will and submit. Any doubt about this outcome can be seen as countries such as Hungary ⁽¹⁴⁾ and Saudi Arabia and China sign deals with Gazrpom to ensure the energy keeps flowing this winter.⁽¹⁵⁾ This week it was announced that Gazprom had signed a deal with China to convert payments to rubles and yuan.
As more and more European nations dependent on Russian energy realize that their decisions are a matter of life and death for their citizens, we expect more and more countries will make deals to buy Russian energy in rubles.
We are watching China and Russia and other BRIC nations come together to create a new currency system outside the dollar and the euro.
As this occurs over time the dollar will continue to be less and less in favor. As central banks sell dollars and buy other currencies the dollar will weaken. As the dollar weakens, gold prices will rise.
It’s not a new theory. It’s one we have been writing about for the last four years.
The Great Devaluation
We exist within a global monetary system controlled by central banks who have no choice, particularly with the amount of indebtedness around the globe, but to devalue their currencies over time. This is nothing new and is why physical gold has long been considered the investment of Kings and has been a favored asset of the wealthy for more than 5000 years.
Remember that all wealth is held in currencies controlled by governments. Individuals looking to maintain wealth must have a plan to overcome the depreciation that currencies will endure over time. Gold has historically been seen as one of the very best ways to maintain value and pass along generational wealth.
You won’t find a lot of young people investing in gold because most young people have not acquired any real material wealth. Most young people are more interested in getting rich than staying rich. You won’t find the financial media talking too much about physical gold either. The CNBC’s and Bloomberg’s of the world get their advertising dollars from Wall Street. Gold is not something that investment banks or advisors recommend because it’s not something they can effectively sell. Physical gold requires no ongoing management and therefore generates no ongoing fees.
For these reasons gold has been labeled and is mostly seen as a contrarian investment. It’s also why so few people understand how to buy physical gold.
Physical gold is an asset without also being a liability. While this has always been the case, this feature has never been more relevant than today. All other financial assets have counterparty risk. No third party needs to “perform” for gold to be gold. Physical gold requires zero trust and makes more sense today in our world of fake news and propped up markets.
While gold coins come with a country's stamp on them, the value attributed has nothing to do with the stamp on their face and everything to do with the gold content inside. This makes gold’s beauty far greater than skin deep. This unique feature of physical gold is the reason why every central bank (except Canada) in the world holds physical gold in reserve. Gold is the third largest reserve holding of all central banks behind the US dollar and the Euro.
Currencies come with risk.
Governments who take on too much debt, or become over reliant on other countries’ productivity, or have weak political systems may be in jeopardy of having currencies that devalue and can become obsolete. These are three giant concerns facing the American economy today. The easiest and most obvious big picture reason to own physical gold is the massive debt experiment the world has undergone in the last 20 years. Once government debt levels get too high, the only solution becomes servicing the debt with diluted currencies.
Real growth or elevated inflation are the only two reasons for interest rates to rise.
Real growth witnesses healthy yield curves and rates that can organically rise over time. However, once government debt levels become too extreme, higher rates due to growth become a fiscal headwind and are mathematically unsustainable. Rising rates today ensure that costs to service our debt will rise even faster than our growth.
In fact, the more we grow the more we owe. This means that the US dollar is already among the walking dead.
The second and more problematic reason to raise interest rates is then need to fight inflation. If we cannot grow our way into higher rates, we assuredly cannot willingly raise them to fight inflation without also causing a self-inflicted and depressionary mortal wound.
It’s why the macroeconomic perspective is so critical to understand for long term investors.
What the Fed will or won’t do in the short term should be of far less concern to long term investors than what they can accomplish over the medium to long term. All the tough talk on fighting inflation in the world won’t change the reality that we cannot afford another recession. Our debt to GDP levels require that we avoid recession at all costs, and why it’s so clear that while the central bank is talking a tough game today, there are only two possible outcomes from here, a serious recession or extended elevated inflation.
The main premise of The Great Devaluation was that we had hit the breaking point where our debts as a country would become too big a drag and would not allow central banks to tighten without causing fiscal doom loops. It’s why today I am so excited about the near term prospects for gold prices. I believe we have hit the moment where the Federal Reserve cannot tighten further and must choose between pushing the economy into a deep recession or staying behind the inflation curve and manipulating interest rates below real inflation.
The debt clock has hit midnight and there is no turning back.
Of course timing is critical for investors. We exist in a global currency system where exchange rates are constantly moving. While many of us have experienced the dollar buying less food, rent, and gas over the past year, it buys us more Euro’s, more Yen and more Pound Sterling.
When considering timing on gold we need not only look at the long term value of the dollar versus gold, but also the short term value of the dollar versus other currencies.
But $5000 gold by the year 2025?
That prediction seems outrageous to many today, especially when considering that gold has mostly traded sideways in the last two years, that the Federal Reserve is now tightening monetary policy, and that Europe and most of the world are facing impending food insecurity and energy shortages which makes investing in their economies and holding their currencies all the more risky.
It seems that everyone agrees the dollar can only get stronger under this global backdrop. This is why so many pundits are predicting gold prices won’t rise, but that they will fall from these levels.
I’m most focused on the solution being a weaker dollar. The last time we found ourselves in this position, we witnessed the dollar drop over the next six years. As that occurred gold prices more then tripled.
It’s true that the dollar is on a tear and has risen 19% since August one year ago. Back then the DXY was at 92. On Tuesday September 6th the DXY closed above 110. The dollar is booming relative to other currencies. Naturally as the dollar has strengthened gold has been pressured. Gold prices have fallen over 5% over the last year. This performance in the face of the highest inflation in forty years has left many people to believe that gold no longer works.
I believe these people do not understand the how and why of gold. They also miss what's happened to the DXY over the last four years and why buying gold under $1800 spot presents what I believe to be a once in a twenty year buying opportunity.
“Buying right” never feels good. It’s why I dare say that there may never be a better time than now to get seriously invested in gold.
Allow me to make a final point about something that everyone seems to have missed about the dollar index and the price of gold over the last four years. In August of 2018 when Gold is A Better Way was published, the DXY was at 95 and the price of gold was at $1200. Today the DXY is over 109 and gold spot gold prices are over $1700.
That’s right.
Gold prices are 42% higher despite the fact that the DXY is higher by 14%.
Let this one fact sink in and the bells of opportunity will be ringing in your head.
Had you told me four years ago that the DXY would be 14% higher by today I would probably have never written GIB in the first place. When I wrote the book I was more of a linear thinker and would have believed a stronger DXY would have meant a lower gold price not a higher one.
It was only as I witnessed the years unfold in real time that I began to recognize The Great Devaluation the world is living within.
The big secret to gold is this: while we are no longer on a gold standard, gold is still the standard by which our currency is measured. Gold is priced in dollars. When the dollar strengthens it takes less dollars to buy the same amount of gold and prices fall. When the dollar weakens it takes more dollars to buy the same amount of gold and prices rise.
Over the last two years the concept has become distorted. The dollar, like all currencies, has weakened over the last four years. It’s why gold is up 42% despite the DXY rising.
But the DXY is poised to fall for geopolitical reasons and because the strong dollar is killing the world. It’s why we believe it’s time to get greedy.
Any prediction about the future price of gold must take into account the future relative value of the dollar. Notice the emphasis on the word relative. While gold priced in dollars has traded sideways for the last two years, gold prices have hit all time highs virtually everywhere else. Gold prices are only down in the US and Canada. They sit at all-time highs in every other major currency in the world.
Recognizing The Great Devaluation can make us all wiser.
I personally understand the complexities surrounding the question of the value of the dollar better than before. The fact that gold prices are 42% higher in the last four years averaging a return of more than 10% annually while the DXY is also higher is an indication that we are deep inside a sovereign debt crisis of The Great Devaluation, an era defined by the ongoing loss in the value of all government currencies relative to gold.
Because of the tremendous pressure that the dollar is having on the global system, and due to the horrific negative balance of payments here at home, I have little doubt in my mind that gold prices will rise to as much as $5000 per ounce by the end of 2025.
This, I believe, will become the number one political issue in the 2024 presidential campaign.
This does not mean that the dollar index can’t continue to strengthen from here in the shorter term, or that gold prices cannot also go lower from here. Keep in mind that the DXY hit today’s level of 110 twenty one years ago in May of 2000. By July of 2001 the DXY had risen 8% higher to 118. During that span gold prices dropped 4% from $276 to $266.
The big takeaway should be that the DXY is a shorter-term measuring stick and tells us nothing about the price of gold over the long term. The DXY was at 110 in the year 2000 and gold was priced at $276. The DXY again is at 110 and gold prices are $1706. We have the same exact dollar strength relative to other currencies as we did at the turn of the century. However, when measured against the price of gold we see the truth.
Gold prices are more than 6X higher against the dollar.
Just as it’s impossible to recognize the day to day growth happening in our world all around us, the expansionary monetary policies and the extreme impacts they’ve had on the global contract can only truly be appreciated over time. It’s only when considering the system as a whole and over time that we come to the conclusion that money systems are cyclical and have a beginning, middle and end.
Endings are always signaled by crisis mode.
One Minute Past Midnight
Crisis mode is when the principles and foundations of nations become superseded by the calamitous moments and become the excuse for the accumulation of impossible and unpayable debts.
There is no doubt in my mind that the dollar supremacy we have enjoyed over the last forty years is rapidly weakening. I encourage everyone who recognizes this to take action now and protect yourself. I recommend buying physical gold while it’s still possible and before the inevitable events I highlight in the Return To Real Essay Series come to complete fruition.
We have become conditioned to believe that the Federal Reserve can save us. This is what they have continually done throughout the past 15 years and why so many are certain that they will do so again. As the Fed has gained more and more control, especially in the last two years, gold has lost more and more of its luster.
The truth as I see it is that the Fed wants and needs less people to have faith in them.
I believe the Fed wants and needs the dollar to devalue from here.
It’s the one obvious ailment killing us at home and the world at large.
The big winner, in both the short and longer term should our dollar remain too strong are our enemies who have prepared for this moment for much of the last decade.
Putin is winning. He understands that pain provides leverage. The world is suffering, not because of Putin’s actions, but rather because of our poor response. The “unification” of the G7 countries and the unilateral response to sanction and financially punish Putin has backfired in a big way. The central banks are driving the world into a recessionary spiral with only one eventual way out. More money printing.
The surest thing in history has been gold. The dollar, as is the case with all currencies has and will continue to devalue. At least if history is our guide. We can be sure of this one reality. It’s why, when the recession comes, and central banks must slow down and turn on the printing presses, we will see a dramatic weakening of the U.S Dollar.
When the goal is to win and win today this matters less.
However, for those seeking to win big in the long term the decision as I see it has never been easier. There is blood in the streets on gold prices today. This means there’s only one thing to do.
Now, in my opinion, is the time to buy physical gold with both hands.
Author: Adam Baratta
References:
[1] Source: https://goldprice.org/
[2] Source: https://www.ft.com/content/2624cc0f-57b9-4142-8bc1-4141833a73dd
[3] Source: https://www.marketwatch.com/market-data/currencies
[4] Source: https://www.telegraph.co.uk/finance/currency/8163347/Putin-Russia-will-join-the-euro-one-day.html
[5] Source: https://fred.stlouisfed.org/series/WALCL
[6] Source: https://www.ecb.europa.eu/pub/annual/balance/html/index.en.html
[7] Source: https://www.boj.or.jp/en/statistics/boj/other/acmai/release/2022/ac220831.htm/
[8] Source: https://www.investopedia.com/terms/u/usdx.asp
[9] Source: https://tradingeconomics.com/euro-area/currency
[10] Source: https://www.marketwatch.com/investing/index/dxy
[14] Source: https://www.politico.eu/article/hungary-signs-deal-with-gazprom-over-additional-gas/
[15] Source: https://www.foxbusiness.com/markets/russias-gazprom-signs-gas-deal-china-convert-payments-ruble-yuan
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