A common expression among bikers who love to ride is, “It’s not the destination, it’s the journey.” TS Elliott and others made similar statements nearly a century ago.
How Does This Apply to Gold and Dollar Devaluation?
Some adults understand:
- Voltaire said over 200 years ago, “Paper money eventually returns to its intrinsic value – zero.”
- The value of the U.S. dollar has declined from about 1/40 of an ounce of gold to its current level of about 1/1300 ounce of gold since 1971.
- Because central bank and government policies perpetually increase debt and currency in circulation, the value of the dollar inevitably trends toward zero.
- The destination of the dollar is clear – to near zero. But the journey is important. Will the path of dollar devaluation be slow and steady or a crash that hyperinflates the dollar currency?
- The U.S. dollar is the reserve currency in global trade, but its importance declines every year.
- Reserve currency status does not last forever.
The value of the dollar as measured in gold since 1913:
The value of the dollar has devalued against food, automobiles, and most other commodities and paper assets. Another example of devaluation comes from the tobacco index (a proxy for the cost of cigarettes) as calculated by the St. Louis Federal Reserve:
The dollar is heading toward zero along with other unbacked debt based currencies. It may take several years or many decades. The specifics and timing of the journey are unclear.
Why? Debt! Dollars are created as debt; they are borrowed into existence by commercial banks and central banks that increase debt and collect interest as revenue. Official national debt has increased exponentially (a straight line on a log scale graph) since 1913.
Another interpretation of debt comes from FRED, the St. Louis Federal Reserve. The FRED tracks total debt securities, which also have increased exponentially.
Everyone wants more dollars to spend, whether they are single mothers, small business owners, corporate managers, state governments, pay-to-play foundations, or national governments. But as more dollars are borrowed into existence, debt increases, and every existing dollar is devalued closer to zero.
Bankers understood this before the Federal Reserve was planned at Jekyll Island in Georgia in 1910. They wanted to increase bank profits as they encouraged government and individual debt, collected interest, and gradually squeezed the value out of savings and investments through their inflationary increase of currency in circulation.
Why Create The Federal Reserve? Wealth and Power!
- Politicians spend more dollars (deeper into debt) buying votes and transferring wealth to their friends and owners.
- Bankers increase their wealth and power.
- Governments spend more dollars for wars and entitlements. They increase wealth and their influence over other countries.
- Corporations borrow inexpensively to augment their wealth, power and bonuses.
Devaluing the dollar has transferred wealth to the upper few percent, the financial and political elite. Read David Haggith.
The Problem: Dollar devaluation benefits the financial elite. The lower 90% suffer if their savings and retirement are stuck in dollars which do not retain value.
The middle class can protect savings and retirement from devaluation if they depend upon hard assets such as gold and silver. You can protect your purchasing power with real money that has been a store of value for thousands of years.
But why invest in gold when the U.S. stock market is roaring higher?
Warren Buffett suggested one million (or more) for the Dow in 100 years – a compound rate of increase of 3.8% per year. Both stocks and gold will be priced much higher as dollars devalue. Gold would increase to over $2,000,000 in 100 years at a 7.7% compound growth rate, its growth rate since 1971. Official national debt would exceed $100,000 trillion at its current growth rate. A reset is more likely.
Consider this graph of gold divided by the Dow since 1971 when President Nixon severed the remaining gold backing for the dollar. Gold and the Dow have risen since 1971 but because the Dow has bubbled to all-time highs and gold remains 33% below its all-time highs, the ratio favors gold in late 2017.
Central bank “money printing” and outright purchases of stocks have levitated the DOW. John Mauldin reported that the list of stocks owned by the Swiss Central Bank is 66 pages long. Amazing!
“Printing” currencies from “thin air” to buy stocks is an exceptional benefit exercised by the Swiss Central Bank (and others).
Russia and China have steadily purchased gold bullion. Russia reports they own 1,779 tons of gold, while China obscures their holdings. However reliable speculation by Alasdair Macleod indicates that China holds in excess of 20,000 tons of gold. Both countries have converted devaluing dollars received from trade into gold, and both appreciate currently inexpensive gold prices.
Unfortunately, the American public and institutions prefer digital assets and paper debt while Russia and China have accumulated gold bullion.
Repeat: Russia and China have accumulated gold bullion. They understand that dollars will be created by the trillions, and thereby hasten the devaluation toward the dollar’s destination of near zero value. Gold will become increasingly valuable because it is desired by individuals and governments while the supply is small and grows slowly.
The Journey – Possibilities:
- Slow and steady: The dollar is devalued slowly while gold rises 6 – 10% per year. Many dollars will be created while politicians talk and collect payoffs.
- Spikes and jolts: Interest rates could increase from multi-generational lows and cause another credit crisis as per 2008. The dollar might collapse as central banks address their self-created problem by attempting to reflate the dollar and credit bubbles. The global trauma in 2008 might be mild compared to what could happen with currently inflated stock, bond, and currency prices. Expect government created distractions. (The spikes and jolts scenario seems likely.)
- Loss of Control: Central banks and governments lose control, “black swan” events occur and currencies hyperinflate. Think Zimbabwe, Venezuela, Argentina, and hundreds of other countries and currencies. Expect severe social trauma if governments hyperinflate.
The path the dollar travels on its journey toward zero is important, but gold and silver will become increasingly valuable in all scenarios. A credit crunch may devastate many debt based assets and cause hard assets to spike upward. Hyperinflationary “money printing” will boost gold prices to unheard of numbers as the value of dollars, and most fiat currencies, falls toward zero.
CONCLUSIONS:
- The destination for the dollar and most unbacked currencies is near zero.
- Global debt will increase exponentially and currencies will be devalued. Gold is the ultimate hard currency and will be priced much higher in devalued currencies.
- Digital debt based assets have been levitated to previously unbelievable levels. Who would have believed in 2009 the Dow would exceed 23,000?
- Debt (leverage) has increased to dangerous levels. Global debt exceeds $200 trillion. U.S. official national debt exceeds $20 trillion and unfunded liabilities are $100 – $200 trillion. Europe has issued trillions in negative interest rate debt. Dangerous!
- Few believe in 2017 that gold will sell for $10,000 or far more during the next crisis. However, it is only a matter of time.
- The ratio of gold to the Dow suggests gold will be revalued much higher, possibly soon.
- While the powers-that-be assure the populace everything is wonderful and while stock markets rejoice, gold and silver are inexpensive. Call Miles Franklin at 1-800-822-8080.
Gary Christenson
