President Nixon “temporarily” severed the weak link between gold and the U. S. dollar in 1971. The link is still severed.
The economic well-being for most people and the sound dollar have
suffered. The dollar is no longer described as “good as gold” as it was
60 years ago. Today we deal with mini-dollars and $ trillions instead of
$ billions.
The government grew much larger, the financial complex benefitted,
while “fly-over” America suffered, victims of dishonest money.
In the U.S. we view gold in terms of dollars, which often move
inversely to each other. Example: The dollar goes up a little, gold goes
down considerably, or the dollar drops ten percent, and gold doubles in
price.
The monthly dollar index compares the dollar to a basket of other
devaluing fiat currencies backed by debt and dodgy promises. Multiply
that index by the monthly price of gold, and the result is gold with
dollar variations mostly removed. In other words:
- How much have the Fed and the government devalued the currency?
- How much has gold risen in price because too many dollars chase too little gold?
- This does not account for the fictions of fractional reserve paper
gold, leasing, swaps, and other tools used for “management” of the gold
price.
This log scale graph expresses the dollar index as a fraction slightly more or less than one. Gold
prices, with dollar variations filtered out, have risen exponentially
for two decades and are currently close to the bottom of the trend
channel.
Why an exponential increase? The short answer is
exponentially more debt and dollars in circulation. Dollars are borrowed
into existence via the creation of debt
(fractional reserve banking, QE, etc.).
The U.S. National Debt has increased exponentially at about 9% per year
for over a century, dollars in circulation have increased similarly,
and gold prices expressed in dollars are far higher now than the $42
when President Nixon did the deed.
Examine the same data after it has been smoothed with a 20 month moving average and note the projection in about ten years.
For perspective on debt and currency in circulation, examine 44 years of national debt plotted every presidential election year.
The national debt will increase unless you believe that politicians want to spend LESS money in the future.
More debt means more dollars are created and those increased dollars
in circulation create higher prices for most items, including college
tuition, banker bonuses, hospital charges, employee salaries,
prescription drugs, cigarettes and beer.
The reserve currency status of the dollar is vulnerable. The euro and
the pound are weak but eventually the miserable fundamentals for the
dollar will manifest as a weaker dollar versus most other fiat
currencies. Confidence in the U.S. government and the dollar could
weaken considerably. The dollar could fall hard and rapidly if/when
global oil is regularly purchased in other currencies and if/when Russia
or China issue a gold backed currency. It seems likely that all paper
currencies will continue their slow or possibly rapid march toward a
value of zero.
Suppose the dollar index drops to its low (or far lower) from the past three decades – about 70.
The trend channel shows a smoothed target of about 4,000. With a dollar index of 70 (0.70 as graphed) the
smoothed price of average gold could be about $6,000. A spike higher
could easily double that price – well over $10,000 without considering
expanded wars, hyperinflation, loss of reserve currency status etc.
Imagine $10,000 gold within the next decade. How about multiples higher
if confidence in the dollar crashes or our leaders cause or allow
hyperinflation? Hyperinflation will create a difficult world for almost
everyone
(think Zimbabwe, Argentina, and Venezuela) but that does not mean it can’t happen in the U.S. or Europe.
Possible Scenarios:
- Honest Money: U. S. politicians cut government
expenses, crash the economy, resign in mass, refuse their pensions for
the good of the country, slash military expenses by over 50%, reduce
government payrolls by 40%, abolish the Fed, balance the budget and
restore honest money to the United States.
- Unexpected Gifts: The Easter Bunny arrives amid
great fanfare, is greeted by HRC and President Trump in Times Square,
and is given a lifetime salary by the Clinton Foundation for regular
deliveries, to the Treasury, of dollars in non-inflationary $5 trillion
Easter baskets.
- More of the Same or Worse: More debt, ever
increasing government expenses, higher taxes, imminent recession and/or
nasty depression, aggressive “printing” by the Fed, much higher consumer
prices, possible hyperinflation, politicians blame Russia for the
economic trauma, and the dollar tanks while gold and silver skyrocket
during the next four years or less.
I suggest the scenario for “more of the same or worse” is most likely.
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GE Christenson is the owner and writer for the popular and contrarian investment site Deviant Investor and the author of the book, “Gold Value and Gold Prices 1971 - 2021.” He is a retired accountant and business manager with 30 years of experience studying markets, investing, and trading. He writes about investing, gold, silver, the economy, and central banking. His articles are published on Deviant Investor as well as other popular sites.
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The author is not affiliated with, endorsed or sponsored by Sprott Money Ltd. The views and opinions expressed in this material are those of the author or guest speaker, are subject to change and may not necessarily reflect the opinions of Sprott Money Ltd. Sprott Money does not guarantee the accuracy, completeness, timeliness and reliability of the information or any results from its use.
