Whatever vestigial link between US dollars and gold ended after Bretton Woods was terminated on 15 August 1971. The classic gold standard was abolished long before in 1933 when the despotic executive order of United States President Franklin D. Roosevelt that made it illegal for citizens in the land of the free to own gold.
There are periodic calls to return to a gold standard as a way to reign in government spending. The return to a pre-1933 gold standard would be a huge step in the right direction.
A true gold standard uses gold as money. A true gold standard in the US would redefine dollars as a quantity of gold. A true gold standard is NOT saying that gold is worth $35 per ounce as was the case in Bretton Woods.
This is explained in fantastic detail by Mises Institute Senior Fellow Joseph T. Salerno in his lecture Gold Standards: True and False.
A Return to the Gold Standard in the US?
It sounds click-baity to me too, but Jim Rickards is predicting $10,000 gold as the result of a currency reboot. The link above is to a sales page (which I get zero benefit from and considered not linking to) that explains in his own words why Rickards thinks Trump will return the US to a “gold standard”.
James G. Rickards is a New York Times bestselling author who appears on networks like RT, CNBC and Bloomberg. He’s testified in front of congress, he’s done some consulting on currency for the CIA and Pentagon. So there are some reasons to listen to what he says and at least evaluate his rationale and his arguments.
If I can quickly summarize his argument it’s that the US is deeply in debt, debt has crushed the middle class, a gold standard is one of the keys to “Making America Great Again” and so President Trump going to move the US back onto a gold standard. Rickards also claims he has some inside information that gives him additional reason to believe a return to such a gold standard is likely.
I agree the US is deeply in debt. I also agree the economy is broken and stacked against the middle class in favor of the super-wealthy. I also agree that a return to a classic gold standard similar to what existed pre-1933 would help America.
There is also some evidence that Trump is receptive to the gold standard.
Would Trump Support a Gold Standard?
Trump has stated to GQ: “Bringing back the gold standard would be very hard to do, but boy would it be wonderful. We’d have a standard on which to base our money.” In the same montage of questions he also stated that Justin Bieber shouldn’t be deported and that he’s not a fan of Man Buns.
Trump has also tweeted this:
Although “gold” here could simply mean wealth.
As far as I can tell Donald Trump is not a systematic thinker. He doesn’t have a set of principles with which he evaluates problems and situations. I think Trump’s “philosophy” is basically “I’m a smart guy with good business sense. So I’m going to use my gut and my experience to make ad hoc judgments about what to do.”
Although he probably wouldn’t use the term ad hoc.
So could Trump be in favor of a gold standard? Who knows? Even if he was in some way at some point in the past who knows what he would decide today. Just look at his 180 turn on the war in Afghanistan as one example of his fickleness.
Where does Rickards get $10,000?
Rickards uses a fairly basic calculation based on what he thinks the world money supply will be, how much gold there is and a 40% backing to get $10,000 gold.
Rickards writes that the US government would keep the price at this level by simply conducting some “open market operations” in gold:
The Federal Reserve will be a gold buyer if the price hits $9,950 per ounce or less and a gold seller if the price hits $10,050 per ounce or higher
And this is really the rub. Such a price peg is not a return to a true gold standard. It would not change the US government’s fiat monetary system in any meaningful way.
Dollar to Gold Price Pegs are not a True Gold Standard
The plan Rickards describes is essentially the same as a bill that was proposed in 2013. Mises Institute fellow Joseph T. Salerno explains how such a fake gold standard would not help at all. A true gold standard defines dollars (or other currency) as a certain weight of gold. For example, the definition of a dollar used to be 1/20th of an ounce of gold (roughly). A $20 bill was not the money per se but a claim to one ounce of gold.
The “gold standard” Rickards speaks of is simply fixing the price of gold in dollars.
I Would Like Gold at $10,000
All else equal I would like gold at $10,000. Sure, if I wanted to add to my holdings it would be cost prohibitive, but since I already own some gold a price increase to $10,000 via Federal Reserve open market operations would be of benefit to me.
However, if the dollar collapsed and a loaf of bread costs $10,000 I’m probably not better off. After all no sane person would want to be a millionaire in Zimbabwean dollars in 2008.
This fake gold standard Rickards is predicting certainly wouldn’t help the US economy at large. As I mentioned above, it would not be any significant change to the fiat monetary system. A price peg of gold in terms of dollars is NOT a gold standard. If anything I think it would be horrible optics for the US government and shake the world’s confidence in the dollar. It would effectively be a revaluation down of the dollar, at least relative to gold, and the Fed’s balance would very likely have to massively expand in order to bid gold up to $10,000.
A Return to the Gold Standard Seems Unlikely
A return of the United States to a true gold standard seems very unlikely. A fake gold standard as described by Rickards is more likely than a return to a true gold standard–but still a long shot. I do believe gold is a fantastic long term investment but I also believe it will take the market waking up to the problems of the global financial system and not an act of government.
Gold recently traded above $1,300 per troy ounce for the first time time in 2017. It immediately fell back down to the mid $1,280s. This is the third time the price of gold has been beaten back down when attempting to breakout above $1,300.
Price Resistance at $1,295 continues to hold.
In April of this year I made some “predictive guesses” as to the price of gold. Thus far gold has traded around the purple dotted line that I anticipate will be the general price of the yellow metal.
The purple line is my predictive guess as to the price of gold, made in April of 2017.
My predictive guess calls for gold to trade up to $1,400 in November before tailing off again. I expect gold to continue to trend slowly upward in the long term, until there is some large external catalyst such as a stock market crash, physical supply shortage, war or currency crisis, that propels the price upward.
I think holding some gold in one’s physical possession is wise, it’s also important to hold some offshore out of one’s home jurisdiction. While I only hold a portion of my assets in physical gold and silver I think it’s an important component of a diversified portfolio.
Click here to learn about one of my favorite ways to own physical gold.
As expected the Bitcoin Hard Fork occurred around 12:20 UTC today. A new cryptocurrency, Bitcoin Cash (BCH or BCC depending on the exchange) was born. It shares the same history as Bitcoin up until today in what I’ve already referred to as a modern day Ship of Theseus paradox.
So which Bitcoin is the real Bitcoin? BTC continues with a similar price as before and Bitcoin Cash was a new node to begin with so certainly Bitcoin remains bitcoin.
But it’s another example of how a brand new cryptocurrency, one which a current market cap of over $6 billion, can be created seemingly out of thing air.
I understand that Bitcoin Cash has the support of some miners, and work went into the technical changes (it has a larger block size, in an attempt to overcome some of Bitcoin’s scaling issues). But is it really worth $6 billion?
The market seems to think so and that is all that matters in the present.
In the short term each BCH is trading for around $375 as of writing. My plan, which I previously shared, worked flawlessly.
Upon hearing about the hard fork, I moved my Bitcoins from an exchange that did not support BCH, to an exchange that did. When the fork happened I retained my original Bitcoins, but was also awarded an equal amount of Bitcoin Cash. I doubled my Bitcoins! (Sort of) The original Bitcoin is still trading around $2,700 and as stated above the new BCH I receive are only worth $375 each.
Learning from Past Mistakes
This is an example of how I was able to learn from a past mistake to benefit.
I missed out on coins resulting from when Ethereum forked. The place where I had my coins, hashflare.io, famous for unprofitable cloud mining, did not support the fork. I wasn’t about to let that happen again. If I’d been on an exchange that supported Ethereum Classic, or had my Ethereum in a wallet where I controlled the keys, I could have received 1 ETC for each ETH I held.
Cryptocurrencies are Inflationary
As I’ve written about before, one of the things that I dislike about cryptocurrencies is that there are no natural limits on the supply. Bitcoin Cash is a perfect example. Sure, the number of Bitcoins (BTC) did not increase, but a coin very similar to BTC, albeit with less network hashing power and some technological differences, was created, which in some sense doubles the amount of Bitcoins in existence.
Playing the Fork
The market doesn’t seem to care about the Bitcoin hard fork, BTC was trading up near around it’s all time high of $2,910 the day before the fork and is still at $2,700.
One could theoretically have purchased 3 BTC right before the fork for $2,900 each ($8,700 total). Then the fork happens, and the person gets to keep their 3 BTC and also gets 3 BCH, each worth $375 ($1,125 total). The price of BTC then falls to $2,700. So one would have lost $600 total on the BTC, but gained $1,125 on the BCH, for a net of $525. Not bad. That’s a 6% increase over just a few days.
Easier to talk about with the benefit of hindsight, but if someone is already holding Bitcoins, there is no financial risk to being a position to get the newly created cryptocurrency.
Long Term Problems
The market doesn’t seem to care about the Bitcoin hard fork, it was trading up near around it’s all time high of $2,910 the day before the fork and is still at $2,700. But in effect 6 billion USD worth of value was created out of thin air. Over the long term this simply isn’t sustainable. Is the price really coming from new money buying up BCH as the future cryptocurrency? It seems unlikely. The supply of cryptocurrencies continues to grow and Bitcoin Cash is only the latest example.
I’ll continue to hold various cryptocurrencies as a speculation that one or more takes off (even more) and reaches widespread adoption but as a long term investment I think it remains very risky.
I’ve written about problems with the United States dollar and the US economy.
I’ve been influenced by folks like Peter Schiff and Simon Black. To say the least these guys are not bullish on the US economy. I think they’re right and I think it’s wise to listen to what they say, be aware of the risks, and determine what course of action makes sense for your unique situation.
But while things aren’t great, particularly for those on fixed incomes without assets or investments, there hasn’t been a significant stock market correction and the US dollar is still relatively strong. Does that mean that people like Peter Schiff or Simon Black are wrong? Does that mean I’m wrong?
Things aren’t getting better. The underlying problems remain and only get worse. Governments have tremendous debt, interest rates are distorted, governments continue to spend recklessly, central banks are out of control and asset prices are inflated.
In the face of these problems I think there are two mains risks when it comes to behavior that fall on opposite ends of a spectrum. To willfully embrace either of these mindsets and their resultant behavior is, I think, crazy.
The First Kind of Insanity: Doing Nothing
Proud as a Peacock
On the one hand there is a person who does not take the risks seriously because they don’t think there are any significant risks.
People with this mindset believe that the United States can manage it’s debt. They laugh at anyone who suggests the recovery isn’t real or that the stock market growth isn’t based on sound fundamentals.
Subscribers to this attitude think the United States is the richest and freest and greatest country in the world and that $20 trillion in debt and trillions in unfunded liabilities is not a problem. They think the US government can just print money or increase taxes or grow the economy and everything will be fine.
Folks with this type of attitude hold their savings entirely in dollars and US-centered assets. They are comfortable being heavily invested in US stocks. They believe that government promised programs will be there for them when they most need them.
They can’t envision a world in which the United States isn’t the dominant world superpower. They can’t imagine the US dollar not being the world reserve currency.
This mentality is common in those who are blissfully unaware of the lessons of history and the facts of math.
This is the peacock mentality. People with this mentality strut around and deny there are any problems and so do nothing to protect themselves.
An Ostrich Hiding
Similar to the peacocks of the world there are people who realize there are problems with the economy but still choose not to do anything about it. Maybe they think there isn’t anything they can do about it. They think if the dollar falls and the stock market crashes then they have no choice but to go down as well. They’re either unwilling to learn about alternatives or simply don’t think alternatives exist.
They also might willfully ignore anything suggesting there are problems. If pressed they would concede that another 2008 or 2000 crisis are possible and that government debts won’t be repaid, but they really don’t want to think about it.
People with this type of attitude don’t have the misplaced confidence of the peacocks but they make the same choice not to take any decisive action to protect themselves.
They stick their head in the sand. This is the ostrich mentality.
A Second Kind of Insanity: Living Life around Anticipation of Crisis
But at the same time I think there is a risk of having a bunker mentality. This attitude that crisis is imminent and the sky will fall any day now. Individuals who think this way might go 100% into cash. Or go 100% into gold. Or go 100% into guns and food. Or they take huge risks trying to short the stock market.
A Turtle in it’s Shell
But I think this attitude of going into one’s shell is not particularly helpful. It’s hard to accomplish anything or live a fruitful life when you’re hunkered down and metaphorically looking over your shoulder all the time. This is the turtle mentality.
The Golden Mean
Aristotle and the ancient Greek philosophers spoke of a golden mean. The idea that the correct course of action or virtue is the middle path between two extremes. For example, courage is the golden mean between recklessness and cowardly inaction.
The key to sanity in an insane financial world is decisive, measured and purposeful action when it comes to preparation. Two extremes when it comes to investing would be on the one end of the spectrum shorting the S&P 500 with one’s life savings. On the other end would be buying a 3x bull S&P 500 ETF.
But just because I believe US stocks are in a bubble doesn’t mean I’m going to go with the extreme of shorting the market. It does mean that I’m going to limit my exposure to US stocks and be very selective about which stocks I own.
When it comes to dollars the two extremes would be 100% in dollars or 0% in dollars. But just because I think dollars are overvalued and will continue to lose value doesn’t mean I have to go to the extreme of 0%. It doesn’t mean I go 100% into gold or I only own precious metals and cryptocurrencies. I actually advocate holding some cash. Emphasis on some. I also earn money in dollars and invest in value stocks.
This applies to attitude as well. Being negative and pessimistic isn’t going to do anyone any good. Thinking everything is awesome and always will be isn’t a very good approach either. But there are still many great businesses in the US and there is lots of opportunity in the United States and in the world.
The United States has problems. Lots of economies around the world have problems too. There are going to be winners and losers. Many promises that have been made will be broken. But in the midst of all this there is tremendous opportunity. The important thing is to remain calm, take some practical steps to protect yourself and live your life.
Starting in October of 2008 gold made a run from 680 US dollars per ounce up to and over $1920 in September of 2011 for a gain of 182% in less than 3 years. Gold traded sideways and down for the next year and a half until April of 2013 when it crashed down to the low $1300s. For the next few years gold trended down in a falling wedge pattern. Gold was negative for years 2013, 2014, and 2015.
The recent multi-year low of $1045 was logged in December 2015 and I believe this price is the new bottom for the gold market.
Below is a chart of the gold market with my comments. Click the link if you’re not familiar with reading candlestick charts.
2016 was a positive year for gold even though a lot of the gains were surrendered in November. On the whole for 2016 the yellow metal was up over 9%. It’s my opinion 2017 will continue this trend of gains in extension of a new multi-year bull market.
Gold is up over 11% in 2017. It started the year around $1,155 per ounce and is currently trading over $1,290.
Gold still Undervalued and US Dollars are Overvalued
Despite these positive moves I still believe gold is significantly undervalued at this price.
Paltry efforts at “tightening” at the United States Federal Reserve notwithstanding interest rates are at historic lows. There is also record debt and unfunded liabilities paired with an unbalanced budget. The United States Federal Reserve balance sheet remains over $4 trillion. Globally interest rates are also historically low and debt is high. There are even negative interest rates in Europe and Japan. Geopolitical risk of war in North Korea and Syria may have caused the most recent bump in precious metals price.
President Trump has recently done a 180 on several issues. He told the Wall Street Journal the dollar “is getting too strong.” He has also warmed to Janet Yellen and has stated: “I do like a low-interest rate policy, I must be honest with you.”
The Recent Past of Gold
Last week gold made a strong move up through the 200 day moving average (the solid light blue line above is the 200 day simple moving average.
My Predictive Guesses as to the Price of Gold
The following are my guesses/predictions as to where the price of gold will move over the next year. I’m not recommending anyone buy or sell gold based on these predictions.
Gold has been trending upward since the December 2015 bottom. I think gold will make a new intermediate high between 1400 and 1425 in the fourth quarter of 2017. From that peak it should drop back down to 1260 sometime in mid-2018 perhaps around June.
Of course if there is another 2008-style crash or a hot war in the middle east then all bets are off.
The dashed purple line is my predictive guess as to the price of gold
Longer term I expect gold to make a new high above $1920 within the next four to eight years.
Although there is no substitute for physical possession of a percentage of one’s precious metals I also think it is vital to have some gold stored offshore.
The most cost effective way to own physical gold offshore, particularly for investors will less capital, is through Goldmoney.
I personally own several grams worth of gold via Goldmoney and I’ve been extremely pleased with the service.
Gold has been valued across cultures for thousands of years. It has no counter party risk and I believe it is an excellent defensive holding.
I wanted to flesh out the idea that my Caribbean Cruise was a microcosm of the global economy.
Basically Americans spend US dollars to consume goods and services while the rest of the world works to provide those goods and services in exchange for dollars.
One problem with this arrangement, at least for the people of the world who aren’t US citizens, is that the US dollar is no longer backed by a solvent and productive economy.
Another problem is that a lot of the loans American use to acquire dollars are provided by the very countries who also provide the goods and services.
In other words what are these countries getting in exchange for providing goods and services? IOUs.
These IOUs are promises to pay from a group of people and a country that has more debt that any country or people in the history of finance.
In the movie Dumb and Dumber, main characters Harry and Lloyd spend hundreds of thousands of other people’s money. But hey, they kept IOUs so they could pay them back! (both were unemployed)
So what will happen?
The US dollar will continue to lose a significant portion of it’s remaining value and American’s standard of living will continue to fall while the standard of living for the rest of the world will eventually rise once they stop selling their goods and services in exchange for overvalued US dollars.
This has been happening for a while, but people still have faith in the dollar and the other fiat currencies around the world are being devalued by their respective government even faster than the dollar.
So dollars are the cleanest dirty shirt.
But will this continue forever? Will Americans be able to continue to borrow at low rates and live beyond their means while the rest of the world foots the bill?
I doubt it.
The World Reserve Currency
The US dollar is the world reserve currency which means that many things that are traded on the global market are priced and bought and sold with US dollars.
It also means I was able to buy a Hawaiian shirt in Honduras, go snorkeling in Belize and buy drinks in Mexico at a low cost using US dollars.
Using China as an Example
Why do countries put up with this lopsided arrangement?
It has everything to do with history and perception. I touch on this some in another article downfall of the US dollar. But the short version is that the US was the most powerful and dominant country after World War II and the currency reflected this strength.
The result was that critical goods like oil were priced in dollars.
Countries like China therefore need dollars in order to buy oil.
Meanwhile the American consumer wants goods and services.
So in order to get dollars China produces goods and services that are then sold to Americans for dollars.
Back when the majority of Americans had a lot of savings and the dollar had more value this worked fine.
But the US began producing less while simultaneously consuming more resulting in trade deficits.
In 2015 the US imported $497.8 billion in goods and services from China and exported $161.6 billion to China. Thus the U.S. goods and services trade deficit with China was $336.2 billion.
You can’t consume more than you produce (which is what a trade deficit is) without losing money and as time passed the US consumer found his savings depleted.
About half of Americans have zero net worth.
But China has an large portion of it’s economy built around American consumption and the world associated dollars with strength and prosperity.
So China loans money to the American consumer to pay for the American to buy the things China produces.
This works for the time being because the US is the most powerful economy in the world and the dollar is the world reserve currency.
So of course the American will pay back the Chinese producer! Or so the thought goes.
It’s the ultimate vendor financing: China provides the goods and services as well as the loans to pay for the goods and services.
Meanwhile the US government has also taken on monstrous amounts of debt and has devalued the dollar.
So the IOUs the Chinese producer already has are worth less and less each year.
How long before the Chinese producer begins to seriously doubt if the US consumer will ever pay back the IOUs?
Once this doubt takes how long before the Chinese producer stops providing the loans to buy the goods and services?
When this happens prices will have to rise and it will be harder for Americans to buy goods and services.
This process is explained in more detail in an excellent book that I recommend. The book is written by Peter Schiff and is called “How an Economy Grows and Why It Crashes“.
Two beers, four mixed drinks and chips and salsa for under 20 USD. Compliments of El Cial La Ceiba in Cozumel, Mexico. It wasn’t just the two of us imbibing though!
This is basically what I was witnessing on my Caribbean Cruise.
I was able to spend my higher valued US dollars for goods and services provided by peoples outside the US who wanted dollars.
It is a great benefit that Americans have had for some time but will it continue forever?
I don’t think it will.
I think there are lots of opportunities to position oneself to avoid getting destroyed as the dollar continues to lose value.
Thats why I created this website.