The U.S. Dollar vs. Gold

Of the 21.4 trillion U.S. national debt, approximately 6.2 trillion is owned by foreign countries, almost 30 percent. China and Japan are the largest holders with more than a trillion each, but the Social Security Trust Fund (aka your retirement fund) owns most of it. While there’s been plenty of rhetoric about reducing the gigantic debt load, a trillion more dollars was added just in the last six months.

When I was a kid, it was difficult to get a credit card. I remember my mother applying and being rejected even though my father had a good job. Nowadays, it’s easy to get credit and people shrug it off like it’s a normal part of living. The government can and does print as much as it wants, and from the data presented, its dollar making appears to be helping the economy grow. Yet this isn’t the case for countries like Venezuela, Argentina, Turkey, and many others. The same currency printing is causing extreme economic hardship as their money loses value.

There’s one reason why the U.S. can get away with what other countries cannot: its dollar is the world’s reserve currency. Since foreign banks use dollars for trade, and they use treasury bills and bonds as a store of value, it’s easy for the Federal Reserve to continually add more to the deficit. What many people don’t realize is if China or Japan tried to cash out of all their treasuries, it would drive interest rates up and the credit bubble which holds our economy would pop. That’s right, the whole U.S. economy is now completely dependent on you and foreigners to buy more of its debt.

With most investors in the same FANG stocks through mutual funds, ETFs, and direct shares, the majority must leave their money alone in order for the market to stay up. Many companies must buy back and hold their own stock shares also. When people need money, baby boomers will need to cash out first for living expenses and medical, and when the selling really begins, it will quickly escalate into an avalanche. Only if there are buyers will you be able to sell your stock and use the proceeds; otherwise, you’ll be holding the bag a long way down. This is why I’m not invested in equities now. It’s too risky because after all the record highs, the stock market has a very long way to fall. Either it will fall back to where it was before Trump was elected or our currency will lose great value when the rest of the world decides it doesn’t want dollar anymore and sends them all back home to us.

Recently in Argentina, interest rates were raised in one swoop by 15 points to 60 percent. In the U.S. people can barely pay their mortgages with rates at 2 percent, so it’s easy to imagine what the shape of a crash in the U.S. will look like. The acceptance of the dollar by other countries as a savings and trade medium allows the U.S. to freely print without the consequences of a crashing currency like in Argentina, but when the willingness of others to hold our currency fades, look out below! Americans will experience some hard times. Many Americans take their privileges for granted, not knowing that their entire inflated standard of living is due to the willingness of strangers to hold their dollars. At the current rate of a trillion dollars every six months, the Feds will need to generate some serious buyers of treasuries to keep on going.

There are two major stores of value where countries keep their wealth: U.S. treasuries and physical gold reserves. Nations are not buying bitcoin or other cryptocurrencies and putting them on their balance sheets, and I’m not buying them either. It’s not the right time and crytpos don’t have any real value or utility for me at this time. I believe the future holds a one world currency, not hundreds of cryptos. As far as I can tell, cryptos are not used to buy or sell goods and services. They are full of “chasers” who are looking for huge gains, essentially something for nothing. They depend on momentum and bag holders to make profits. This is gambling; not investing.

The two major players in the global monetary system are the U.S. dollar and gold, because that’s what countries own, entrusted by their governments. You can look at technical data and fundamentals, trends, charts, or whatever, but history speaks for itself. The dollar was detached from gold in 1971 and is now in direct inverse relationship. How ironic, no? Generally speaking, if the dollar goes up in value, gold goes down. The lower the dollar, the more valuable is gold. Imagine what would happen to the dollar if people suddenly realized the true value of precious metals against a dollar backed by gigantic unpayable debt.

In the last few months, there has been a dollar squeeze unto the trade war. Several foreign countries have been front running dollar purchases as their own currencies deflate. If they didn’t do this, their international bills would become much more expensive when paying in their currencies. While it’s working for now, it’s a catch 22 for the world financial system; the stronger the dollar becomes, the more difficult it is for emerging markets, the more expensive it becomes for other countries to do business with us, and the closer we come to a worldwide economic crisis.

What’s on the horizon? Investors will jump currencies from one lily-pad to another, until the only store of value that makes sense anymore is gold. The war is about the dollar (a debt instrument) vs. gold (a store of value for 5000 years). Gold can’t be printed, it doesn’t earn interest, and you have to pay to store it safely. But is it the interest rate in a debt-ridden world or your principal that you care about when the house of cards falls down? While a national secret, I’ve heard from several credible sources that China is buying a lot of gold. Russia has been buying a lot of gold too. Do you think they might know what’s coming? It’s inevitable; the only question is when.

It doesn’t take a brain scientist to figure out what the future holds for an economy that cannot pay back its debt and continually adds more. Gold needs to return to the center of the monetary system for the world to be healthy again. One day it will be revalued to match the debt load, and this will be the solution. When everyone is a debtor all over the world, and they are all holding other people’s debt as a store of value, there’s something terribly wrong with the financial system. Since I believe the biggest danger to the global economy is a pop in the credit bubble, I will not store my wealth in someone else’s liability, and I will not be scared away from gold.

While overvalued FANGs have a long way to fall, gold miners and gold metal really doesn’t have a downside in the big picture. The price of gold contracts and futures may still fall some if the dollar is squeezed more, but the upside is much greater than the downside for those who believe in the future.

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