There was a time when saying something was as safe as “money in the bank” meant it was the soundest of all possible investments. You don’t often hear that line these days, and for good reason. Never in our history has cash been as abstract as it is today. The currency we use is nothing more than a vapor of numbers in a bank computer.
There’s still some paper currency floating around, but the only reason you can exchange it for anything these days is faith. The person accepting currency has faith he or she will be able to use that paper you hand them to pay their own bills. But in contrast to how our system was originally designed, you can’t take paper dollars to the government and exchange them for anything of inherent value.
In the old days if a government wanted to cheat on currency valuations they had to cut down on the actual amount of gold or silver in government-issued coins; they literally had to dilute the volume of precious metal in coins by mixing it with a cheaper metal. Applying the word “dilution” to our sagging modern currency is a holdover from those days, but it helps one make sense of an inherently nonsensical system.
Too Much Cash Sloshing Around
The financial world is drowning in cash because central banks keep trying, and failing, to fix what may be an irreparably broken system.
First, you have to wrap your head around the fact that each nation’s central bank actually wants the value of its national currency to go down relative to everyone else’s. A weak currency means goods and services manufactured in your country look cheaper to overseas buyers than the exact same goods and services from a country with a stronger currency. The alternative to arbitrarily devaluing their currency is to implement tariffs and trade barriers. Tariffs are, in effect, taxing other countries for having a weak currency, thus making their goods more price-competitive with domestically produced goods and services.
Supporters of this approach are routinely branded as being opposed to free markets and international trade. But instead of the honest approach of tariffs, central banks game their own system by devaluing the yen, the yuan, the dollar, etc. The result? We’re trapped in a global race to the bottom on currency valuations, with central banks pumping more and more cash into an already cash-bloated financial system.
The Golden Upside
There’s one bright spot to these attacks on the value of your currency, and that’s their effect on gold. Currency dilution hits a wall when it comes to commodity prices. No matter how much a central bank devalues its currency, there’s still a fixed cost associated with an asset that has to be clawed out of the earth. Since historically gold has functioned as money, it’s the one tangible asset investors can purchase – with cash – that can preserve the buying power of that cash for decades.
Does gold really have that power? Consider this: While $100,000 cash today will buy you one-third of what it did in 1980, if you’d converted that $100,000 to gold in 1980, at $460 an ounce, and simply held on to it, at the market’s close today you’d have over $292,000.
Given that central banks seemingly can’t find an alternative to digging an ever-deeper hole for their currencies, gold gives you a nearly unlimited upside.
It’s no accident that China and Russia are stockpiling gold and that China’s working hard to make itself a major player in the global gold trade. Many suspect that after decades as the world champion of currency dilution, even China sees an endpoint, and is now looking to create some kind of gold-backed medium of exchange for settling future trade debts.
Say what you will, the Chinese have a long-term vision, one that’s already led to their fighting for a seat on London’s new LBMA gold fix, as well as setting up their own yuan- denominated gold fix. When the world’s biggest cheater says it’s time to try something different, and that something definitely has a gold tint to it, it’s time we all sat up and paid serious attention.