Don’t Dismiss Gold And Silver

There is worrying evidence that 2021 will see the end of fiat currencies, led by the US dollar. US dollar money supply has accelerated at an extraordinary rate, a process that will continue.

Signals from the markets that a monetary collapse is increasingly likely to include a weakening dollar on the foreign exchanges, bitcoin’s price reflecting a growing disparity between the rate of its issue and that of fiat, rapidly rising commodity prices, and a bubble in non-fixed interest financial assets.

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Current thinking is yet to link these events with a developing collapse in fiat currencies, but it is only a matter of a relatively short period of time, perhaps spurred on by a banking crisis, before a realization that a John Law-style financial asset and currency collapse is on the cards.

While gold rose in dollar terms by 25% last year, it has yet to reflect an increasingly likely collapse in fiat currencies, which this article concludes is likely to happen in this new year.


We enter the new year with a growing realization that fiat currency debasement is accelerating. It is hardly surprising that bitcoin bulls, who have learned about relative rates of currency issuance, are in the vanguard of those hedging increasing currency debasement. They are being encouraged by statistics in charts such as that shown in Figure 1.

(Click on image to enlarge)

Screen Shot 2021 01 07 at 12.35.13 PM

Institutional investors in increasing numbers are now clamoring on board what appears to them to be the only asset that offers a hedge for ever-increasing quantitative easing and government budget deficits. They continue to eschew the traditional hedges, precious metals because they are only seeing one side of the story. The reason that bitcoin is on a tear is because of its heavily restricted rate of issuance relative to fiat. But investment managers still think in terms of profits measured in their own government’s fiat. For them, bitcoin is an investment or speculation, and despite monetary inflation, they still believe money is dollars, euros, or whatever to be eventually sold for fiat. Managing money is their mandate, always to be accounted for in fiat, and they are tasked to deliver investment performance measured accordingly.

With respect to fiat, they see the expansion of the money quantity, but in their muddled assessment of the future, they still think that at some stage, central banks will succeed in rescuing their economies from disaster through monetary policies. While the short-term outlook is unclear, they read into rising commodity prices an expectation of increased future production. And the stunning performance of equity markets assumed to be forward-looking, is sending the same message. When covid is over, perhaps in the late spring, the common opinion appears to be that business activity will resume, and the economy will continue to grow.

While the establishment’s portfolio managers are dreaming their dreams, gold closed up only 25% on the year, outperformed by most commodities by a country mile — a respectable performance as an investment asset, but barely noticed by the equity and crypto bulls.

The underlying condition is the accelerating debasement of fiat. The chart in Figure 1 is not just a covid response. The rate of M1 monetary inflation has been increasing over the years, but only now has the rate of increase become hyperinflationary — there is no other word for it. So far, the Fed’s inflationary response has been just to the first round in the covid battle; round two is not yet reflected in the rate of hyperinflation, having been delayed by squabbling politicians. And the Fed’s flexible friend is yet to be fully deployed to prevent the US economy from being destabilized by the pre-covid crisis of September 2019 in the US repo market, and the trade and financial wars between America and China, which commenced in earnest in late 2018.

The global banking system is now withdrawing credit from industrial borrowers because bankers’ greed for loan business is now replaced by fear of non-performing loans. The commercial banks must rapidly contract their balance sheets in the face of collapsing businesses and supply chain disruption or face their own crisis.

This is not a lending environment for the support from bank credit expansion that the Fed or any other central bank would wish for. Even without an overt banking crisis, the Fed and the US Treasury will have to work together in their attempts to rescue the US economy from an inevitable slump. They cannot succeed, but they must try, sacrificing the dollar as a deliberate act of economic policy.

Therefore, the dollar and all the fiat currencies tied to it will become valueless, because there is a firm mandate in all welfare-driven nations to continually deploy monetary inflation at a rate that is now accelerating rapidly.

Currency values are eventually determined by markets

We know from the theories of exchange and from historical examples that fiat money is only money if it is accepted as such by the population and that irrespective of the quantity in circulation the public can reject it utterly. Rejection of the medium of exchange is not something done lightly. It only happens when the state expands the quantity so recklessly that the public, being initially slow to understand that their money’s purchasing power is being debauched, collectively understands what their government is doing with money, and that there is no hope left for it.

For today’s dollar, that this process can happen quickly is explained by the peculiar circumstance of the current situation compared with past hyperinflations for the following reasons:

• The rapid rise in the price of bitcoin and other leading cryptocurrencies has forewarned a significant and growing minority of people about the consequences of inflation of the quantity of state-issued fiat money. Alerted by bitcoin, whose price is rising rapidly, increasing numbers of the wider population are getting the message. It is only a small step for bitcoin bulls to realize that bitcoin’s price rising is a forewarning of a monetary collapse and not just the relative supply argument central to reporting today.

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Disclaimer: The views and opinions expressed in this article are those of the author(s) and do not reflect those of Goldmoney, unless expressly stated. The article is for general information ...

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