Gold & Monetary Revaluation

Posted | 09/05/2022 / Views | 1389
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A lot has been written and speculated of late about the Russia’s moves to back the rouble with gold (as we discussed here) and the weaponization of the US dollar and reckless printing of it starting some kind of reset of global fiat currencies. None of this is without historical precedence of course. We recently shared key takeaways from Crescat Capital’s latest monthly research report (here and here).  They provided the following excellent, balanced overview of this space that is very much worth a read.

“We have been in a de facto Bretton Woods system for the last several decades with many parallels today to the 1968 to 1971 period. Like then, there is a good chance we are about to move away from a system of Western central bank cooperation. The need to deleverage debt-to-GDP globally with fiat currency devaluation is being met with a serious structural global commodity supply shortage.

Western central bank coordination has kept gold suppressed versus dollars, euros, yen, etc. It has also created historic debt-to-GDP levels in these countries creating tremendous pressure on the system.  Here is the best macro academic paper on the Collapse of the London Gold Pool and end of Bretton Woods: https://economics.ucdavis.edu/events/papers/copy2_of_417Bordo.pdf. It is a must-read because it discusses the bigger issues surrounding “central bank cooperation”.

We need to remember that it was inflation, not deflation as posited by the Triffin dilemma, that led to the breakdown of the Bretton Woods system. We face the same problem today. Due to an unsustainable set of macro extremes, inflation has become unhinged and will likely only continue to spiral. Many will be slow to abandon their belief that too much debt in the world means we will necessarily face deflation. At this juncture, we think people will be better served by coming to the realization that inflation is the ultimate path of least resistance to deleveraging debt to GDP.

With France having repatriated its gold from the UK recently, it echoes De Gaulle breaking from the London Gold Pool in 1968. Even with the writing on the wall at that time, it was not until 1971 that the dam broke. Forward thinking investors today likely still have time to get ahead of the curve, but who knows exactly how much time?

Soon enough, individual investors, institutions, and central banks themselves will be breaking from the Western sovereign debt and fiat cabal and grabbing for the gold. At Crescat, we have always referred to the inherent problem with central bank cooperation as a “prisoner’s dilemma”, a game theory problem that ensures the ultimate breakdown of the entire system. It has taken a long time to get here, but we believe we are finally on the precipice.

Contrary to much gold conspiracy thought, it does not mean that we are facing the demise of the Western banking system nor the rise of authoritarian economies and their fiat currencies. It doesn’t necessarily mean the rise of non-government backed intangible currencies either. Governments will maintain legal authority and power over currency systems. Individuals and businesses will use those currencies. The strongest fiat currencies are likely to continue to be those in advanced economies where the principles of liberty, justice, democracy, entrepreneurship, and free markets reign.

The macro setup today portends a deleveraging of the global economy through inflation, including a probable step-function devaluation of all fiat currency systems relative to gold, a persistent phenomenon throughout world history.”

History is in fact littered with failed fiat currency systems where the one enduring store of value is gold (and silver).  Crescat stating “the realization that inflation is the ultimate path of least resistance to deleveraging debt to GDP” simply refers to the fact that global debt is so historically, incredibly high measured against GDP that when you consider the only way to pay that down is 1. Miraculous sustained massive surge in GDP to pay it down, 2. Inflate it away by devaluing the fiat currency it is measured in, or 3. A coordinated world wide agreement to somehow ‘delete’ it (i.e. a debt jubilee).  Respectfully, and as Crescat conclude, blind Freddy can see 2. is the only practical option.  Imagine then, the price of gold in that inflated down currency denominator….