Gold News

Gold vs. the Dollar

Like cheap energy & cheap credit, the US Dollar helped build today's global economy...

GOLD HAS ALWAYS been used both as a store of value and as a medium of exchange – a way of paying for goods, services and debt.

   Gold Bullion cannot be printed simply to meet the political needs of incompetent governments. That is why gold has retained its role in the world's monetary system after all these thousands of years. Its supply remains free of politics.

   Today, we are reaching the natural end of one particular phase of the world's monetary system. The US Dollar was useful for many years as the currency of business worldwide. The US economy was the largest, and for many years its currency was strong, owing to American growth (among other things).

   You did business in Dollars because it was a stable unit of value no matter where you did business.

   But lately, the US Dollar has become a lot less stable. America runs large deficits. It's a consumption based economy and a debtor nation. The Dollar-denominated trade in oil shows is one aspect of the currency's fatal weakness. But why is the Dollar's weakness a global economic problem?

   Like cheap credit and cheap energy, the Dollar was a pillar of the world economic system during the 20th century. These three ingredients made for record expansion of international trade and commerce. The division of labor – involving raw materials, factory production, shipping, transport, retailing and consumption – became a global reality.

   We'd submit that the trifecta of more expensive energy, tighter credit and no one true global currency threatens that system of the world. The Dollar, challenged by high oil prices and undermined by high Gold Prices, is no longer the perfect medium with which to conduct a high volume of financial transactions. And nothing waits in the wings to play the Dollar's role.

   The result is a contraction in global economic activity, or at least more friction as the world finds a replacement (if indeed it can find a replacement). You could argue that the entire experiment of fiat money – meaning government-printed money not backed by precious metals – is reaching its end game. And obviously, if that's the case, a currency crisis is synonymous with an economic crisis.

   But anytime you mess with the value of money – as the artificial setting of interest rates by central bank bureaucrats does – you mess with people's moral and ethical values, too. By targeting inflation, you disincentivise saving. Higher-than stated inflation eats into people's purchasing power. But it's what happens in their brain and gut that really matters.

   When you don't trust the value of the money in your pocket, you begin to behave differently. You're more defensive, more short term. Values – like prices – become relative. If things like eggs, milk and bread can change in price so quickly, it throws people and their understanding of the world off.

   Without constructing a whole sociological theory of the consequences of inflation (such theories exist) we'd say that a currency crisis is always an economic crisis...because what people think of money determines all of their subsequent economic behavior, be it prudent and economical or reckless and maniacal.

   We live in a time of relative monetary values. And even those values – the intermarket relationships between asset classes – are breaking down. The good news is that all that volatility makes it again possible to find undiscovered value or mis-priced assets. The bad news is that a lot of false value is going to be destroyed.

   Gold, on the other hand, remains immutable. Whether or not it comes to replace the Dollar as the medium of exchange for the global economy, gold's role as a store of value will continue.

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Best-selling author of The Bull Hunter (Wiley & Sons) and formerly analyzing equities and publishing investment ideas from Baltimore, Paris, London and then Melbourne, Dan Denning is now co-author of The Bill Bonner Letter from Bonner & Partners.

See our full archive of Dan Denning articles

Please Note: All articles published here are to inform your thinking, not lead it. Only you can decide the best place for your money, and any decision you make will put your money at risk. Information or data included here may have already been overtaken by events – and must be verified elsewhere – should you choose to act on it. Please review our Terms & Conditions for accessing Gold News.

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