More Evidence of a Gold Bullish Declining Dollar

On January 31, 2005, I started to keep tabs on a very informal measure of “inflation.” Government accounting not only provides arbitrary means of accounting for the “cost of living,” if indeed that is what it is meant to be, but it also changes the means by which it accounts for what it costs to stay alive. For example, they use substitution and hedonic prices when that helps spin the numbers in their political favor. But beyond that government dishonesty is another grievous sin that our Keynesian Lords spit at us. When central banks create money out of thin air, if that money goes into stocks and bonds, as it most certainly has since Jan. 31, 2005, it is not counted as “inflation.” Yet it most certainly is inflation. In addition, it has resulted in a

massive relocation of wealth from those who create goods and services that help humankind to those who simply pick the pockets of honest, hardworking men and women.

So, my definition of inflation includes a broad base of financial assets and their change in price since I started my Inflation/Deflation Watch back on January 1, 2005. With the exception of two monetary metals—gold, which gained 218.8%, and silver, which gained 157.76% since 1/31/05—commodities as a whole have not performed well, at least to date. Gold and the Dollar Index (which gained 8.73%) are not included in the index since they serve as monetary yardsticks against which we measure everything else. Even though crude oil has gained considerably of recent weeks, it is up only 8.74% since 1/31/05. The Rogers Fund, which is heavily weighted in oil but also includes metals and agricultural commodities, has actually lost 13.38% when measured in dollars.

The point I wish to make is that while a massive amount of money has been created, it has not yet found its way into the real economy. But when it does, given the massive amount of money pushed into the system since 2008-09 and even before, we may be headed for a super inflationary problem the likes of which America has never seen, at least not since the Civil War.

But what is increasingly troublesome to people who are not addicted to group economic think but observe history and Austrian economics is that what the dollar is facing now isn’t a normal credit cycle. Since World War II, the dollar has been the leading global reserve currency. But now dollar hegemony is being challenged by the likes of China, Russia, Iran, and a host of other nations aligned with those two super powers, who are no longer willing to comply with the dictates of the U.S. to use intrinsically worthless dollars in exchange for commodities and manufactured goods. China is leading the way for the New Silk Road trading infrastructure and all the BRIC nations and others are also putting into place banking and trading institutions to compete against the dollar. Neither are the Chinese interested in funding the U.S. Treasury, which uses Chinese savings to fund a military that denies China the right to rule over its own sea lanes.

In Shanghai, oil will reportedly begin trading on a futures market on January 18. But it will not be traded in dollars. It will be traded in Yuan. Not only that but Shanghai has a physical gold-traded market too, unlike the fraudulent market for gold in London and the U.S. that is manipulated by massive paper gold trades by government controlled banks. In a January 4 essay written by Alasdair Macleod titled, “How Quickly Will the Dollar Collapse?” Alasdair points out that the U.S. is very closely following the path of Germany prior to its hyperinflation. It’s impossible to know just how quickly the dollar will meet its waterloo. But the following signs suggest it may not be far off:

  • The S. abandoned market-driven gold-backed money in 1971 so that it can finance global wars starting with Vietnam. Germany did the same prior to World War I which enabled it to finance its involvement in the war with printing press money. Germany piled up huge amounts of debt, which, combined with reparations requirements after WWI, meant that the only way Germany could pay its debt was through an exponential growth in the money supply. We in the U.S. are doing the same, in spades.
  • Until now the S. has been able to use its military might and post-WWII standing to require nations around the world use the dollar for trade. That was underpinned by the arrangement between Nixon and the Saudi Arabian government shortly after Nixon abandoned the gold standard in 1971. By the oil producing nations requiring the world to pay for oil in dollars and with a military to enforce that doctrine, the U.S. has been able to buy up the world’s goods with printing press money, the deficits of which have, until now, been financed by net saving nations, chief among which had been Japan and more recently China.
  • China is now openly letting the world know that it will be moving out of dollars and requiring the world to use Yuan if they want to sell products to China. Indeed, one of the most striking changes of late has been the arming of Saudi Arabia with China, as China is now Saudi Arabia’s largest customer for crude oil. In addition, the New Silk Road and major physical and institutional infrastructure for Yuan-based trade is also in the making, as I have discussed frequently in this letter. We will be watching January 18 for what is supposed to be the start of Yuan petroleum futures trading in Shanghai.
  • The S. is losing its geopolitical influence in the Middle East and in Asia as well, and that process is accelerating now with Trump’s move away from multi-lateral trade deals to unilateral trade deals and a lack of diplomacy among nations that we have traded with. Meanwhile China is moving into many of those markets. The importance of this is that when we lose markets, the need for dollars will diminish, just as was the case in Germany when that country lost its colonies in Asia, Africa, Alsace-Lorraine to France, and large parts of Prussia to Poland. When markets are lost, you lose a population that needs your currency. As Ludwig von Mises pointed out in the 1920s, Germany needed to reduce the quantity of money in circulation or else it would start to realize price inflation. That was the start of Germany’s hyperinflation. You can certainly make the case that the same process is beginning to unfold now in the U.S. Trump should reduce spending and the Fed should start to reduce the money supply. Trump is ramping up spending like none before him. And the Fed, in a very limp-wristed manner, is trying to pull back some of the QE put in the system by Bernanke and Yellen. But that threatens the next massive credit implosion, given an economy that is over-indebted and addicted like a crack cocaine addict to easy money and low interest rates.
  • The dollar has begun to weaken over the past year and already it is starting to be reflected in the start of rising commodity prices as well as a stock and bond market that remains insanely overvalued. My IDW, which hit another new high this week, is suggesting we may indeed be starting toward a very serious inflationary event. 

How a Fiat Currency Dies & Hyperinflation Begins

In his excellent January 4 article, Alasdair explains the process of how a fiat currency is finally forced to meet its death.

First, as the pathology of a currency begins to take shape, very few people recognize it. In the case of the German hyperinflation, very few people recognized it until the last six months before its utter collapse. Indeed, a chart of the deutschemark displays a hockey stick shape. Very few people outside of the Austrian economists could envision the demise of the deutschemark because from what they could see, there was always a shortage of money.

But once people start to perceive that their currency is buying less and less, they begin to hold on to it for shorter periods of time until eventually they exchange it, not simply for things they need to satisfy their living requirements, but, realizing that their currency is becoming worthless, they start get rid of it as fast as they can to buy real things in the hope they can preserve purchasing power. 

This is exactly why I set aside a small amount of my monthly savings to buy a bit of gold at Goldmoney at the start of each month. While the dollar lost 97.3% of its purchasing power compared to real money (gold) since 1971, (the dollar was at $35/oz right before 1971 to $1,350 now), gold bugs like the Chinese (like gold bugs around the world) have been taking advantage of an overpriced dollar to exchange it for gold, a monetary asset that does not depend on other people paying their debts for its value. I’m most certainly not looking forward to the dollar’s collapse because that is likely to bring with it all manner of economic and political hardships. But if you want to be responsible in preserving your family’s wealth, you must at least swap some of your savings out of a currency that is headed down the rabbit hole for money that is eternal as long as God allows this planet and the people on it to exist. That means gold and silver for a start, along with some other possible life-sustaining assets.

About Jay Taylor

Jay Taylor is editor of J Taylor's Gold, Energy & Tech Stocks newsletter. His interest in the role gold has played in U.S. monetary history led him to research gold and into analyzing and investing in junior gold shares. Currently he also hosts his own one-hour weekly radio show Turning Hard Times Into Good Times,” which features high profile guests who discuss leading economic issues of our day. The show also discusses investment opportunities primarily in the precious metals mining sector. He has been a guest on CNBC, Fox, Bloomberg and BNN and many mining conferences.