GOLD series: Part 1 – The case for Gold
Have you ever wondered how this entire economic structure started?
Why do we use paper (or fiat) currency for our normal day to day transactions? Who has got control over the paper printing machines and could that person use the printing for wrong reasons? Was there a system in place before the fiat currency and if there was why was it changed? Reflecting and finding the answers to these questions will help us understand the monetary system and manage our finances better to improve our lifestyle. I have collated the main points from various sources(references below) in this 3 part series article.
In the beginning, there was barter trade, where we exchanged one good for another. As society developed and grew, for ease of exchange and standardization, we moved into the commodity metals for transactions, mainly gold. However, since gold was not easily portable for trading, we linked fiat currency to the amount of gold available in the supply. This was commonly known as the Bretton Woods system.
For example, if there was 1000z of gold and 1000 US dollars printed then you could buy 1 oz of gold with 1 USD. However, if money printing carried on, and there was 10,000USD for 1000oz of gold, then 1 USD was worth 0.1 oz of gold. In other words, the same 1USD could buy less gold.
After WWII, due to decreased economic output by US, devaluation of the dollar and foreign countries paying more for the dollar, Germany decided to leave the Bretton Woods system first by exchanging their fiat for gold, followed by others. The US dollar started to weaken and eventually this led to President Nixon announcing in August 1971 that the strings that tied fiat currency to gold would be cut off in an effort to stabilize the US dollar. This also meant that other foreign countries could not convert their currency back to gold. In my opinion, this is the time when fiat lost its value and became worthless.
From here, we can gather that the real money is gold, where there is true value. However, through time, this main story has been lost, public perception altered, and gold prices started to fall and fluctuate. However, the elite few who knew the real story of gold, always invested in it. Like everything else in history and in life, truth always prevails. Gold is back on the rise with 610% gain since the turn of the millenium and fiat currency is becoming worthless , with the Fed printing more and more paper. In line with our primordial instincts, when danger strikes, we revert to safety by going back to our monetary origins – GOLD. This includes warren buffet who recently invested $565 million dollars.
A few main reasons on why fiat is losing its value:
- Central bank money printing
- The erosion of value in fiat currency through inflation
- Volatility in the stock markets
- Increasing geo-political risk (China, Trump, Russia, N Korea – take your pick!)
We can now see there is a strong case for gold. However, as in trading and other investments, it is not just about the entry or buying price alone.
We do need to know our exit price and our trade management during the price fluctuations. We will explore all of this in detail on Part 2 of this article. Till the next time, stay disciplined, follow your trading plan and keep trading like a Master.
- The hidden secrets of money – https://www.youtube.com/playlist?list=PLE88E9ICdipidHkTehs1VbFzgwrq1jkUJ
- Jim Rickards – The Big Drop e-book – https://bit.ly/3bRD7ri
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