Gold's Rise and the Real Warning
Gold moved from about $2,000 an ounce to roughly $5,500 (USD). The move itself was not the shock. The shock was how fast the dollar lost buying power against gold. Gold was expected to hold its buying power. The speed of the dollar's fall was not expected.
At $5,500 gold may have gone too far for now and has been correcting since. No price move in my experience was one I truly predicted. You cannot know the exact point a market turns. There are signs that a bear market or a bull market is ending in any commodity, but the precise turning point stays unknown.
Markets move in steps, not straight lines. Gold history shows this staircase: in 1999 gold sat at $253 an ounce. It rose to $1,921 in 2008. Then in 2008 or 2009 it fell to $1,500, and near $1,000 was close to the low, then it climbed again. Prices push up in an impulse, correct, push up, correct. A correction can hide a trend that is still going. The danger for savers is thinking short-term ups and downs mean buying power has come back.
Why Money Printing Continues
Central banks likely have no real choice but to print money. They do have alternatives, but the alternatives in a democracy are very painful. Tight money is very hard to put in place. Democracies cannot stomach the economic pain that genuinely tight money needs. So printing continues, and in this setting the price of gold will keep rising against paper currencies.
Gold may not rise against everything. Oil, wheat, corn, and soybeans could rise more than gold. But for anyone whose goal is to keep buying power, gold is still worth holding.
Central Banks Print Yet Buy Gold
Central banks own the money printers and print heavily, yet they also buy gold. This is not really a contradiction. Look at the US, current and past administrations, which freeze the assets of other countries. Given that, no one should want to hold assets in the United States. A country like Kazakhstan, Russia, China, India, or Indonesia should treat the US as about the last place to hold any asset. China holding all its money in the US would be crazy.
Asset freezes have turned reserve management into a geopolitical risk question, not just a yield question. Governments want trust in their currencies while making foreign ownership open to policy attack. China and the Shanghai gold exchange aim to cut out much paper trading. Multiple central banks keep buying gold. The Netherlands just brought its gold home from the US.
Cash Will Not Disappear
The idea behind stable coins may be to do away with cash, but cash will never disappear. People value the ease of going somewhere and paying directly. Stable coins and bitcoin need an internet or mobile phone connection. If the system is switched off, you cannot pay. If someone hacks your phone, you cannot pay. To travel and transact, you need coins - and those coins could be stones, diamonds, rubies, gold, or silver. Digital payments add ease but add a new point of failure through their reliance on connection.
There is a practical limit. Arrive at a department store or supermarket with a kilo of gold and they cannot give you change. Arrive with gold coins worth $10 and they probably can.
A Coming Crisis and the Return of Hard Money
Einstein was asked how the next war would be fought. He said he did not know, but the war after that would be fought with swords and forks - meaning everything would be destroyed. The next crisis cannot be solved with money printing. There will be massive turmoil and chaos, and debts will not be repaid, especially US government debt.
During and after that, people will trade goods and services in units that carry real, built-in value. In prisoner camps a pack of cigarettes becomes money because there is no paper money; prisoners trade with cigarettes, Mars bars, or a Coca-Cola bottle. Gold, silver, and platinum coins will then hold the status of money. They already have that status today, but you cannot walk into a store in Thailand or Switzerland with an ounce of gold and get paid in gold coins, because they have no change. In the future there will be a time when gold coins can buy your life. This is not a scenario to look forward to, but it is likely to happen, if not in my lifetime then in the next.
The real threat to money is not gold competing with it. It is confidence in debt collapsing first. When paper currency stops working, people go back to whatever can settle a trade at once, from cigarettes to precious metals. This is a warning about how fragile money is. Wealth preservation and preparing for disorder are two different things.
Platinum, Silver, and Oil Look Cheap
We are in a bull market for all commodities, but it is irregular. Cocoa and coffee have made major highs and probably will not set new highs soon. Wheat, corn, soybeans, and sugar should rise. Precious metals should rise too, though they are no longer cheap against everything else.
Storage matters. An individual cannot store a ton of wheat in his cellar, but he can store $10 million of value in a small box in his apartment. Platinum is favored because its price is relatively low compared to gold. The same is true of silver, and a barrel of oil priced in gold is relatively cheap.
Platinum used to be more expensive than gold. There are times when platinum costs more than gold, but usually gold costs more. The bet is that platinum becomes dear compared to gold, and that within about the next 5 years the price of platinum will pass the price of gold. Scarcity and portability can matter as much as price.
Supply, Substitution, and Bonds
Most platinum comes from South Africa and Russia, which brings jurisdiction risk. Silver has run a deficit for multiple years in a row. Copper has had no major new discoveries in about the last 10 years.
Do not worry about immediate new-supply discoveries. Recent oil discoveries have not been as large as those found after the Second World War in Saudi Arabia, the Middle East, and other areas. But substitution is the danger. Diamonds are now made synthetically and their prices have collapsed. The open question is whether producers can make cheaper alternatives that do the same job as existing commodities. So far no one has made gold synthetically, but that does not mean it can never be done. A supply shortage can lift a metal's price, yet a technological substitute can wipe out that gain fast. Investors must judge both scarcity and whether another material can do the same work more cheaply.
Money Printing and Bonds
Money printing can eventually become counterproductive because bond markets react very badly to it. A bond portfolio - different maturities, different qualities - works as a substitute for holding cash on deposit with banks. When the Fed prints money, I am less inclined to buy bonds, because that printing eventually flows into higher prices across the system. Printing pushes investors to expect inflation instead of trusting the fixed payments bonds promise.
Measuring Value in Gold
How do you measure real value? Measuring in another currency may fail because that currency can lose value too. Measuring in gold is one way to adjust every item - wine, a stock, a bond - relative to the price of gold, then call that the real value.
