Divided world

This week two grandiose summits are taking place, revealing just how divided our world is. In Washington D.C. those two behemoth legacies of the Second World war, the International Monetary Fund (IMF) and the World Bank, created at Bretton Woods in New Hampshire in 1944, will sit round tables with many delegates in attendance and tell the world how it is doing. Poorly, I suspect. Almost simultaneously, more than 5,000 miles away in the southwestern Russian city of Kazan, representatives of the BRICS countries (Brazil, Russia, India, China and South Africa) will hold their 16th annual summit where Russia's President Putin will pursue his aim of convincing the group to sideline the G-7 group of countries and more generally the West as a whole. He wants to build, in his words, a "new world order". One in which US political leadership and economic dominance is humbled and replaced by BRICS. In January this year - more than a year after Russia invaded Ukraine - Egypt, Ethiopia, Iran and the UAE (United Arab Emirates) joined the BRICS group; Saudi Arabia is flirting with the idea of membership. It's interesting how supposed allies of the US - think Saudi Arabia or India - are slowly drifting into a different camp. The centre of political and economic gravity is shifting.

Sleepwalking

Gold is embarked on a staggering bull run. The Dollar-denominated price has risen by some 30% since the start of the year. Analysts are pinching themselves, asking how long this can go on, when it might end. They are struggling to explain why gold is doing so well. Sometimes the analyst just gives up - as a column in the Financial Times (feebly) put it this week, "no one knows why it [gold] goes up and down. Don't sweat it." But gold investors need to try to understand. Interest rates starting to fall? Yes. Wars bursting out? Yes. East-West mutual hostility? Yes. The 'global south' flexing its muscle against the 'global north'? Yes. All of these factors - which can be lumped together under the heading "uncertainty" - are playing their part. But a more subterranean (and more alarming) event is playing a part, and that's the end of the US Dollar's global currency domination. The world is sleepwalking toward the decline of the most prized fiat currency of the past century. Like every sleepwalking episode, the walker is unaware of what he or she is doing. The fear is that the walker might tread into fatal danger. The junking of the Dollar isn't going to happen overnight; but happen it will. We are all sleepwalking towards the edge. Fortunately we can diversify our assets to get some protection from the unknown.

Fifty years

It's been more than 50 years since President Richard Nixon effectively ended the global gold-backed monetary system. Since then governments have been free to run up debt, expand the public sector in whichever direction the voters press for, and issue as much new paper money as felt required. The Great Financial Crash of 2007-2009, the reverberations of which we are still living with, was batted away with vast quantities of newly created fiat currency. In 2021 Deutsche Bank researchers published a study of the last 50 years of fiat currency, finding that those years have seen "worldwide inflation at its highest levels ever...Fiat money has only been the dominant framework for a small fraction of history and as such it shouldn't be too controversial to suggest it may not always be the system of choice. With endless structural deficits and extraordinary levels of money printing, we have certainly stressed its flexibility in recent years." Inflation of course erodes the purchasing power of paper currency.

It's our own fault

Fiat currencies come and go - the average lifespan of a paper currency is about 35 years. Governments cannot resist the temptation to print more and more to fund greater public spending. Some of this spending - on health perhaps, or education or self-defense - may advance economic growth, but some - the expansion of civil service functions - do not. Authoritarian governments do not need to pay attention to the wishes of voters, democratic governments do - which is one big reason why they spend money they don't have and borrow to fund their spending. While the BRICS group is riven by internal squabbles, notably between India and China, they are united in one important matter, the aversion to the Dollar and the desire that something else should be used for trade. The US has lost its place as the unalloyed defender of justice and honesty (partly because it is unable to hide its dirty washing from public scrutiny), and it is losing its grip on the global economy. A period of heightened uncertainty awaits us; the gold price has risen as the world slowly comes to this realization. We have not yet reached the culmination of this momentous change. Which is why the most likely direction for the gold price, which will bob up and down along the way, remains up.

At Glint, we make every effort to demonstrate a balanced conversation between gold, crypto and fiat currencies when it comes to purchasing power and, while we strongly believe that gold is the fairest and most reliable currency on the planet, we need to point out that it isn’t 100% risk free. While we have seen a steady increase over time, the value of gold can fall, which means that its purchasing power can also decline.