Gold's latest record price

With a new record gold price mainstream media is once again scrabbling round for an explanation. It's concerns over Trump's instability and tariffs, or it's imbalances in the monetary system, or it's geopolitical instability as a consequence of the wars in Ukraine and Gaza.

The reality is much worse. It's the outcome of decades of budgetary mismanagement by Western politicians, leading to astonishingly high levels of debt, both nominally and as a percentage of GDP (gross domestic product). Debts are now at levels previously only touched in time of major wars, when GDP was depressed and spending elevated.

Sadly most of this irresponsible behavior has been while the world has been largely at peace, and the economy vibrant.

The result is that the global monetary construct established at Bretton Woods in 1944, with the US Dollar as the centerpiece and the only currency then still on the gold standard, is in decline. The Dollar left the gold standard in 1971 and since then the US has been without the need to balance its budgets.

US national debt has grown from $400 billion in 1971 to $5.6 trillion in 2000 to $37 trillion today. The growth rate since 2000 is perhaps the most concerning. Over the next 12 months the US Treasury will be issuing more than $12 trillion dollars of Treasury securities, twice the level of outstanding total Treasuries 25 years ago.

Unsurprisingly the market for these Treasuries is weak. There's very limited appetite for 10 year and longer-dated out securities, leaving the vast majority of the issuance with 3 year maturities. The US is right to have deep concerns about the future stability of the US treasury market.

Who is to blame?

Investors and holders of Dollars are similarly nervous. The vast majority of global trade (and virtually all global oil trades) have been conducted in dollars since 1971, leaving foreign countries with massive dollar holdings. US Treasuries formed more than 71% of central banks' foreign currency reserves in 2000; remember there were less than $6 trillion of them outstanding at the time.

Today that number is 47% and the 10-year total return of Treasuries purchased in 2015 is negative, meaning you have less today than you originally invested in nominal terms while inflation has further diminished your value by a cumulative 25%. Finally if you are a European investor, the Dollar has devalued against the Euro by more than 10% in the last year, further eroding benefits of holding the Dollar.

It's no shock therefore that global trade is reorganizing around non-Dollar solutions. Renmimbi for oil from the Middle East, Yen for European cars and Euros for Japanese cars. All this because of the massive cumulative deficits run by the US over the last 50 years. And while it is fun to lay the blame at Trump or Biden’s feet, or blame the Democrats or Republican, the reality is that all politicians over the last 50 years share the blame.

Nor can we blame the emerging BRICS (Brazil, Russia, India, China, South Africa etc) bloc; we can only blame ourselves.

Dollar peril grows

However the emergence of an organized competing agenda to the post war democratic west adds to the peril of the Dollar.

China, Russia and India together represent 22% of global GDP and are increasingly aligned, driven by China and India's need for Russian oil and Russia's need for Chinese and Indian economic might. Not only are they large enough to be reckoned with as an economic axis but they are the fastest growing.

When all the satellite BRICS are included you get to half of the world GDP. It's a powerful if historically unstable economic force, all looking for a Dollar alternative. Finally, the US relationship with Europe is increasingly fractious with disagreements over how big a threat the emergence of this new Eastern axis is to our Western existence.

European companies and governments are now also moving away from the Dollar. From a store of value perspective keeping funds in Dollars has cost them dearly over the last decade, with total returns being negative, inflation eroding nominal returns and currency devaluation all combining to make Dollars singularly unattractive.

The primary argument remaining in the Dollar’s favor is the sheer size and scale of investment opportunities denominated in Dollars, from venture capital, private equity and credit on the private side to deep and liquid markets for equity and debt on the public side. But opportunities are increasing in European and Chinese markets and will continue expanding as the Dollar declines.

Alternatives?

So what are the alternatives ? Selecting another fiat currency to act as anchor? Or return to a world where fiat currencies are anchored to a non-political store of value - gold. The arguments in favor of gold are increasing daily. Technology and the blockchain have made the movement, trading and valuation of gold seamless, with gold being used as a base for debit card and banking transactions (such as GLINT ) and as a store of value at central banks and with stable coins. The emerging Eastern axis has a strong preference for this and Western countries still own a disproportionately large share of the world’s gold reserves.

While it is unlikely that all countries will convert to a gold standard, what is easy to envision and increasingly easy to implement would be a world where fiat currencies remain fiat currencies but the world values them against an ounce or kilogram of gold and not vis-a-vis the Dollar. Fiscal imbalances grow, the value of the fiat currency falls, and politicians are pressured to take action. Conversely currencies will be rewarded for sound fiscal policies, with unpolitical gold serving as the arbiter.

In this world the value of gold will likely require a step function increase to reflect the increased demand, with the new equilibrium range for gold being at values substantively greater than where we are today.

Nicholas Silitch has built a reputation as one of the leaading figures in financial risk management. Over almost 30 years at Bank of New York Mellon, he advanced through senior roles culminating as chief risk officer for the bank's alternative investment services, broker dealer services, and Pershing divisions. In 2010 he moved to Prudential, first overseeing In 2010 credit and investment risk, and two years later became the firm's chief risk officer. From 2012 to his retirement in 2022 he directed Prudential's global risk strategy, strengthening its resilience by embedding advanced models, metrics and stress-testing frameworks across all business lines.

For UK clients: At Glint, we make every effort to demonstrate a balanced conversation between gold, silver, 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.

For US clients: Graphic representations of value are for illustrative purposes only. The Glint debt card is issued by Sutton Bank, member FDIC. The sale, purchase and storage of precious metals are offered by Glint and not Sutton Bank. Your investment in precious metals through Glint is

·        Not insured by the FDIC.

·        Not a deposit or other obligation of, or guaranteed by, Sutton Bank.

·        Subject to investment risks, including the possible risk of loss of the principal amount invested.

All investments involve risk, including possible loss of principal. The value of precious metals is affected by many economic factors, including but not limited to the current market price, demand, perceived scarcity, and quality of the precious metal. Precious metals can increase or decrease in value. Past performance is not a guarantee of future results. As such, investing in precious metals may not be suitable for everyone.