The Two Pillars Of Trust

In the previous post, we discussed how the Central banks are printing currency without restrictions and that the entire monetary system is just based on the confidence of the masses in the currency but was the situation always like this?

Well let's go back to the time when these two pillars i.e. Gold and Dollars had their fate intertwined, The Gold Standard which was adopted by the USA in 1834[1] was a commitment by the participants to fix the value of their currency with gold, thus bringing stability in the world as the currencies were now backed by precious metal. A metal that was considered apex money since the dawn of civilization.

The prosperity that the gold standard brought through unprecedented Economic Growth and relatively Free trade was short-lived as this standard broke down during World War 1 as countries began deficit spending and started printing currency for meeting war expenses, paying war reparations, etc.

Under the Federal Reserve act of 1913, the government can put $50 worth of claim checks(Paper currency) in circulation was backed only by $20 worth of gold also known as debasement.

Britain first discarded the Gold standard in 1931 and USA followed suit in 1933. They later adopted the Bretton-Woods system in 1945 around this time the USA became a superpower making the Dollar so stable that other currencies were pegged according to the dollar which was backed by Gold.

US government forced its citizens to exchange gold for Dollars, many people even jumped on the opportunity and the government did that because the more gold they have in reserve more dollars can be printed and come into circulation. Exchanging gold for paper currency was also revoked later in 1971 to make sure there is an only inflow of gold, not the other way around.

Another reason why the Bretton-woods system was abolished was that after WW2 USA had 2/3rd of the total gold in circulation in the world. Everyone realized that the USA took advantage of the war to sell its product and that helped in increasing their gold reserves. USA set the price of 35 USD in exchange for an ounce of gold and other countries utilized this and by 1971, the USA lost 50% of it.

During the 1970s Dollar standard was enforced (dubbed as Nixon Shock) and ever since the masses' trust in the Dollar become so absolute that it has been enjoying the same status as Gold. As all the currencies were forced to be pegged against the USD which was backed by nothing more than- TRUST

Gold and Panic

In every crisis that has occurred so far in the world, people trust only two things Gold and the USD. When people panic they start investing in precious metals like Gold and Silver because it's their instinct to protect their purchasing power.

During, the pandemic, the Great Depression, and the Global Financial Crisis whenever a crisis occurs people valued Gold which leads to a massive hike in prices in 2008 gold prices rose 5.6% in an instant in terms of USD due to the principle of demand and supply.

Gold has a proven track record of being the apex in the last thousands of years but the Dollar on the other hand recently came into existence and is thus a pillar that is relied upon without any past evidence or data to completely make sure that it won’t crumble like thousands of other currencies.

However Dollar has been stable for the past 80 years or so, the reason is simple it can be printed and manipulated as the government wishes it to. Also, why the governments not only in the US but around the globe are so hell-bent on making gold stay as an asset class rather than money itself.

Gold Adjusts

The value of gold never increases as it can not be manipulated but it's rather the value of currency or the USD that falls due to excessive printing, to put it into perspective.

The value of gold was set up at $35 per ounce in 1934 and was artificially maintained however after the Bretton woods system got abolished the value rose to $850 within the next 2 years. This sudden increment in price happened because gold adjusted itself in proportion to the currency supply in the economy which is rather funny as the value of gold increased by almost 25 times.

This pattern has been observed many times throughout history when the price of gold suddenly rose but is maintained at an artificial level for soo long that the generation which drove the economy at that time dies and is changed by a newer generation.

Reserve Currency

But why is the USD so strong that even after printing trillions of dollars it is still relied upon. A major aspect is that other currencies use it as a reserve currency meaning they buy Dollars from the market and then store it for varied purposes like Defending currency value, foreign trade, etc.

The USD is about 60% of the value of all the currencies around the globe but more than half of it is outside the USA. Top economies like China, Japan, India, etc hold trillions of dollars in their foreign exchange reserve which if all went back into the US economy will bring massive inflation and will collapse the entire monetary system the signs of which are starting to show.

Summing it up ;)

US Dollars are starting to lose the trust of the masses as first, they can be printed and second, it is backed by nothing and after the recent waves of Quantitative easing explained in the last blog, the USA has printed so much in the last decade that it exceeds the total dollars in circulation since the inception of Federal Reserve.

Major economies have already started shifting to available alternatives,

Evident from the fact that China massively increased its gold reserve after the last few stages of Quantitative Easing. Other countries are trying to do the same at their own pace.

India in this case has an edge over other countries as even though tho Indian central bank holds 754 tonnes of gold, the Indian households have an obsession with storing gold. This resulted in Indian households holding 11% of the total gold on the planet.

Usage of Bilateral Trade Agreement between countries where they bypass setting the value of their currency in USD therefore, discouraging its usage like when the rupee-rial agreement was signed between Iran and India when the USA implemented sanctions on Iran for suspected Nuclear Testing.

The trust that the masses put in the USD has been misused by the Federal Reserve and the other central banks know it but the masses are not made aware of this because it goes against the interest of the top 1%.

the time for understanding how the Central Banks are scamming us, the citizens is now. The time when this new pillar of trust will collapse is near but no one knows when and when that happens the gold prices will adjust itself and those with it will be able to defend their purchasing power.

Gold just like the ancient times will soon prove its credibility to us all.

Stay tuned for more insights :)