Since this article was written in early January stock indices have bubbled higher. Some analysts have dreamed of a “melt-up” for stock markets. Regardless, bubbles crash eventually.
The Dollar Index dropped from 102.28 on December 30, 2016, to 91.82 on December 29, 2017, and further to 88.26 on January 25, 2018. The Index tracks the floating value of various unbacked fiat currencies against other fiat currencies also backed by nothing but debt, politician promises, and taxing authority.
The U.S. dollar fell this year against other paper currencies, the DOW, gold, silver, Bitcoin, crude oil, and more.
Who would have thought inflating the currency supply by creating $20.5 trillion in official debt and well over $100 trillion in unfunded liabilities could become a problem? Yes, this is sarcasm, and sad, but true.
Massive debt is a drag on the economy, creates consumer price inflation, and increases income inequality. The debt will be addressed via default (Sorry, we’re not paying! Best of luck with your future investments!). Or more likely, it will be paid with DEPRECIATING dollars that buy far less than in 2017, 2000, 1971, and 1913.
(From Alan Greenspan 1966)
The Economist Magazine cover from 1988 showed a new world currency would arise, like a Phoenix, in 2018. It was an enigmatic cover that begged questions.
- Did the Economist anticipate the inevitable decline of the U.S. dollar as the reserve currency used for global trade?
- Did the Economist expect the rise of the SDR (Special Drawing Rights), another fiat currency issued by the IMF (International Monetary Fund)?
- Was the Economist prescient on the rise of cryptocurrencies?
- Why pick 2018? Why not 2008, 2010, 2020, or 2028?
- Did the Economist choose 2018 based on these ideas?
From Gary Savage: The Surprise for 2018
“The surprise in 2018 is going to be the collapse in the US dollar. It will drive the bubble phase in stocks (it already is), it will drive gold out of its basing pattern (I think it has begun), and inflation, in general, will start to rise significantly next year (oil is already at $60 when many were looking for a return to sub $30).”
From Vladimir Putin in 2011:
“They [USA] are living beyond their means and shifting a part of the weight of their problems to the world economy… They [USA] are living like parasites off the global economy and their monopoly of the dollar.”
The Russian retaliation against the dollar has several phases, including the accumulation of gold bullion (in place of U.S. dollars) and the development of global trade payments based on gold, an alternative to dollar systems.
From Jim Rickards’ Strategic Intelligence (Subscription Service)
“Recently, and in a remarkable – but not unexpected – announcement, First Deputy Chairman of Russia’s Central Bank, Sergey Shvetsov announced that BRICS nations (Brazil, Russia, India, China, and South Africa), are now working to create a unified system of gold trade.
In essence, this new gold-trade system will become a parallel, globe-spanning monetary system, in competition with the current, dollar-based regime.”
From Peter Schiff: Pakistan Dumps the Dollar in Trade With China
“The United States uses the dollar as a weapon to keep other countries in line, but it’s becoming a less and less effective strategy as other nations find ways to minimize their dependence on the greenback.”
Conclusions and Actions
The dollar fell against other currencies in 2017, as it has been against most commodities for decades. Expect the slide in purchasing power to accelerate in 2018 due to excessive U.S. debt, the rise of global competition to the dollar as a reserve currency, changing global financial systems, the rise of private and central bank-issued cryptocurrencies, and declining confidence in the U.S. economy.
Protect your savings and retirement by escaping the guaranteed destruction of dollars (euros, pounds, yen, etc.) by moving into something more real than a “high yield” checking account that pays 0.01% interest, a Ten Year Treasury Note that pays less than 3%, or an over-valued stock market. Silver and gold come to mind.
What About Gold?
THE MEDIA TELLS US GOLD IS DANGEROUS AND UNSTABLE. We can’t eat gold or buy gasoline with it. We can’t eat dollar bills or buy gasoline with Treasury Notes either. Gold has been money for thousands of years while Federal Reserve Notes are debts (IOUs), not assets, issued by the Federal Reserve. The purchasing power of those notes depends upon confidence in the government, central bank “printing” policies, and expected future inflation.
It requires real effort to mine gold, but Federal Reserve Notes, Currency Swaps, Guaranteed Loans, Quantitative Easing Scams, and more Central Bank manipulations “create” dollars, yen, pounds, and euros by the trillions from nothing.
Counterfeiting twenty dollar bills in your basement is illegal, but it’s perfectly acceptable if the Federal Reserve prints them, which inflates the currency supply.
From Alan Greenspan: Gold and Economic Freedom (1966)
“In the absence of the gold standard, there is no way to protect savings from confiscation through inflation. There is no safe store of value.”
Tom McClellan of McClellan Financial sees an eight-year cycle in gold lows and thinks gold will move much higher from here.
“McClellan Financial says an eight-year cycle for gold is about to start and the next five years will likely be good ones.”
“As we head into early 2018, we have both the 8-year cycle and the 13 ½ month cycle in their ascending phase. That means both horses are pulling in the same direction, and it should mean good things for gold prices, especially in the first half of the year.”
All fiat currencies devalue over time, so gold prices, consumer prices, and stock prices rise. Like Bitcoin, they can bubble higher, such as gold in 1980, Internet stocks in 1999-2000, houses in 2006, and tech stocks and cryptocurrencies in 2017-2018.
Gold prices rise as currencies fall toward zero purchasing power. Other forces that will propel gold higher are:
- The decline of the Petrodollar and the rise of the Petroyuan and Petroruble will weaken the dollar. The Petrodollar and the dollar’s reserve currency status will not disappear overnight, but both are threatened. Gold will rise as the dollar loses its reserve currency status. Read Pepe Escobar on China’s Petro-Yuan Bombshell.
- Gold has corrected from its 2011 high for over six years. Gold prices bottomed in December 2015, and reached higher lows in December 2016 and 2017. All-time highs will occur in 2018 or 2019.
- Wars are expensive and inflationary. Congress, the Administration, and the Military show no sign of restricting the “Defense” budget or curtailing military interventions. Reportedly the U.S. Military has troops in 170+ countries.
- North Korea, Syria, Eastern Europe, and the Middle East are “hot spots.” We don’t know how extensive these wars will become, but new or escalating wars will be expensive and create far more debt. Gold prices will rise.
Gold prices bottomed in late 2015 and have risen since then. Expect gold prices to accelerate higher in 2018 and 2019 as currencies weaken, stock markets and bond markets correct, and a credibility crisis erupts surrounding central bankers and governments that have mismanaged their economies and currencies.
Examine this log-scale chart of gold prices over 20 years. You can see gold’s exponential rise (straight line on a log scale chart) as the purchasing power of the dollar has declined, particularly since 9-11. Gold prices are tracking upward on the low end of their exponential channel.
Prices could stay within the 25-year exponential trend channel, as drawn, and reach $5,000 by early next decade. A “moonshot” as shown by the black dashed line connecting four major highs puts $10,000 in play. Even higher prices are possible.
How high gold moves in the next decade depends on the loss of confidence in the US dollar, the rise of other trading currencies, such as Russian and Chinese-supported gold-backed trading units, and how rapidly The Fed and U.S. government inflate the supply of dollars through uncontrolled deficit spending and other destructive policies.
About the Author:
Gary Christenson is the owner and writer for the popular and contrarian investment site Deviant Investor and the author of several books, including Fort Knox Down! and Gold Value and Gold Prices 1971 – 2021. He is a retired accountant and business manager with 30 years of experience studying markets, investing, and trading. He writes about investing, gold, silver, the economy, and central banking.