It’s easier to understand gold’s record-breaking move up if you look at it from the other side of the equation. The dollar is now at its all-time low compared to gold. In simple terms, the dollar is losing value and dollar debasement is driving up the price of gold.
This isn’t a narrative you don’t typically hear on the mainstream financial networks, but there seems to be a growing awareness that the dollar and the system based on it might be in trouble – even in the mainstream investment world.
Now, Wells Fargo has weighed in, warning in a report that the bull run in gold signals “a growing lack of trust in the world’s monetary system.”
Wells Fargo head of real asset strategy, John LaForge, penned the report, noting that gold has been on a strong three-year run with the price up about 35% in 2020 alone. He outlined three primary reasons gold has gone up.
Low real long-term interest rates.
Excessive global money printing (quantitative easing).
A weakening US dollar.
LaForge goes on to offer a fourth ”meta” reason for gold’s bull run that he called “the elephant in the room.”
It’s called ‘trust.’ Trust in money, over the very long term, has been a fickle thing. No paper money has survived time, while gold has. Gold is history’s trusted ‘store of value.'”
LaForge isn’t ready to perform last rights on the dollar-based monetary system just yet. He wrote that it is working today and is largely trusted. But he does think that trust is beginning to fray around the edges.
The recent rise in gold prices and cryptocurrencies may be a sign that a small, but growing, contingent is questioning the world’s monetary system.”
LaForge argues that trust is the pillar of any monetary system. When that trust breaks down, the entire system can collapse. When that happens, then what? People will revert to something proven to be trustworthy. And what has been trusted as money throughout history?
This is why gold, through much of history, has been tied to money. If history tells us anything, it is that money is only worth what someone else is willing to give you for it. If it can’t be trusted to have value, what was once money can become worthless. It seems that recent generations know little about gold and its historical role. Gold was ditched by the West as money about 100 years ago, in favor of trusting government and institutions.”
But there are plenty of reasons not to trust government and government institutions.
Since the economy crashed thanks to the governments’ shutdowns in response to the coronavirus, the federal government has borrowed trillions of dollars for its stimulus program. The June budget deficit was bigger than all but five of the yearly deficits in history. Meanwhile, the Fed is monetizing a big chunk of that debt through its government bond purchase program. In effect, it is buying up US debt and paying for it with money printed out of thin air.
Normally, the threat of price inflation would put a check on Fed money printing, but the central bankers have made it clear that they intend to let consumer prices run hot as a matter of policy. The question is if they let the inflation genie out of the bottle, will they be able to keep it under control?
I wouldn’t count on it. As Peter Schiff tweeted after gold pushed above its record price:
This record won’t last long as the dollar’s decline is only just getting started. It’s about to plunge to new depths taking the American standard of living down with it.”
If you ask me, the growing lack of trust in the dollar system is more than warranted.