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US$, Gold, and the international monetary system

The gold standard era came to an end in 1913 with the creation of the US Federal Reserve, although after that there were still pseudo structures to base value on some kind of link to gold. It was the beginning of the era of fiat currency which developed treacherously through the period until 1971, which is celebrated this week when President Richard Nixon terminated the US$ convertibility to gold, 45 years ago on 15th August; effectively de-linking the US$ from gold. He exclaimed famously “Your dollar will be worth just as much tomorrow as it is today… ” as he created the totally fiat (paper based) end of the Gold Standard. This was the seminal moment in international monetary system history which led to the global financial crisis we endure today with all it’s crucial and threatening elements in unsustainable debt levels, low and negative interest rates, anaemic growth rates, leading no doubt to terminal need for change.

In effect what Richard Nixon achieved was not de-linking the US$ from gold, but rather de-linking gold from the US$. Since 1971 gold has increased in value from $35 an ounce to $1350, and the US Dollar has depreciated by a similar inverse percentage (97%).

The period between 1913 and 1971

During this time volatility crept increasingly into the markets and we witnessed higher highs and lower lows, remembered for the ‘dizziness’ of the 1929 US equity peak and the desperation of the 1932 great depression, as the relationship between paper (represented by the Dow Jones Industrial Index) and gold began to fluctuate wildly, as evidenced in the Dow / Gold ratio. During this time gold was fixed at $20.67 until increased in 1931 to $35, representing a US$ depreciation of 69%.

The period from 1971 until today

This has been characterised by the Dow / Gold ratio dropping to a low of 1.0 in 1980 with both the Dow and gold at 800, and thereafter increasing to a high of 45 in 2000 with the Dow at 11250 and gold at 250. This massive increase in volatility is continuing with the Dow / Gold ratio now en-route lower to a yet lower low point such as <1.0 in the next period, with stock and bond markets threateningly vulnerable and gold in it’s next 8 year up cycle.

Value of the US Dollar and its reign as the world reserve currency

The US$ is losing value, as indeed are all paper currencies, and this process is amplified by the actions of central banks.

US$ Purchasingsmall

Fiat currency (all currency) is declared by government proclamation to be legal tender, and depends on trust and confidence for perceived value. These values are beset by trials and tribulations, including horrific treatment such as QE and negative interest rates, amongst others, and maintain perceived and accepted value despite obvious devaluation to core value. Such perceived value remains exposed to massive collapse as reality sets in.

The world is changing fast and the financial power blocks are shifting, probably from west to east. China and Russia combined are buying gold bullion at the rate of world gold production, and America even refuses to undertake an audit of US gold reserves. Combined with the vulnerable state of world stock and bond markets, this truly presents a toxic cocktail, and the banking system is showing signs of another crisis (or collapse).

Even the US reign as holder of the international reserve currency of the world could be threatened in due course. as these dominant periods only seem to last an average of 94 years. Consider the diagram below.

Reserve currencysmall

We are at that moment in time with:

  • potential global financial crisis;
  • collapse of the international monetary system, and introduction of a new one;
  • massive international currency devaluation against gold;
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