Gold Versus The Magical Currency Creation

In Recent headlines, the Fed’s open market committee (FOMC) made an announcement indicating that they could slowly start raising interest rates as early as 2023. However, the one thing that remained underreported was that they intend to continue to purchase $120 billion in bonds every month for the indefinite future. This translates to $1.44 trillion dollars every single year in new bank reserves. It is money that has been created out of thin air and thrust into the US economy. The amount of artificial “money” Fed is inserting into the economy is essentially the same amount of the market capitalization of IBM, which yields $130 billion each month. That is a tremendous amount of money flooding into our monetary system.

In a previous article, it was discussed that for something to be considered currency it needed to have inherent value. This is the reason why; gold has for centuries been a storehouse of value. If you were to use something commonplace like iron-ore or tin, the value would greatly depreciate. The more you have of something, the less value it holds. This principle remains the same for the mighty dollar. The more dollars flooding into the market, the less value and purchasing power each dollar holds. You only need an elementary understanding of economics to have a grasp on this concept. It’s for this reason that fiat currencies around the globe have a life span. Any currency not backed by gold, is fraught with monetary manipulation. When an economic problem arises, central bankers and politicians can’t stand up under the pressure to resolve their problems through quantitative easing, which creates more debt, which ultimately hurts the economy, and the cycle continues.

Previously, when the dollar was tied to the gold standard, it implemented discipline in the currency. The dollar couldn’t be manipulated and as such retained its value well. If you examine the gold mining industry, it produced 97.5 million ounces around the globe this past year. At the current price of 1,800 per ounce this totals roughly $1.58 billion per month. The Fed is creating out of thin air, nearly 8x as many dollars then what the entire world produces in gold.

One other notable factor, is that when you mine for gold or silver it takes a considerable amount of effort. You need companies, workers, machinery, time and expense. For the Fed to increase the amount of dollars in circulation, they only need to add some zeros with a flick of a finger on a keyboard. How much true value can be assigned to something that is created with literally no effort?

All in all, the biggest takeaway is that the purchasing power of the dollar will never be greater tomorrow than it is today. With each paycheck throughout your lifetime, the dollar will lose more and more purchasing power. For instance, if you look at the value of $1 in year 2000, that same dollar is worth only $0.63 today. In 21 years, the dollar has lost nearly 50% of its purchasing power. In contrast, the purchasing power of both gold and silver has greatly increased. In 2000, one ounce of gold was worth only $281.50, today that same ounce is worth $1,102 after adjusting for inflation. The purchasing power of silver has increased by 209% during that same time period. If history repeats itself, it’s quite likely that silver will actually exceed the purchasing power of gold within the next several years.

The fact remains that the dollar can no longer be trusted as a store house of value for your investments. As the purchasing power of the dollar continues to decline, you will be better served to store your money in a vehicle that not only retains its value but also has increased its purchasing power throughout the years.