Money and gold

The global macro economic context keeps evolving. It’s not clear it’s moving to a better place. After the WWII, the world’s major economies got together at Bretton Woods to create the modern monetary system. The U.S. imposed the rules: all currencies pegged to USD, and the dollar pegged to gold at $35. The major condition imposed on the U.S. was to keep the monetary base stable. After almost 3 decades, the U.S. could not hold its part of the deal and in 1971, Nixon broke the gold standard. Since then we are in a pure fiat system. Not backed by gold. Since then, its full faith and credit. Now take a look at the top chart below. The global monetary base keeps expanding. What does it mean in simple terms? Suppose Fund@mental is a country, that only produces 10 apples a year, that are consumed within the year, and it has a monetary base of $10. One Apple costs $1. The next year we produce another 10 apples, but Fund@mental’s central bank prints another $10, for a total monetary base of $20. Now each apple costs $2. You would say, apples have doubled in price. I would say, the currency has lost 50% of its purchasing power. How do you defend yourself against currency debasement? Basically with real assets, and mostly with gold. Now take a look at the bottom chart: Tether, the biggest stable coin in the world, has been buying gold at a very rapid pace. It now has 120 tonnes. It used to buy mainly treasury bonds, but now its accumulating gold. Central banks, including those in the top chart below, are doing the same. They’re printing fiat currency with the left hand, and buying gold with the right one. Holding cash in this environment is tricky. It will defend you from volatility, but it will lose purchasing power very quickly.

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