Destruction in the value of paper money
We discussed the inherent challenges of the debt-fueled world economy and the fiat monetary system in our first e-book (February 2011).
Since then, approximately 30% of value of U.S.Dollar has been wiped out comparing to the gold – “the 4th currency” and the only “currency” whose amount cannot be increased significantly by decisions of world politics or central banks. There seems to be no currency in the world that keeps up with the value of gold, that is by many seen as the “real” value, whereas currencies are imaginary.
What does that mean?
The situation where value of paper money is getting destroyed has escaped most people on the planet.
Now it is completely plausible that world returns back to normal – or at least to the “new normal” stabile, lower growth. In that case it would be likely that precious metals would stabilize or lose value.
But the extreme strength in precious metals (gold, silver and platinum) is suggesting that the smart money is worried about the stability of the whole financial system of the world and wants to “stack some away for the rainy day.” Gold nearing 2000 USD / ounce hints to the fact that some participants are seriously concerned about end of the world as we know it. Some market participants are worried even the whole fiat monetary system could collapse or seize to exist at least in the form we currently know it.
Why should I care?
Isn’t it strange that people follow the mantra of diversification of their financial assets to avoid big shocks to their overall wealth but then they fail to diversify in terms of currencies, including the fourth (very) solid currency, gold? I know nobody that has their all eggs in one basket when it comes to stocks or bonds, but I know plenty of people that have all their wealth in one basket when it comes to currencies, namely in Euro, Yen or USD, depending if I am talking with a person in Paris, New York or Tokyo.
Even during the boom years of pre-2008 there was wild fluctuation in currencies – euro for example almost doubled in value compared to USD. Gold easily doubled in comparison to USD from 2003 to 2008 and significantly increased in value compared to Euro.
US –based investor might have felt that his or her wealth was increasing at good return on investment every year, but was losing out when comparing to euro or gold at the time.
The common answer would be that it doesn’t matter unless one travels abroad.
However, long term weakness in a currency destroys purchase power in the country. Now there is certainly boost for country’s industry as the currency devalues, but if the difference does not correct itself, eventually prices creep up everywhere in the economy to reflect the lost value of the currency itself.
What should one do?
The solution is obvious – one should consider diversifying not only among asset classes but between different currencies including gold or other precious metals for capital preservation.
Disclaimer: This article as a whole is an OPINION, with the exclusion of the factual past performance data of Euro and gold in comparison to USD and Euro in comparison to gold briefly mentioned. It is merely an article to raise discussion and is by NO MEANS investment advice. One should always use his or her own judgment and consider consult professional advice. The writer have had, currently holds and may continue or discontinue having exposure to different currencies and precious metals through directly owning them and / or through exposure of investment products such as stocks, ETFs, mutual funds and other products.
