The FED (Federal Reserve) has increased the U.S. dollar supply to extraordinary levels over the years. Paper U.S. dollars are still being printed to unprecedented levels today.
As a result paper U.S. dollars buy less goods and services.
Inflation.
Inflation is the slow and silent killer of wealth. If you look at the U.S. dollar for example, then it’s purchasing power has been gradually eroded over time.
Simply go online and find any U.S. Inflation Calculator. Type in the year to start say year 2000 and end year 2020, and the calculation will provide you an inflation percentage figure along with how much an item cost in say year 2000 compared to what it costs today in 2020.
For example, if you bought an item for $1 in 2000, that same item in 2020 would cost you $1.49. A cumulative rate of inflation of a staggering 48.9%.
In simple terms the U.S. dollar has lost a whopping 90% of its purchasing power since 1950, mainly due to politicians and the federal reserve printing more of them.
What is the role of inflation?
The inflation rate is supposed to be based on the rate prices rise or fall of a set basket of goods or services (The Consumer Price Index). Central banks then announce the inflation rate to the public.
If you actually look at the information provided by the Consumer Price Index (CPI) online, then it states that the CPI actually changes the 650 odd items in the basket of goods periodically to account for “changes in consumer habits”.
It can, therefore, be argued that the actual real rate of inflation is higher than what central banks state because the items in the basket are changed to cheaper consumer items, thereby distorting the real rate of inflation.
Central banks such as the Federal Reserve use a monetary policy known as inflation targeting to try and control the overall rate of inflation.
Inflation-targeting is when a central bank raises or lowers interest rates to try and maintain a base rate of inflation. Low interest rates usually gives a boost to the economy therefore boosting inflation and high interest rates would do the opposite.
When the value of the dollar currency or any currency falls, then essentially you can buy less with it, also summed up by the term ‘loss of purchasing power’. Governments and central banks who use the fiat currency system, can simply print paper money out of thin air which means every dollar, euro, pound printed is reducing your paper currency wealth by essentially devaluing that currency.
When it comes to gold often, informed people say “the central bank can’t print gold”, which is basically highlighting why gold is a better store of value compared to the u s dollar or any fiat currency. When the price of gold goes up or down it’s more to do with the value or purchasing power of the paper money, the U.S. dollar currency or any currency. Normally you would buy gold to resist inflation, which is why it is commonly known as a hedge against inflation.
The fact that the central banks are expanding the money supply suggesting moves towards unlimited quantitative easing aka printing money (announced by the FED in March 2020 “Aggressive efforts must be taken” and goes on to suggest purchasing Treasuries and Mortgage backed securities “in the amounts needed”), along with near zero interest rates, means that the erosion of the value of the U.S. dollar and other fiat currencies is going to continue for a long time.
U.S. debt.
The US national debt has now passed $25 trillion. (May 2020, Source USDebtClock.org). That equates to around $202,500 in debt per tax paying citizen in the U.S. The debt is now completely out of control, outrunning economic growth.
The U.S. and many countries across the globe are essentially borrowing up to five times more than their economies produce.
Since March 2020 the federal reserve has continued to cut the interest rate to almost zero and has introduced a raft of stimulus measures including more quantitative easing, “unlimited” asset purchases, billions in loans and so on.
Due to the current pandemic the U.S. is predicted to have a budget deficit of $4 trillion this year alone.
As this crisis continues then businesses with continue to fail, unemployment will rise, the economy will suffer and GDP will fall.
Purchasing power of gold.
In theory the longer these adverse financial circumstances continue, with all the stimulus packages and uncertainty in the financial markets, this tends to be bullish for gold as gold is a safe haven asset. As gold prices continue to rise, this is a natural response to fear as investors rush to preserve their wealth.
Over the last twenty years the price of gold in U.S. dollar terms has increased in price per ounce by over 510% (See gold price chart on our website). When the U.S dollar is losing its purchasing power, gold appreciates in value, revealing how unstable fiat money really is.
The weak U.S. dollar along with the economic fallout, money printing (quantitative easing), falling GDP, interest rate cuts, declines in retail sales, declines in manufacturing, all historically lead to an increase un the gold price.
Even though the price of gold has been increasing over the last few years, there is strong ongoing support and upside for gold, as many investors will eventually tire of a sluggish or non-existent stock market recovery. The return of some kind of normality in the equity market now seems a long way off.
Even bonds, which are traditionally used as another form of safe haven for wealth, may no longer be a viable option due to these bonds having little upside while still taking on some degree of risk.
As the U.S dollar and paper assets continue to plummet in value, investors will find it increasing difficult to ignore the true value of owning gold as a way to truly diversify their investment portfolio. Not only will gold offer a hedge against inflation, but it will also act as an insurance policy against a collapse in the banking system, war or further pandemics which let’s be honest, is now coming more likely in 2020 and beyond.
In essence, gold is an ideal store of value and retains its purchasing power as it does not have the same inflationary pressures of the dollar and other fiat currencies.
Even if you had your dollars tied up in the stock market and your stocks have done well, you still have the underlying fact that those dollars have essentially lost almost 50% in purchasing power over the last 20 years.
As the pressure on governments across the globe to fend off this economic crisis increases, and more is needed to financially support society, means the stimulus packages will keep on coming.
With all this in mind, now could be the last time to stock up on gold before it is too late.