Gold Markets Are on Fire

Gold markets around the world are on fire as fiat currencies — paper currencies unbacked by anything tangible — are rapidly losing value. Globally, investors are realizing that true value lies in physical assets rather than in paper money that can be printed at whim or in digits that can be created with a keystroke.

Gold bullion kilo bar from China.

Currency Wars Are Igniting Gold

Nations all over the world, saturated with debt, are competitively devaluing their currencies to make their debts more bearable as well as to stimulate their economies, since modest inflation is widely believed to have a positive economic effect. However, these devaluations — known as “currency wars” — are leading to a rise in commodity prices, since the supply of raw materials cannot be increased as easily as paper currencies, thus increasing their nominal values. As well, continuous money printed by the world’s central banks is leading to a loss in confidence of paper currencies, triggering waves of gold buying and a new bull market.

Gold Is and Always Has Been Money

For thousands of years, gold has been regarded as money due to its scarcity, beauty, divisibility, malleability, and durability. In fact, the world had been on a gold standard up until 1971, when President Richard Nixon removed the peg that existed between the gold and the U.S. dollar under the Bretton Woods monetary system. Under this system, only foreign nations and not American citizens could convert their dollars for gold. This peg was removed because foreign nations were demanding that their dollars be converted into gold, thus depleting America’s gold at a time when the dollar supply was massively expanding during the Vietnam War.

Since the unlinking of gold to the dollar, which was the world’s reserve currency, the world has operated under a “fiat” system — a system in which currencies are¬†backed by nothing other than confidence, and are allow to float freely in value against one another. However, we are in the final stages of this monetary system, as it is beginning to show cracks. Central banks around the world — notably Russia and China — are net buyers of the yellow metal, creating shortages and buoying its price. The system that has been propped up by increased debt, followed in turn by massive money printing, has reached a limit on the amount of debt it can support. As nations around the world feverishly accumulate gold and hard assets to diversify away from unbacked paper assets, they are realizing that gold is and always has been money.

We Are on the Cusp of a Golden Era

As nations begin to realize that gold is money and a provider of economic stability, they are likely to consider reintroducing a gold standard, or at least partially backing their currencies with gold. The era of unbacked paper currencies is surely coming to an end, given the devastating consequences of lacking an anchor such as gold. Because gold is in limited supply, increasing at roughly 1.5 percent annually under the best of conditions, the price of gold may rise in multiples before the market recognizes a fair price under a new gold standard.