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LAWRIE WILLIAMS: Currency devaluations ahead.  Hold gold.

World currencies have to be vulnerable to value deterioration.  The potent combination of ultra-high debt levels run up as a protection for the person in the street against the adverse economic effects of the COVID-19 pandemic and the restrictive measures to try and combat it.  This all leads to resultant high inflation as the world begins to shrug off its effects, and could well have a devastating effect on the buying power of domestic currencies all around the world.

Gold tends to be a great wealth protector under these circumstances.  You can’t rely on overvalued equities or hybrid cryptocurrencies to protect what you have, and more.  Equities are probably overdue for a major crash anyway, and bitcoin saw its value halved recently in just a few days, and this could very easily happen again. However, gold does mostly stand the tests of time as a value retainer. 

It is noticeable that, for example, investors in Germany – a country that suffered hyper-inflation just less than 100 years ago – have been turning to gold in their droves recently, while traditional gold hoarding nations, mostly in Asia, have also been seeing an influx of investment interest in the yellow metal.  Gold's value protection properties are built into the psyche of citizens of countries that have experienced such a domestic currency breakdown in living memory.

Gold is stable money, whereas fiat currencies can be subject to value deterioration, and even total collapse.  Even in a supposedly strong economy, like that of the U.S., it is estimated that the purchasing power of the dollar has diminished by as much as 90% or more over the past 50 years.  In relation to gold it has deteriorated even more (perhaps 98%).  True, the gold price rise in relation to the dollar has not been a straight line relationship, but anyone alive today who can remember back to prices being paid for staple goods, household items, automobiles etc. 50 years ago will know exactly what we are talking about.

According to an article published on Bloomberg.com veteran investor Mark Mobius recommends that investors should invest say 10% of a portfolio in gold – a common suggestion among gold’s proponents.  He predicts that currencies will be devalued against gold, following the huge unprecedented stimulus amounts unleashed by many countries to fight the COVID-19 coronavirus pandemic

Mobius stated “10% should be put into physical gold,” reports Bloomberg.  Mobius has a good track record and is known to be gold supportive.  He set up Mobius Capital Partners after more than three decades at Franklin Templeton Investments. “Currency devaluation globally is going to be quite significant next year given the incredible amount of money supply that has been printed.” Mobius is reported as going on to say.

The gold price had rallied to a record level of over $2,000 an ounce last August, boosted by the spread of the high virus pandemic infection rates being  experienced in some of the world’s most advanced economies.  As the virus shows signs of being brought under some kind of control due to vaccine rollouts – more successfully in some countries than others - the gold price has fallen back, but seems to be consolidating at, or around, the $1,800 level.

It is going to be very, very good to have physical gold that you can access immediately without the danger of the government confiscating all the gold,” Mobius said in an interview, reports Bloomberg.

The country which is probably now key to gold price progress, or otherwise, is the U.S., where activity in the gold futures markets has the prime global price-setting role at present.  The U.S. is currently seeing a significant surge in new virus infections – in part brought on by vaccination acceptance being something of a political choice with residents in Republican states more likely to shun vaccination than in Democrat ones.  However, the overall effect is to cast doubts on the speed of the nation’s economic recovery.  The U.S. is also the world’s most indebted country which makes the dollar one of the most vulnerable currencies to degradation, according to Mobius’ argument.

U.S. debt run up to counter the effects of the virus pandemic alone is estimated at comfortably over $3 trillion and continues to grow at a substantial rate.  However this is only a small part of the country’s huge national debt position.  Total debt is put at over $28 trillion and interest alone on this is around $1billion per day and is expected to double in the next decade.  The size of this debt is such that it is highly unlikely it can ever be repaid which could lead to a continual weakening of the dollar index over time, which should be gold positive in the medium to long term.

02 Sep 2021 | Categories: Gold, Dollar, US

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