May 25, 2016

The Global Monetary System Has Devalued 47% Over The Last 10 Years

We have argued the inevitability of Fed-administered hyperinflation, prompted by a global slowdown and its negative impact on the ability to service and repay systemic debt. One of the most politically expedient avenues policy makers could take would be to inflate the debt away in real terms through coordinated currency devaluations against gold, the only monetize-able asset on most central bank balance sheets. To do so they would create new base money with which to purchase gold at pre-arranged fixed exchange prices, which would raise the general price levels in their currencies and across the world to levels that diminish the relative burden of debt repayment (while not sacrificing debt covenants).

The odds of this occurring seem to have risen, judging by the gold prices. Table 1 looks at gold performance over one, five and ten years in terms of the fifteen currencies representing the fifteen largest economies (about 77% of global GDP). The bold figures at the bottom show gold’s performance weighted for GDP.

Gold is mostly quoted in US dollars, but it is also implicitly valued at each point in time in all currencies (as is everything that may be bought or sold across the world), simply by applying cross exchange rates to its USD price. Table 1 shows the experience of gold holders around the world has been quite different. A Russian would have had the currency he receives his wages in devalued to gold by almost 370% over the last ten years. Or, he could have generated a 370% gain by converting his ruble savings into gold. Anyone else in the world would also show a 370% gain by having owned gold and having been short the ruble.

Meanwhile, gold in dollar terms, as it is quoted for capital market participants given London and US exchange dominance over fungible gold trading, is up far less – about 94%. (This performance also represents gold performance for currencies pegged to the dollar, like the Saudi Arabian riyal.) Gold in Chinese yuan terms and Swiss franc terms are only about 57% higher over the last ten years.

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