The Fiat Currencies Are Headed into Crisis

by David Galland, Managing Director, Casey Research

It’s important to recognize what’s actually going on with the price of gold, which has broken into new record territory again today – to $1,331 as I write. It is not that there has been a change in gold’s fundamentals, because there hasn’t. To recap those fundamentals:

  • Gold is still viewed as good money across every country and every culture on this planet.
  • It is still extremely difficult to locate a gold deposit and to scratch it out of the Earth’s crust.
  • Because of the difficulties in mining gold, the supply of gold has remained remarkably constant. In fact, despite higher prices the global production of gold continues to go down. That is an irrefutable confirmation that all of the easy deposits have been found and of the challenges of mining gold – which today includes not just the geological difficulties but large doses of environmental and governmental roadblocks.
  • It is the constant nature of new gold supplies that have helped make gold sound money. That would not be the case if you could gin the stuff up at will, as the governments can do with the paper currencies. Put another way, if gold could be created as easily as the paper currencies, no one would want to hold it as a store of value.
    (Some people refer derisively to gold owners as “gold bugs.” Turning that idea around, legendary investor Richard Russell, in a rare public appearance at the summit, used the term “dollar bug” to describe those who would foolishly prefer holding paper currency over gold. I think that’s a very good way of looking at the gold vs. dollar argument.)

And that, dear readers, brings us to what’s actually driving the price of gold up.

Namely, that there’s a global race to the bottom underway for the world’s fiat currencies. In their efforts to save their economies from the extraordinary levels of debt they and their predecessors have run up, the misguided politicians now believe that the best approach is to devalue their currencies against those of their trading partners. This in the hopes of gaining a competitive commercial advantage for their export products on global markets.

During the Casey’s Gold & Resource Summit, Doug Casey explained exactly how wrongheaded this approach is, but the last time I checked, the world’s leaders were not listening to Doug (though they certainly should be).

This morning, it has been announced that the Japanese are again intervening in their currency markets, by pushing their already low interest rates lower still… just a tick off zero, despite two decades during which they had the opportunity to discover the flaw in this approach. That the Japanese are taking such extreme measures reinforces just how desperate they are becoming. (Vitaliy Katsenelson, in his eye-opening summit presentation, explains Japan’s fundamentals and why it’s on the verge of a financial Armageddon that everyone needs to prepare for.)

And it’s not just Japan intervening in their currencies. As Bud Conrad explained in his excellent opening presentation, there’s a long and growing list of countries that have either recently intervened or are currently trying to force their currencies lower. In fact, in addition to Japan, both South Korea and Brazil have just announced what are essentially exchange controls on money coming into the country from foreigners. By raising taxes on foreign investments in their bonds, they hope to reduce the inflow of foreign purchases, which otherwise help keep the local currency strong.

This race to the bottom cannot end well.

About 

For over a quarter of a century, legendary investor and best-selling author Doug Casey and his team at Casey Research have been helping self-directed investors to earn superior returns through innovative investment research designed to take advantage of market dislocations.