Are gold and Bitcoin buyers onto something?
We are in very unique times. In 1963, the late Sydney Homer published the first edition of his book A History of Interest Rates. Covering 4000 years of interest rate history, and now in its fourth edition, the book has become a classic in the fields of finance and economics.
Nowhere in Homer’s pages however do you ever read zero interest rates.
So that is how extraordinary and abnormal the last 10 years has been. Human history has not hitherto experienced the zero interest rates we have all now experienced in the last decade or so.
Today, a government’s response to any crisis is to throw money at it and cut interest rates as rapidly as possible. One consequence of this liquidity-driven stimulus is that house prices (real assets) surge much faster than wages resulting in affordability crises.
Populations are therefore stretched by inequality with house prices generally up 50-100per cent in many cities post-2010, versus wage growth of just 20-30 per cent.
The second-order effect is that governments are unable to raise taxes because populations are unable to afford them. And because populations are aging, government deficits are increasing.
Spurred on by Modern Monetary Theory (MMT), which argues that currency-issuing governments can always monetise without default, using inflation as a “release valve, the only tools governments and central banks have now are indeed to monetise.
By that I mean, ‘debt monetisation’ – when a central bank directly or indirectly funds government spending/deficits by purchasing government bonds with newly created money (essentially “printing” currency). They’re not raising revenue through taxes, productive growth, or genuine market borrowing – they’re expanding the money supply to cover shortfalls and avoid default or austerity.
The downside of course is that it erodes savings, punishes savers, fuels inequality (asset owners win), and leads to “fiscal dominance” where central banks lose independence.
And while alternatives include immigration to tackle ageing and boosting productivity through technology, the result is suppressed yields that keep borrowing cheap, distorting stock and housing markets.
A more significant consequence, however, is monetary debasement.
During such times, what investors need are monetary inflation hedges such as gold and cryptocurrencies, which explains their recent record high prices.
The question of course is where to next?
What’s next for gold and crypto?
Notwithstanding the retail stampede into gold in recent days, which suggests a short-term peak is developing, and ignoring the particularly irrational retail buying of physical bullion instead of exchange traded funds (ETFs), the long-term outlook for both gold and Bitcoin is said by several experts to be bullish.
In his book, Capital Wars, Michael Howell notes the real battleground between America and China is control of the world’s capital and capital flows. More recently, and specifically, Howell notes the battle is for the development of a dominant financial system to collateralise money.
While the U.S. appears to be moving towards digital collateral in some form, whether that’s a stablecoin or repackaging treasures through a stablecoin, China is collateralising its system through gold.
The U.S. strategy, however, permits global citizens to disintermediate out of their domestic currency and into the U.S. Dollar system, which is, of course, Trump’s plan. This could arguably be making the Chinese very nervous.
Consider, for example, a Chinese exporter today accumulating cash. Currently, their choice is between depositing money in Western banks and risk having it seized, as Russian oligarchs’ funds were seized by Western authorities at the outside of the Ukraine War, or depositing with domestic Chinese banks, who might also seize it on a whim.
It becomes immediately obvious that depositing the funds into the dominant stable coin, which offers some anonymity and protection, becomes attractive. The resultant capital flight might be a huge threat to the Chinese and to the integrity of the Chinese financial system. Already, the combined market capitalisation of all stablecoins has surpassed US$460 billion, according to Coinspot, indicating more capital is coming ‘on-chain’ and being used across the crypto ecosystem.
The Chinese are understandably scared of capital flight and losing control, which is why strict restrictions have been imposed and have been in place for many years.
Perhaps in response, the Chinese are gold-plating (pun intended) their financial system and this is reflected in the surge of liquidity being injected into the markets (a trillion U.S. dollars equivalent into their monetary system) – they clearly want to mitigate their debt problem.
As an aside, the only way a nation can extract itself from a mountain of debt, without defaulting (which, of course, is not possible if the debt securities are the collateral in the financial system), is to devalue paper money, and that’s what China is trying to do – devalue the Chinese Yuan against real assets, devalue against gold.
Two material and persistent forces are devaluing paper money and pushing up gold and crypto. One is China and the other is the U.S. According to Howell, assuming the real gold value of U.S. debt remains constant from here, the skyrocketing amount of debt says that sometime in the mid-2030s, gold will test over US$10,000 an ounce. And by 2050, it could be US$25,000 an ounce. Then consider what Bitcoin might do in that timeframe given it’s tendency to follow gold with a lag. Unique times indeed.
Roger Montgomery is the Founder and Chairman of Montgomery Investment Management. Roger has over three decades of experience in funds management and related activities, including equities analysis, equity and derivatives strategy, trading and stockbroking. Prior to establishing Montgomery, Roger held positions at Ord Minnett Jardine Fleming, BT (Australia) Limited and Merrill Lynch.
He is also author of best-selling investment guide-book for the stock market, Value.able – how to value the best stocks and buy them for less than they are worth.
Roger appears regularly on television and radio, and in the press, including ABC radio and TV, The Australian and Ausbiz. View upcoming media appearances.
This post was contributed by a representative of Montgomery Investment Management Pty Limited (AFSL No. 354564). The principal purpose of this post is to provide factual information and not provide financial product advice. Additionally, the information provided is not intended to provide any recommendation or opinion about any financial product. Any commentary and statements of opinion however may contain general advice only that is prepared without taking into account your personal objectives, financial circumstances or needs. Because of this, before acting on any of the information provided, you should always consider its appropriateness in light of your personal objectives, financial circumstances and needs and should consider seeking independent advice from a financial advisor if necessary before making any decisions. This post specifically excludes personal advice.
