In my opinion, Yes. 2019 is the year to buy gold. I have added some positions into gold. Gold is something that has always been in my watchlist for quite some time. I wanted a portfolio that has a decent mix of gold and bitcoin. The idea is to hedge against the devaluation of our currency, political uncertainties, global recession and the potential collapse of our monetary system. Collapse? Isn’t the last point a bit too far-fetched? We will see later on in this article.
“Gold is money. Everything else is credit.”
– J.P. Moragn
If you want to dive deeper into understanding gold, there are 2 people you should go to, Mike Maloney and Peter Schiff. These are not my stuff, I am merely summarizing the information that I have gathered. So do check up their YouTube videos (“Hidden Secrets of Money”) and watch some of them to understand the history of gold and our monetary system.
To start off, we have to first understand the difference between currency and money as well as the 7 stages of an empire. This is to help set the context and framework for the content of this article.
Difference between Currency and Money
What is the fundamental difference between currency and money? The similarities between currency and money are that it can be used as a medium of exchange, a unit of account, it is portable, durable, fungible and divisible. That is as far as the similarities go.
The main difference that separates money from the currency is that money SHOULD have a STORE OF VALUE. Our $10 notes in our wallet are currencies, they are not money. It doesn’t have any store of value. This is because central banks can print money through quantitative easing. The more money they print, the more worthless our paper money becomes.
For example, the purchasing power of the US dollar has lost its value by 95% since 1913. In contrast with gold, Egypt first started using gold 5,000 years ago. The same gold that the Egyptians used can still be used to buy stuff even up till today. We don’t have to think hard about whether gold has been successful in maintaining its store of value. What do you think a $100 bill can buy you in the next 10 years? Is the US dollar a store of value? So this is the first part. Money SHOULD have a store of value.
The 7 Stages of Empire
The second part is about the 7 stages of the empire. Mike Maloney describes the 7 stages of empire as a societal pendulum that swings from quality money to quantity money. This has happened throughout every empire in history for thousands and thousands of years. This is how it goes.
Stage 1: A country first starts out with good money which is either gold or silver or a currency that is BACKED by gold or silver. This is sound money. This is quality money at the opposite end of the pendulum.
Stage 2: As the country develops and flourishes, it began to expand layers of public works and social program. To gain votes and popularity, the country starts taking on more economic burden and debts.
Stage 3: As the country gets richer, so does its political influence. Now it starts shifting a large part of its budget to strengthen its defence and military position.
Stage 4: Military expansion leads to global tensions and uncertainties. Soon after, it began to put its military developments to use and war between countries broke out. Expenditures to fund the war skyrocket significantly.
Stage 5: War creates a huge demand for funding and the country starts debasing their quality money (Gold & Silver) to replace it with currencies that can be minted or created without limit. This is the Currency Debasement phase of the stage. The pendulum has now swung to the other side, “Quantity Currency.”
Stage 6: The excessive increase in currency supply leads to the loss of purchasing power. Prices of basic necessities began rising unsustainably. Once it reaches a tipping point, people start losing faith in the currency, monetary system and the government.
Stage 7: Everyone starts selling their currencies BACK into quality money (Gold & Silver). The currency collapses since no one perceives it to have value anymore. A currency crisis leads to the rise in the value of gold and silver.
You will see these 7 stages repeating themselves over and over again, even in modern history. Try and see if you relate to the 7 stages of Empire as we go along.
The History of Gold
Alright. Now that we know what is the difference between currency and money and how empires rise and collapse as they move from money to currency, let’s dive into the history of gold. It is only if we understand the history of gold, do we see the importance of gold in the future.
“The farther back you can look, the farther forward you are likely to see.”
– Winston Churchill
Gold has been around for 5,000 years. It all started in Egypt when they used gold and silver as a commodity. But it was in odd sizes and purity. Each unit has different value and commerce was difficult. This was before when the process of minting coins was invented.
Gold became money only when they were minted into coins in Lydia around 700 BC. This made gold fungible. Each gold has the same weight and same value. Goods and services can now be priced in gold.
The concept of using gold coins as money spread to the free markets in Athens. Athens has a free market system that allows them to rise to the peak of their civilisation. This is evident through the remarkable architecture of temples and buildings. But what went wrong? Why did Athens fall?
How Did Athens Fall?
The reason is always too much greed and too much war. They fought with Sparta as they tried to expand their empire. Athens has already gone from stage 1 to stage 4 of the “7 stages of Empires”. Gold is being used as money, sound money. Then they began expanding aggressively and their empire grew to become prosperous. To further expand their influence, they went into the war with Sparta thus creating a huge hole in military expenditures.
Soldiers that are miles away are being paid in gold and the supply of gold start leaving the city. This lead to a deflationary spiral as less gold is circulating in Athens. So they started debasing the money to fund the war. (stage 5)
Gold coins are being melted with other metals to produce a large number of copper coins. Prices of goods and services can now be transacted with either gold, silver OR copper. Soon after, people began to save and hoard gold, while only spending copper. Copper is the “quantity money” that got created as a currency in this case. Gold and silver (quality money) started to disappear from circulation.
Why is that so? This is because of Gresham’s law, a monetary principle stating that “bad money drives out good”. If there are two forms of commodity money in circulation, people would keep the valuable one and spend the less valuable one.
For the first time in Athens, gold and silver are being priced in copper. In the past, the prices of goods and services are directly measured by the weight of gold. As Athens minted more gold into copper coins, prices of commodities began rising, thus leading to hyperinflation and the collapse of the Athens empire.
Recalling the 7 stages of empires, you would see how the pendulum swing from quality money into quantity money. They started with gold and they got into the war with Sparta as they expand their empire. Gold is being debased into copper coins, which eventually became worthless when too much of it is being minted. As a result, this has led to the demise of the Athens empire from its peak.
Hyperinflation in the Weimar Republic
Let’s use another example that is more recent. Germany, like most countries, started off with the classical gold standard. This is when the nation’s money supply is pegged, fully or partially, to the amount of physical gold in the central bank’s reserves. When WWI broke out, they incurred a large amount of expenditures to fund the war. So Germany went off the gold standard and the German Mark became unredeemable for gold and silver.
They started printing the Mark excessively to fund their ongoing war. The number of Mark in circulation quadruple during the war but prices were not being inflated yet. This is because people were saving in times of uncertainties and the Marks in circulation are NOT being spent.
However, when the war ended, consumer optimism rises and people started spending all the Marks that were being saved. This is when the prices of goods and services rose sharply to catch up with inflation. The exchange rate was initially 100 Marks per oz of gold but by the end of the war, it became 1,000 Marks to 2,000 Marks per oz.
The savers that had been hoarding their cash found themselves buying a lesser amount of goods. By 1919, the purchasing power of Mark had fallen by 90% due to excessive printing of money. In 1923, Germany’s paper mills were printing 45,000,000,000 Marks per day! They started printing more and more money to fund for the after-effect damages caused by the war. Soon after, hyperinflation occurred and the oversupply of Mark has made the currency worthless. This is exactly the same situation as what we are seeing in Zimbabwe today.
Again, Germany started off with quality money, war broke out and it needs large funding of money. They suspended the classical gold standard and the German Mark became unredeemable for physical gold. The milling press started printing the Mark excessively and when people start spending it, hyperinflation and instability arise.
How Did Our Monetary System Evolve Over 140 years?
We are still studying the past history. But let’s shift gears and talk about the monetary system. Try to see if there are any resemblances to the different phases in the 7 stages of Empire. It is all the same cycle repeating itself in different ways, but humans never learn from history. It all started with the classical gold standard.
1873: Classical Gold standard. Each unit of currency is backed by an equivalent amount of gold in the vault. A $100 bill is equivalent to $100 worth of gold. It is a receipt and a claimed check on gold that is stored in physical vaults. This is sound money. This is quality money.
1914: World War I, Gold Exchange Standard. Currency is now being backed PARTIALLY by gold. It allows the government to print $50 worth of bill backed up only by $20 worth of Gold. The reserve ratio is being set at 40%, meaning that it allows the government to print up to $100 for every $40 worth of gold in the treasury. Remember that war calls for huge funding? Many of the countries broke off from the classical gold standard to fund the war, including Germany, the Weimar Republic as we have discussed earlier.
1944: World War II. The US did not get involved in both wars until Pearl Harbour. During WWI & WWII, Europe redirected its resources and productions to the manufacturing of war equipment and supplies. Other consumer goods and food necessities are being imported from the US. Everything was paid for in gold. So the US was receiving a huge supply of gold from Europe, in return for supplying consumer goods to Europe.
During this period of time, the US benefited advantageously as their supply of gold increased dramatically. By the end of WWII, US owned 2/3 of the entire world’s gold supply. The rest of the world owned 1/3 and Europe has none. US loaned Europe with the US dollar and Europe is now flooded with the US Dollar.
1960: Brenton Wood System. Now all other currencies are backed by the US dollar and the US dollar are being backed by gold. The US dollar is being pegged at US$35 per ounce. There were no forex rates and fluctuations during this period of time.
Under the Bretton Woods system, there was no reserve ratio established. This means that the US can print as much money as they want, without considering the amount of gold they held in the central banks. There is a lot of deficit spending (Korean War, Vietnam War, Gulf War, etc.) as paper money printing is being exported all over the world. The US doesn’t have the required gold to back the amount of US dollar in circulation. It just keeps printing as a war requires huge expenditures funding.
After a while, people realised that the phrase “The Dollar is as Good as the Gold” does not hold true anymore. It used to be all fiat currencies pegged to the US dollar and the US dollar pegged to the gold at US$35 per ounce. However, due to excessive printing, there was simply too much US dollar in circulation. Countries started selling back the US dollar in exchange for gold. From 1951 to 1971, the US lost 50% of its gold supply. At the end of 1971, there is 12x MORE US dollar than the gold. They created more receipt for gold than they have in their physical vaults.
1971: The End of Gold Standard. Realising that there isn’t any more gold to go around, Nixon abolished the gold standard. They can’t do this anymore. If countries continue exchanging their US dollar for gold, the US would go bankrupt. The supply of gold in their banks have already been depleted significantly. There isn’t any more gold to be exchanged for the US dollar. This would be a huge bank run as the US is acting like a bank in this case. After the gold standard was abandoned, the world’s currency now became fiat, meaning they are backed by nothing anymore.
Where Are We Today?
Let’s zoom out and look at the bigger picture. Recall the 7 stages of Empire. First, we started out with quality money (The Classical Gold Standard). Then countries advanced their military developments. Greed, ego, domination and power led to wars. Military power was put into use, causing a huge hole in expenditures. Countries began to divert away from the gold standard by debasing their currency. This is where the pendulum starts swinging from quality money to quantity money.
The breaking point came during 1971 when the US dollar is cut off from gold. It is the moment when the pendulum swings to the highest point of “Quantity Money”. It gives the fed the power to print as much money as they want. The 2008 crisis allows the fed to do quantitative easing (QE1, QE2, QE3) 3 times, pumping in trillions of US dollar into the economy.
The money that is printed is used to bail out banks and prevent the big boys from going bankrupt. The people who suffer the most are those who save. They would see the purchasing power of their currency decrease (buying lesser goods and services) as more money is being printed and injected into the economy.
The reason why we are not experiencing hyperinflation is that the excess printed money is not being spent yet. This is my guess and some of the theories that are out there. The US exported inflation into other countries all around the world. Most US dollar is being held in central banks of different countries. The printed money also flowed into stocks, bonds and the real estate market. But if and when everyone starts dumping the US dollar back to the US, that is when shit happens.
Fiat Currencies have ALWAYS Failed
This is something interesting, yet scary that is not known by many. Throughout the history of mankind, there are ZERO fiat currencies that managed to maintain its store of value. ZERO. Hundreds and thousands of fiat currencies have been created but none survived. None of them managed to retain its store of value over the centuries. If that’s the case, how confident are we that the US dollar is an exception? How sure are we that the US dollar is going to be that ONE out of the few thousands of currencies in the past that is going to succeed?
The previous chart has already clearly shown us that the purchasing power of the US dollar has declined by more than 90%. We are now at the extreme end of the pendulum, “Quantity Currency.” What do you think will happen when the big boys fail again? My guess is they are going to print even more money out of thin air. When they do this, we become poorer. Our currency notes reduce in value. Soon after, people start losing faith and most would convert their fiat currencies into gold. When your wealth is in gold, you do not have to worry about how much money they print. You are safe. That’s how gold derives its name as a “Safe-haven asset”.
The next recession would probably be big or even catastrophic. No one knows what will happen. We are in unchartered territories after breaking the link from gold in 1971. Debts are ballooning sky-high. The only thing we can do for ourselves is to prepare.
All of this stuff seems insignificant or unbelievable at the moment. It is probably because we are too micro-zoomed in on what’s happening over the years, rather than decades. The world has formed a new monetary system every 30-40 years. We are nearing the 50th year since 1971 when Nixon abandoned the gold standard. How and what would the next monetary system be like? Gold, bitcoin, digital money, crypto? I have no clue. All I know is the value of our fiat currencies are depreciating. To zero? Perhaps.
Recent Developments in the Gold Market
Now that we have taken a peek at the history of money and currencies. Let’s see what is happening in the future. These are some of the recent developments that are happening in the gold market in 2019.
1. Gold Price Breakout
In 2019, gold has attracted widespread media attention as it has broken above the resistance zone of 1,300. For a period of 5 years, prices of gold have been trading sideways as seen from the diagram above. But now that it has broken out of the resistance, we might be seeing a new gold rally in the years ahead.
2. China & Russia are Accumulating Gold in 2019
China’s Gold Reserves
Russia’s Gold Reserves
As seen from the above 2 bar charts, both China and Russia has been busy stockpiling gold over the past few months in 2019. They are diversifying away from the greenback as they seek to reduce reliance from the US dollar. I have no idea what is going on, but something is brewing underneath. A new world order? Tipping of global power balance? Gold-backed Yuan? Hedging against recession? Trade war bargaining chip? Breaking the US dollar hegemony? We would never know the strategic reasons of China and Russia accumulating gold so aggressively. But if the 2 global superpowers are in, then I am in.
3. Ray Dalio’s Article on “Paradigm Shifts”
In his most recent article on paradigm shifts, Ray talks about paradigm shifts occurred in global markets over the decades. He talks about how paradigms have changed over the past 100 years and what’s the next paradigm that is coming. Do take a read if you got the time, it’s quite a lengthy article.
In essence, Ray thinks that there the US is running out of stimulants to save the economy in the next crisis. Interest rates are already at all-time low and quantitive easing is going to decrease the purchasing power of the dollar. There are too much debt and non-debt liabilities such as pension funds and healthcare. This debt bubble is going to be so big that it can’t be repaid with the existing assets. Interest rates are going to be so low that creditors are not finding it worthwhile to lend money anymore.
The urgent need to fund the debts as well as the unwillingness of creditors to lend money would create a “big squeeze” for credit money. At this point, the government is most likely to print even MORE money (QE4 & QE5) or increase taxes to fund the debts. There would be currency depreciation and conflicts will arise between the capitalists and socialists. The winners are those who held on to gold. Here are some of the quotes relating to gold in his article.
“Those that will most likely do best will be those that do well when the value of money is being depreciated and domestic and international conflicts are significant, such as gold.”
– Ray Dalio
“Central banks doing more of this printing and buying of assets will produce more negative real and nominal returns that will lead investors to increasingly prefer alternative forms of money (e.g., gold) or other storeholds of wealth. “
– Ray Dalio
“Most investors are underweighted in such assets, meaning that if they just wanted to have a better balanced portfolio to reduce risk, they would have more of this sort of asset. For this reason, I believe that it would be both risk-reducing and return-enhancing to consider adding gold to one’s portfolio.”
– Ray Dalio
When this article was released, the price of gold shot up to US$1,400. His words and opinions have an effect on the gold market. I don’t know about you, but when a billionaire hedge-fund manager is going into gold, I wouldn’t second guess his thoughts. Furthermore, he is going to release an article in the future about why he thinks gold is an effective portfolio diversifier.
Anyways, Ray Dalio has an all-weather portfolio that recommends an allocation of 7.5% into gold, 7.5% into commodities, 30% stocks, 15% intermediate-term bonds and 40% long-term bonds.
4. Hedging Against Inflation, Geopolitical Uncertainties and Recession
Those who are in the market would know that we are in a period of volatility and uncertainties. Global economic data from China, Germany & Singapore are showing weak manufacturing output. The US-China trade war and tit-for-tat tariffs add on to the global uncertainties. Jobs are cutting back and people are getting laid off. Car companies and chipmakers are not doing well. Sales revenue and net profits are missing analysts’ estimates. The US national debt is a ticking time bomb. The yield curve inverted. Everyone is predicting a recession in 2020. Deutsche Bank is having problems with its derivatives in the number of trillions. Big funds are pulling money out of equities into bonds. Bond yields are at an all-time low. $13 trillion of European bonds are having negative yields! The list goes on and on.
Now is certainly not the time to go aggressive into stocks. It is time to be more cautious, more defensive and more risk-averse. The asset that would do well in times like this is gold. When people are scared and uncertain, they go into gold. When people lose faith in the government and the monetary system, they go into gold. When the currency is weakening, they go into gold. It has always been like this for the past thousand years and it will continue to be like this in the future. However, there is one exception. Bitcoin has become a contender of gold. But we will skip that for now. For me, I would just keep BOTH gold and bitcoin in my portfolio.
Adding a Small Position into Gold
For the abovementioned reasons, I have gotten some small positions into gold. My war chest has been idling around for a couple of months. My last transaction was First REIT @ $1.00. Since after, I didn’t really see any opportunities in the market. Everything was skyrocket high, especially REITs. Yields are being compressed to 4%+. Stocks in my watchlist are mostly priced at their premiums.
Since I have always wanted to diversify my portfolio with gold and BTC, and recession is around the corner, and a breakout is seen on the price action of gold, there is no better time to stock up on gold now.
How to Buy Gold in Singapore?
I bought gold through the SPDR Gold Shares ETF. The SPDR Gold Shares is the world’s largest ETF backed by physical holdings of gold. It is designed to track roughly one-tenth of an ounce of gold. The stock code is O87 and you can find it in most local brokerage firms. Just go to top 20 ETFs and you would definitely see the SPDR Gold Shares (GLD). I bought it through OCBC Securities. It is a cheap and reliable way to participate in the gold market rally. There is an expense ratio of 0.4% per annum though. The minimum lot size is 5 and I got 5 of them @ US$134.50. After which, my war chest is entirely wiped out.
Before:
After:
TADA.. let’s welcome gold to the family! It’s now more diversified. This would more or less stabilise and reduce the volatility of my portfolio. Crypto has been reduced from 70% to 64% and gold makes up 9% of my portfolio. In my previous post, I have also taken steps to stabilise and reduce the volatility WITHIN the crypto portfolio. It used to be 100% alts, now its 25% BTC and 75% alts. It works because whenever BTC corrects, my crypto portfolio doesn’t fluctuate as much as compared to before.
It is still not optimal yet since crypto still takes up a significant portion of it. The good news is I won’t be so bothered if a market crash comes. The only thing that would probably be affected is my REITs, which makes up roughly one-third of my portfolio. The bad news is crypto is highly speculative and volatile.
The developments in the crypto industry are uncorrelated and unfazed by what is going on in the global financial markets. On the contrary, there is a possibility that funds would flow from equities into crypto. Investors might pull money out and invest in a new asset class. BTC and crypto continue to grow in user base and attract the attention of retail investors, but we are still very early in the game.
Summary
In my opinion, we are approaching the edge of the cliff cautiously, but yet somewhat inevitably. Economic indicators and news headline have already given us warning signals. What’s more interesting is I am also starting to hear stories on the ground about people getting retrenched, debts are not being repaid, business is not doing so well, clients have moved out etc.
In a few more days, the fed is going to cut interest rates by 25 or 50 basis points. You can see that every time when the effective federal fund rates are being cut, a recession (shaded grey area) ensued shortly after. From 2010 to 2019, the massive bull market rally is driven by cheap debt and cheap money at 0 to 1% interest rates. It has already reached the point that businesses can’t even handle a 2.5% interest rate, simply because there are way too many debts.
We are probably somewhere at stage 6 in the “7 Stages of Empire”. If reducing interest rates FAIL to stimulate and kick-start the economy, QE and helicopter money would start coming in. As the supply of money increases, prices of everything increases. When that happens, the value of our currency drops. And remember that the number 1 principle of money is that it should have a store of value?
To put it all together, I believe that in the next 5-10 years, the $100 you put in gold is going to buy you what you could have gotten today or even MORE while the same $100 bill you keep in your wallet or save in your bank is going to buy you LESS of what you could have gotten today.
Also, gold is a long-term play. The time-frame is not weeks or months, but rather years. We are talking about a paradigm shift, a change in the global monetary system. These are all super-macro events that would unfold surely but gradually.
