The Coming Depression
I’m very bearish on the U.S. dollar and have been for years. The reason for this is that I’m a student of history and because of my own personal experiences.
I’ve been investing for decades. It was back in 1972 during my tour of duty in Vietnam that I received some very discerning news from my rich dad that read, “President Nixon took the dollar off the gold standard. Watch out, the world is about to change.”
I was intrigued – but confused.
Shortly thereafter, I read an article in “The Wall Street Journal” that discussed gold. At the time, the price of gold was fluctuating between $35, $40, and $60 an ounce.
Because we thought we were smart, a fellow pilot named Ted joined me to cross 25 miles of the ocean into enemy territory in search of scoring gold from some “naive” locals.
We tried to bargain with an old woman in a tiny village. We began our trading salvo at $40 an ounce. Little did we know that spot was significantly higher at $55. The shrewd woman simply smirked and probably thought we were idiots. She wasn’t wrong. She quickly educated us that the spot price of gold is the same across the world.
We were able to get back to base without any enemy detection, but we didn’t achieve our mission of scoring some gold. However, we did get a real education about money.
A Cautionary Tale From My Experience Investing In Gold And Silver Mines
In 1996, I founded a gold mining company in China and a silver mining company in South America. Both companies eventually became publicly traded on the Canadian Exchanges.
I formed gold and silver mining companies then because I believed that gold and silver were at “lows” and were set to come back up. At the time, gold was around $275 an ounce and silver was around $5 an ounce. If I’d been wrong, I would have lost the mines.
I was confident about gold and silver because I wasn’t betting on them. Rather, I was betting against the dollar and oil. In 1996, oil was about $10 a barrel, and that seemed low. My suspicions were that the dollar was strong, and I believed it would drop when oil went higher. I felt the conditions were right for a massive change in the markets.
I’m confident that those conditions haven’t changed. With the current national debt, balance of trade, and the impact of the pandemic, the dollar is growing weaker and oil is going higher.
That’s why I recently bought more gold as well as more silver—to bet against the dollar and oil yet again. So far, I’ve been pretty accurate.
Today the price of oil per barrel is around $40—a 300% increase from 1996.
Today the price of silver per ounce is around $24—a 380% increase from 1996.
Today the price of gold per ounce is around $1,800—a 555% increase from 1996.
In the meantime, the purchasing power of the dollar has dropped 66% since 1996 thanks to inflation.
Gold vs. The Dollar
A writer, R.A., in “The Economist” wrote a number of years ago on why he thought gold wasn’t money, “But while gold is not money, it shares a very important characteristic with money: its value (apart from limited industrial uses) is derived from the market’s perception that it has value.”
Fiat money works the same way. Dollars have value because people have deemed them to have value.
But as the writer in “The Economist” points out, dollars can be printed easily and at will, devaluing them quickly.
Gold on the other hand has an intrinsic scarcity to it.
“But that’s precisely the way that fiat money works. People believe the flimsy pieces of paper we call dollar bills are worth some basket of real goods only because everyone else believes the same thing. The crucial difference in the perception of value is that new gold can only be obtained at a great difficulty while new bills can be produced by the truckload at virtually no marginal cost.”
Presently, the reason that gold isn’t money in the way most people think of money is that people still think that paper dollars are money.
The writer concludes that dollars will always be money going forward because people have decided to be content with them as money.
And regarding gold? The writer says, “What I don’t understand is the argument for gold that falls back on the mystical, 6,000-year-old Law of Economics that shiny yellow metal is somehow special.”
The Dollar Is Toast
It’s no secret, the U.S. is in a lot of debt.
For many years, it was a reasonable percentage of our Gross Domestic Product, bumping around 50 to 60% of our GDP.
But since 2007 it’s gone up dramatically, and as of April 2020, our debt is 122% of our GDP.
That’s right, we owe more than we make.
It doesn’t take a genius to know that if you continually take on more debt than you have the income to pay for, you’re going to implode at some point. If the U.S. defaults on its debt, the dollar will be toast, and savers will be losers.
If the U.S. defaults on its debt, many people will wish they’d saved some of the money known as gold. Because just like has happened many times over the last 6,000 years, people will turn to it as the repository of value again.
But perhaps the U.S. will fix its debt problems. If so, then the dollar will live on—for a time. But like all fiat currencies before it, the dollar will eventually fall to zero. No matter what, the dollar is toast. It just could be later rather than sooner.
The problem with the U.S. debt is that it is wrapped up in entitlements. Over 60% of our debt spending is due to mandatory spendings like medicare and social security. These are programs that will only demand more spending as the baby boomer generation comes of age.
My concern is that very soon, citizens of the world will tire of America’s gross fiscal mismanagement and hesitate to take U.S. dollars.
In order to keep the world interested in the greenback, interest rates must rise. When that happens, U.S. assets, especially paper assets such as U.S. stocks, bonds, mutual funds, and savings will drop in value. Some real estate prices will increase because replacement costs are high, but overvalued real estate will drop.
At the risk of sounding like a politician who flip-flops, there will still be paper assets and real estate that will rise in value.
Invest In Commodities To Hedge Against Borrowed Time
The secret to surviving the next few years is keeping your wealth in real money, not in the U.S. dollar.
Buy things that hold their value and are exchangeable all over the world. Commodities such as gold and silver have a world market that transcends national borders, politics, religions, and race. A person may not like someone else’s religion, but he’ll accept his gold.
The important thing to remember about depressions is that wealth doesn’t disappear—it’s simply transferred.
Many people will be paralyzed by fear during the coming years. But for the financially intelligent, this will be the opportunity of a lifetime. For those who aren’t financially intelligent, I’d suggest at the very least purchasing some gold or silver—as much as you can afford—to protect yourself from inflation.
If you have high financial intelligence, be on the lookout for deals. As asset prices crash, be ready to swoop in and buy them up.
I believe that soon the biggest transfer of wealth in modern history will come. You have the choice to be on the receiving end—or to lose it all. The dividing line will be those who are financially intelligent and those who aren’t.
One of the reasons why I’m bullish on gold and silver is because the American public is still sound asleep to this asset class.
Most Americans have no idea how or where to buy physical gold and silver. The outlets that sell gold and silver I have visited are already low on inventory.
If and when the American public wakes up to the reality that their dollars are not money, but a currency, the panic, and stampede will begin. Should that happen, today’s prices for gold and silver will look like bargains.
Editor, Rich Dad Poor Dad Daily