Authored by Nick Giambruno via InternationalMan.com,
In the age of fiat currency, the distinct concepts of saving and investing have become conflated and confused.
Saving is producing more than you consume and then setting it the difference aside.
Investing is allocating capital to a productive business to create more wealth. Investing has more risk—and potential reward—than saving.
Today, however, what most people think of as saving is actually investing.
That’s because most people take the excess of their production over consumption and put it into the stock or bond market.
Most people understand that it’s not optimal to simply hold fiat currency, which the central banks continuously debase. So they put their money into other assets, primarily bonds and stocks.
In other words, fiat currency and inflation have ruined saving for most people. It has forced them further down the risk curve into stocks, bonds, and other investments in a struggle to maintain their purchasing power.
However, there is no guarantee those investments will even keep up with inflation. But suppose they do. They will then be subject to a capital gains tax, even if it’s only a nominal gain, not a real one.
That means savers face the daunting task of not only keeping up with inflation but also outpacing the capital gains tax on the nominal gain just to maintain their purchasing power.
That’s made saving an impossible task for most.
Before the era of easy-to-produce fiat currency, people could simply save in money, which was either gold or a derivation of it.
There was no need for a dentist, construction worker, or taxi driver also to become a hedge fund manager to try to keep their head above water.
That’s how the fiat era monetized stocks, bonds, real estate, and other assets that wouldn’t have otherwise been.
For example, 50 years ago, the market cap of all the gold in the world was roughly equal to the market cap of all the stocks in the world. Today, the market cap of gold is about 10% of the world’s equities.
It’s an indication of how capital that used to be allocated to saving in gold became allocated to the stock market instead.
That doesn’t mean there isn’t a legitimate place for stocks, bonds, and real estate—there certainly is. It’s just that people would use them for investing—or, in the case of real estate, its utility value—and not as savings vehicles.
Bonds in general and Treasuries in particular, became the “go-to” savings vehicles to store wealth in the fiat era.
However, I think that will change soon as bonds will be incapable of storing value in the face of financial repression.
With 2022 being the worst year for Treasuries in American history, the shift away from bonds has probably already begun.
That means a lot of the capital parked in bonds will be looking for a new home that functions as a better store of value.
Gold: Make Saving Great Again
Gold has been mankind’s most enduring store-of-value asset because of its unique characteristics.
Gold is durable, divisible, consistent, convenient, scarce, and most importantly, the “hardest” of all physical commodities.
In other words, gold is the one physical commodity that is the “hardest to produce” (relative to existing stockpiles) and, therefore, the most resistant to debasement.
Gold is indestructible, and its stockpiles have built up over thousands of years. That’s a big reason why the new annual gold supply growth—typically 1-2% per year—is insignificant.
In other words, nobody can arbitrarily inflate the supply. That makes gold an excellent store of value and gives the yellow metal its superior monetary properties.
People in every country of the world value gold. Its worth doesn’t depend on any government or any counterparty at all. Gold has always been an inherently international and politically neutral asset. This is why different civilizations worldwide have used gold to store value for millennia.
From a historical point of view, using government bonds as a savings vehicle is a relatively new concept. As it fades, I expect people will rediscover the world’s premier store-of-value asset: gold.
It’s already starting to happen in a big way…
Last year, central banks bought roughly 37 million ounces of gold—a multi-decade record.
It’s no coincidence that the worst year ever for US Treasuries also saw the highest central bank gold buying spree in over 55 years.
As Treasuries’ political and debasement risks rise, nobody should be surprised that demand for gold is skyrocketing. I expect this trend to accelerate.
Instead of parking their savings in Treasuries, people, companies, and countries will increasingly park their savings in gold.
We are already seeing that with central banks.
So far this year, central banks have bought about 25% of worldwide gold production.
China is one of the biggest gold buyers.
China has dumped over 25% of its massive stash of Treasuries since 2021. At the same time, China has bought vast amounts of gold—five million ounces since last November, or nearly $10 billion.
Observation #9: Gold is the top store-of-value alternative to Treasuries. As demand for Treasuries falls, demand for gold will soar.
Central banks and governments are the largest individual holders of gold in the world.
Together they own over 1.1 billion troy ounces of gold out of the 6.8 billion ounces humans have mined over thousands of years.
And those are just the official numbers that governments report. The actual gold holdings could be much higher because governments are often opaque about their gold, which they consider a crucial part of their economic security.
Russia and China—the US’ top geopolitical rivals—have been the biggest gold buyers over the last two decades.
It’s no secret that China has been stashing away as much gold as possible for many years.
China is the world’s largest producer and buyer of gold. Russia is number two. Most of that gold finds its way into the Chinese and Russian government’s coffers.
As the trend of financial repression unfolds, I expect central banks to accelerate their Treasury sales and gold purchases.
Conclusion
Here is the investment thesis for gold:
Observation #1: The US government can’t repay its debt. Default is inevitable.
Observation #2: It will not be an explicit default.
Observation #3: The debt will continue to grow at an accelerating pace.
Observation #4: Foreigners are not buying as many Treasuries.
Observation #5: The US government cannot allow interest rates to rise much further.
Observation #6: The Federal Reserve is the only big buyer of Treasuries stepping up, which means currency debasement.
Observation #7: The US government will use financial repression to debase the currency in a controlled fashion, though it could spiral into out-of-control inflation.
Observation #8: Treasuries will no longer be the “go-to” store-of-value asset as people look for alternatives.
Observation #9: Gold is the top store-of-value alternative to Treasuries. As demand for Treasuries falls, demand for gold will soar.
In short, we are on the verge of a paradigm shift in international finance as gold replaces Treasuries as the world’s premier store-of-value asset.
The last time the international monetary system experienced a paradigm shift of this magnitude was in 1971.
Then, gold skyrocketed from $35 per ounce to $850 in 1980—a gain of over 2,300% or more than 24x.
I expect the percentage rise in the price of gold to be at least as significant as it was during the last paradigm shift.
That’s because this coming gold bull market could be fundamentally different than other cyclical bull markets. It will be riding the wave of a powerful trend: the re-monetization of gold as the king store-of-value asset. It could lead to the biggest gold bull market ever.
While this megatrend is already well underway, I believe the most significant gains are still ahead.
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