We addressed this briefly the other day, but it is a financial megatrend so important that we want to loop back around to add to what we wrote.
Foreign governments and their central banks have lost faith in the US dollar.
Trust in the dollar dates back more than a century when people used expressions like “sound as a dollar,” or “the dollar is as good as gold.”
Although faith in the dollar lasted for a long time, today it is eroding rapidly.
Paper money is basically a confidence game. As long as confidence persists, the game can continue. Once people begin to lose confidence in the game, things start to break down.
Ask investors in Bernie Madoff’s funds. There were those that got a whiff of the funny business and got out early. Others figured the confidence game out too late.
Foreigners have reasons of their own for shying away from the dollar. Things like the Iraq war didn’t help. Economic sanctions that have replaced diplomacy are another reason that foreign nations are abandoning the dollar.
But those reasons wouldn’t really matter, and the dollar’s preeminence would last if the dollar were still as good as gold.
But, of course, it is not.
That’s why China added 10.3 tons of gold to its reserves in June. That’s the seventh straight month that China added to its official gold position. It is in addition to the 74 tons it added in the six months through May.
The last year has seen China reduce its US Treasury holdings by around $70 billion.
Poland added aggressively to its gold reserves recently, doubling its holdings. Turkey, Russia, Mexico, and India are prominent among those adding to their gold reserves.
We think it is vital that our clients and friends read these signs of the times. Such outsized financial dynamics can tell you what is coming.
For example, former Fed chairman Alan Greenspan said he didn’t see the housing bubble information. No one could have foreseen it, he said. Somehow he missed the fact that mortgage debt had grown from $1.8 trillion to $8 trillion on his watch.
That’s what we mean by “outsized financial dynamics.”
The move by foreign central to build gold reserves are a sure sign that the dollar confidence game is beginning to end. As we wrote in a recent post, “Suspicions about the reliability of the international dollar-reserve monetary system are running so high that countries are not just adding to their gold holdings. They are bringing their gold home from accounts at foreign institutions.”
Federal Reserve monetary officials are very clever and eventually, they will resort to the most inventive shenanigans and desperate measures to try to keep the game going.
Just like Bernie Madoff.
Those measures won’t work. But you already know the confidence game is ending. That’s why you are buying gold.