Gold’s spectacular performance has drawn a lot of attention and invited endless analyses and commentaries. There are many theories out there as to why the yellow metal is surging like never before in modern memory, however most of them are shortsighted, or tend to miss the forest for the trees. The metal’s meteoric rise is not merely sending message about inflation expectations or rate policy. It’s flashing a clear warning sign about the credibility of fiat money itself.
For many decades, financial markets, as well as our entire economic system, operated under the assumption that fiat currencies, backed by nothing but political will and central bank promises, could be managed indefinitely and that the busts and crises created by printing and spending could be easily resolved by more printing and spending. That childish hope is now finally fading and the signals are everywhere: yields have reversed a forty-year decline, debt has become exponential (and in many cases has already spiraled to irreversible levels), real inflation has reached the point that it can no longer be covered up and “fudged” by the usual cherry-picking and creative calculations we see on official CPI data.
More blatantly, liquidity is retreating from the paper markets that were once considered “safe” vehicles; for some, they were even totally equivalent to actually owing gold. For a very long time, the paper gold market, futures, ETFs, gold certificates or pooled accounts, provided a convenient and much cheaper way for institutional and retail investors alike to gain exposure to the metal, without having to worry about storage and logistics. That structure worked for as long as did because overall confidence was high that the underlying gold was all there and promptly redeemable upon request, in the cases where such a provision was present. Investors were also content to hold the paper title itself that could be cash-settled rather than insisting on the tangible metal itself.
Now, however, that confidence is seriously shaken and the cracks are visible. Counterparty risk, once merely seen as a “boogeyman”, is back and it seems it is here to stay. Delivery delays are lengthening, while spreads between spot and futures are widening. When investors abandon paper gold for physical, it is clear that they are not chasing performance anymore. They are seeking survival.
Arguably the most concerning part of all this is the willful blindness and denial that mainstream economists, monetary “experts” and policy makers are still steeped in. Keynesians continue to hope for and to engage in all kinds of intellectual contortionism to model “soft landing” scenarios. Wishing for something, however, no matter how hard, doesn’t magically change reality. None of the assumptions used in these models stand when the currency itself is the variable in question. Put simply: gold’s surge is not a reaction to next quarter’s CPI expectations. It is a reaction to the rising and spreading doubts over the credibility of the system that produces it.
Base metals, copper, nickel, zinc, etc., are now trading near 20% of their real long-term value when priced in gold terms. That ratio is telling us two things simultaneously: commodities are absurdly undervalued, while fiat currencies are absurdly overvalued.
In nominal terms, fiat money might appear stable, but in real terms, it is decaying. Each dollar, euro, or yen buys less productive output each year and the illusion of strength persists only because every major currency is falling together. Gold’s relative price exposes that truth, as it measures not inflation, but trust.
This same pattern has appeared before, not in ordinary boom and bust cycles, but in major systemic transitions. In late-stage monetary regimes, confidence doesn’t erode linearly nor does is decline gently and predictably. It just snaps.
In the early 18th century, Scottish economist John Law persuaded France’s Regent, Philippe II of Orléans, to introduce a new financial system to address the nation’s massive debt. He convinced him to monetize national debt by issuing paper money through the Banque Générale and by combining the nation’s colonial ventures into a single speculative entity, the Mississippi Company. For a while, Law’s idea appeared ingenious: as he promised, liquidity surged, credit expanded, asset prices soared, and the French state finally appeared solvent again. It didn’t take too long for reality to catch up though and very predictably it all fell apart in 1720.
Confidence in the livre evaporated as the Banque Royale printed money far beyond the economy’s productive capacity (exactly as is the case today) and when holders of the notes tried to exchange them for gold, the entire house of cards came crashing down. The Mississippi Company’s stock imploded, savings vanished, and France reverted to metallic money. The lesson was clear, namely that no paper promise can outlast the trust that sustains it, but unfortunately nobody heeded it.
Two centuries later, post-World War I Germany repeated the exact same pattern. Being cornered byimpossible reparation payments and domestic deficits at the same time, the Reichsbank monetized debt to cover fiscal gaps. From 1919 to 1923, money supply expanded more than a billion-fold. Stock prices and real-estate values exploded in nominal terms. But, as is the case today again, these “gains” were entirely imaginary, as they were denominated in a currency dissolving by the day.
By November 1923, one US dollar equaled 4.2 trillion Reichsmarks, and one pre-war gold mark was indeed worth roughly one trillion Reichsmarks. Wages were paid twice daily, while savings, pensions, and bonds were totally annihilated. Only real assets survived.
The parallels are crystal clear and all the warning signs are as loud and as unmistakable as can be. While we might not be able to predict exactly when trust the system will suddenly “snap” this time, we can be sure that it has already started to seriously erode and this is all one needs to know to prepare for what comes next.
Currently, gold and silver are going through a consolidation, retreating around 9% and 15% respectively, which is far from surprising, given the near exponential surge of the past months. However, that doesn’t change the fact that whoever purchased gold or silver during the past 2 years already doubled their wealth. A correction of 10% or even 20% is therefore nothing unusual. Every bull market contains correction and consolidation, and that is especially true of today’s markets that are driven by AI and trading robots. Therefore, this is nothing to worry about. We own gold not to sell when gold goes up, we own it because we understood long ago that it is the hardest currency on the planet, that it is real money and that fiat money is getting dramatically debased. This is why I basically see it as a buying opportunity. Unfortunately, the majority of market participants still buy precious metals when its price is rising and don’t buy when they correct.
Claudio Grass, Hünenberg See, Switzerland. www.claudiograss.ch
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