For the first time since 1971, it seems we're faced with a real prospect of the dollar collapsing. Not just a loss in the value of the dollar and then a bounceback, as is the case due to interest rates hikes and cuts. No, here we are talking something more along the lines of the Venezuelan bolivar.
Why 1971? Because that's when the U.S. dollar was untethered from the gold standard. It marked the start of an unprecedented monetary experiment in our economy, one that continues to this day. The result so far? Over $1 trillion of federal deficit, over $30 trillion of sovereign debt, and countries dumping Treasuries left and right.
Whatever some might tell you, gold and the dollar are intrinsically tied. There is no removing the bond, Nixon's efforts aside. Though gold costs different in different currencies, it is primarily priced in U.S. dollars.
Some view gold's ups and downs as merely fluctuations in the dollar's strength. It's a little more complicated than that, but it tells you just how important the metal is to the greenback.
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Why are we hearing about a dollar collapse now?
The whole point of a gold tether was to prevent nations from just freely printing money. Gold is a tangible resource that has a straightforward supply and demand. In other words, the opposite of any fiat currency.
Some 30 months ago, the Federal Reserve printed between 30%-80% of all US dollar bills in circulation, and it did so in the span of a few months. The math on this one tells you why dollar collapse concerns have been trending ever since. If 20% of a currency have been printed over 150 years, and then 80% of it over a few months, well...
The effects of this haven't been felt yet. Analysts agree that this kind of pump takes a while to truly take a toll on the currency and the global economy. The high inflation you're seeing right now is, unfortunately, nowhere near the full extent of the consequence. It's more like the start of a warning that something has gone wrong, and, by all accounts, there is probably no way to fix things.
What would a dollar collapse look like?
The U.S. dollar is the global reserve currency, and its collapse would undoubtedly be the most important economic event since the Great Depression, if not dating back much further. It would affect everyone: to use a somewhat uncomfortable comparison, the U.S. would find itself economically where Ukraine finds itself in the Russia-Ukraine war. But the ripples would be felt worldwide.
A dollar collapse would probably mean a collapse of the U.S. economy on some level. Again, think Venezuela. The country still works, but not really. I might mention Venezuela several times more because it's perhaps the most detailed example we have of a currency collapsing in modern times. But the bolivar is nowhere near the U.S. dollar in terms of global relevancy, so comparisons only go so far.
Because we don't have a real precedent for this, nobody knows what a dollar collapse would look like, only that it wouldn't be pretty. One thing that seems certain is that plenty of countries would want to get right in the global reserve currency spot. The "digital yuan" is often mentioned, but the euro seems just as likely of a candidate.
Not coincidentally, neither of these things are something you would want to own if the greenback fell under.
What to own when the dollar collapses?
Gold, of course.
The case for gold ownership in the event of a dollar collapse is so strong that it warrants its own section. Remember that digital yuan I mentioned? Well, there are growing talks of China using some kind of gold backing for its currency. And how can it not? Even if the dollar stays in its place, any attempt by China to stage an economic takeover needs to present us with a more appealing currency. What use is yet another free-floating fiat?
The reasons we know gold would be good to own if the dollar collapses are almost too numerous to list. Gold and silver were money as far back as we remember, and there are many prominent figures in finance that will assert it hasn't budged from this spot. You might even hear a former Fed Chair dare to utter this.
Gold is the crisis asset, and a dollar collapse would obviously be monumental. There would be a scramble for value. People would be asking: "What's worth anything?" And, more than likely, gold's value would not be questioned. Importantly, of course, we are talking about physical gold and not things like mutual funds.
However this crisis scenario unfolded, it seems almost guaranteed that currencies and assets would be re-valued and priced in gold. What else, after all? You'll probably notice that I've omitted all the other precious metals, and with good reason.
They're great investment vehicles now, but aren't nearly as dependable during times of crisis. What are their faults?
Silver: Like gold, silver might initially seem as straightforward of a buy in the case of a dollar collapse, but that's just because silver coins were once trendy as a kind of "change", cheaper than gold but more expensive than copper or nickel. Would you hoard copper or nickel for the eventuality of a dollar collapse? It's not a bad idea, but it takes a lot of storage space.
Platinum: The less industrial metal of the two, platinum has a lot of uses in jewelry that somewhat maintain its use case regardless. Still, if the dollar collapses, what will happen to the automotive industry, which is the primary dictator of platinum prices? Uncertainties such as these aren't exactly a welcome motif when a crisis hits.
Palladium: The way palladium has risen over platinum almost exclusively due to government policies shows it's fairly limited as a crisis asset. It's not seen as universally as valuable as platinum is. There are rarer materials. And it's likewise dependent on a functioning automotive industry that uses it. Will there be one if the dollar collapses? Again, not the kinds of questions you want to be asking.
In the video below, Devlyn Steele of Augusta Precious Metals discusses the long-term consequences of Nixon removing the gold standard in 1971.
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What forms of gold bullion are best if a crisis hits?
There is a kind of division in regards to this. Artwork is sometimes cited as one of the things to own during a time of economic collapse. But since we've never experienced anything of the magnitude of a dollar collapse, we don't know what would happen to prices of art pieces. That's why numismatics coins, however attractive they might seem, aren't the best choice. They're far more likely to lose value if there is a kind of asset reimagining.
Instead, gold bullion valued depending on its precious metal content is by far the best choice. You don't need to convince anyone that a one-ounce gold bar is worth an ounce of gold. But you might have trouble convincing someone that your antique one-ounce gold coin is worth $100,000. Choices of gold bullion that you can't go wrong with include:
- Sovereign gold coins, bullion: Any top sovereign gold coin is exceptionally well made, has a relatively low premium over spot and holds value well. Sovereign gold coins are sold very easily now because they go out of stock quick, and this isn't likely to change even if the dollar is wiped out.
- Sovereign gold coins, proof: Again, proof coins aren't that much more expensive than bullion ones but tend to be noticeably more polished. Any asset re-evaluing is likely to establish gold coins as a top investment and then soon after make way for a market that seeks a more refined version of them. They're the numismatics piece whose value won't be questioned.
- Gold bars: Any gold bar from an established refinery, meaning one with LBMA or ISO certificates, has as much gold as listed. So long as it's packaged, you will have no trouble liquidating it regardless of what happens in global markets. And even "package-less" gold bars are assayed fairly easily for their gold content. The important thing is to know you bought from the right seller: the rest will be taken care of easily.
- Gold rounds: Despite their intricate designs, gold rounds have a similar price to that of spot. Therefore, they occupy a place next to gold bars: they are valued primarily on a weight basis and therefore make a straightforward investment. If the dollar does collapse, it wouldn't be surprising to see you getting better value for a gold round than a gold coin. After all, how much will the word "sovereign" mean when the dust has settled?
Jewelry and things of this nature traditionally make for bad investments and aren't really to be taken for any value past that which is seen. Any shop offering to buy your gold jewelry will quickly wake you up to the reality of this.
Another point to make are the weights of the products. The greater the weight of any bullion, the lower the premium. Incremental gold coins such as 1/2oz, 1/4oz and 1/10oz are convenient and make for great and affordable collectibles, but the price-to-value ratio isn't that good. Remember: gold content takes precedence over everything the worse a crisis gets.
What assets besides gold could protect from a dollar collapse?
There is no asset that is as safe as gold. But one of the main properties of gold, besides being a hedge against inflation, is that it helps to diversify your assets in a broader portfolio. So you might still be interested in owning other things if the dollar collapses, if only tangentially. Here are some of the other "safe" assets to own if the dollar goes under, along with their downsides.
Often viewed as one of the safest investments, real estate is a pretty reasonable choice. It comes with obvious issues, such as lack of liquidity, a need for constant maintenance and so on. Owning real estate is almost a profession: it has a high barrier of entry financially and then requires a good deal of effort to preserve its value.
A somewhat prevalent view is that a dollar collapse would take down the U.S. stock market, but not necessarily other equity markets. It's true: after all, the world needs goods. But which to pick? What regions and then countries to place your faith in? Foreign stocks would represent a decent, high-risk alternative, especially since many of the nations, left to their own devices, won't have the kind of strict SEC-CFTC regulation that U.S. stock investors benefit from.
Certain foreign bonds were once viewed as safe as anything. These days, they are either giving no yield or forcing owners to pay a holding fee. The bond market picture isn't likely to improve in the event of a huge financial calamity, making foreign bonds an asset with a huge amount of counterparty risk that right now offers little to no return.
Here, we approach the big question: would the dollar collapse bring down other currencies with it? The answer is probably yes. Most Western central banks synchronize their tightening and easing cycles, as is the case right now. To hope to store value in a foreign currency, you would have to look for something more exotic that isn't as related to the Western financial system. But then, didn't the bolivar once fit this bill perfectly? It still does, really.
The latest and perhaps most interesting addition to this list. Cryptocurrencies such as Bitcoin were designed to replace fiat currencies. The collapse of the dollar should, by all accounts, cause a natural shift towards them. Yet most of them still require functioning networks to operate along with well-funded companies to run the projects. Nonetheless, this is definitely an asset class to watch out for any time a conversation such as this springs up.
Is the U.S. dollar really going to collapse?
As I outlined, the subject of whether a dollar collapse is even feasible is controversial. We live in an era of bailouts. If private banks can get huge bailouts because they're "too big to fail", why and how couldn't the U.S. dollar? Unless there's something going on behind the curtains, the Federal Reserve and the U.S. government are going to do everything possible to prevent this.
Just based on this alone, the dollar collapse almost seems implausible. The fundamentals are there, but when have fundamentals really mattered in modern finance? My guess is that we're instead going to see a kind of "denial collapse" where the dollar's purchasing power slowly, or quickly, erodes while everyone pretends nothing's wrong.
In reality, this has been happening since 1971. Comparing the wealth of someone who has diversified with precious metals against someone who simply stacked dollar bills since the early 1970s is a lesson on wealth preservation on its own.
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