In a world where money has become increasingly abstract, we often grapple with various notions—fantasies, weaknesses, deceit, and absurdities. These fleeting ideas are the straws we cling to as we attempt to understand the complexities of contemporary currency, but meaningful insights remain elusive.
Like a first-year math student intent on unlocking Fermat’s Last Theorem, we keep pondering monetary principles, hoping that, with some luck, we might stumble upon a solution. Where should this exploration start?
President Nixon’s controversial actions in 1971 serve as a fitting point of departure. Seizing the unique moment created by the disintegration of Bretton Woods, he severed the last ties between gold and money, leaving the world unprotected.
From that point forward, foreign governments could no longer exchange their dollars earned through trade for gold. As a result, global currencies became purely fiat—backed solely by the issuing governments. Consequently, currencies began to drift like unmoored buoys, bobbing up and down amid unpredictable economic tides.
This unrestrained environment enabled astonishing developments. International capital flows became practically limitless, leading to staggering global trade imbalances.
Remarkable and Unexpected
Public and private debts soared. Likewise, the values of stocks, bonds, real estate, healthcare, and even extravagant items like Balloon Dogs reached absurd heights. In contrast, a million dollars no longer holds the same worth it once did, if you catch my drift.
As we moved through the decades following Nixon’s fateful decision, a clear outcome seemed inevitable. The trajectory pointed towards a monetary system poised for a catastrophic collapse—almost as if it were scripted. Linking one financial crisis to another, the odds of a fission-like explosion of the world’s monetary framework seemed guaranteed.
Initially, events unfolded as anticipated. Inflation soared during the 1970s, while gold surged from approximately $42 an ounce in 1971 to over $850 by 1980. Yields on the 10-year Treasury note skyrocketed above 15 percent by 1981, signaling the imminent end of the paper money experiment.
But then, something astonishing occurred. Instead of collapsing, the dollar maintained its ground. Treasury yields gradually fell, while gold prices languished for the following two decades.
As the millennium approached, gold began to shine again, whereas the dollar weakened. Gold rebounded from a low of around $255 an ounce in 2001 to exceed $1,900 by August 2011, raising the specter of the paper money system’s demise once more.
However, just when it seemed gold was on the brink of soaring higher, it faced an unexpected downturn. The price plummeted to around $1,200 an ounce, where it struggled to regain footing for several years, leading some to speculate about a potential new low. But was it?
The Barbarous Relic Takes a Beating
On Monday, Reuters reported that gold experienced its most significant drop in years, hitting five-year lows as sellers anticipated rising U.S. interest rates and weak demand from India. In what traders termed a ‘bear raid,’ approximately 33 tonnes of gold were offloaded in just two minutes across exchanges in Shanghai and New York, sending prices spiraling down nearly $50, from which they struggled to recover.
“After a more than 3 percent decline—marked as the most significant one-day drop since September 2013—gold is now trading near the crucial $1,100 an ounce support level. Analysts note that another breach could trigger further selloffs.
“This descent has erased half of the gains from the last decade’s robust bull market, bringing prices back to important chart levels and threatening a plunge toward $1,000 an ounce. However, analysts believe a sharp decline in the near future is unlikely, reminiscent of April 2013 when gold experienced a 13 percent drop over just two trading days.”
What does this mean for the future?
It could be that our views have been misguided. Perhaps gold truly is nothing more than a relic of the past—something that primitive trades exchanged for trivial items.
Nevertheless, history teaches us that all fiat currencies eventually reduce to their basic functions: either as fuel for fire or as toilet paper.
Throughout the ages, gold has endured. This recent decline is unlikely to shake its foundations.
Sincerely,
MN Gordon
for Economic Prism
Return from The Barbarous Relic Takes a Beating to Economic Prism
