Or, we could say “Goodbye Paper Money – Hello Real Money”.
All currencies are hopelessly declining in value against gold and this trend will accelerate in the next few months and years, starting now.
Voltaire’s statement from 1729 that “All paper money eventually returns to its intrinsic value – ZERO” is now ringing as true as ever. The graph below shows the decline of major currencies against gold since 1900.The US dollar, Euro (DM), Pound and Yen have all declined between 93% and 99% against gold in the last 109 years.
The US Federal Reserve's aggressive, rate-cutting response to the credit squeeze has created a risk of a sharp rise in American inflation. That in turn creates the risk of a precipitous fall in the dollar and so makes gold more attractive as a hedge.
The world's major economies have experienced rapid money supply growth of 10 per cent plus per annum in recent years. The Fed remains the world's biggest holder of gold, yet supplies of the metal are no longer growing annually. If gold is a finite currency, its value against not just the dollar, but sterling and the euro too should rise.
Moreover, a sharp decline in US real interest rates -- financial markets expect another half percentage point cut this month -- means that the low yield on gold matters less. It may have been a poor hedge against inflation in the past but the combination of rising consumer prices and economic stagnation may make it a better store of value.
Gold's rise shows investors are nervous. That is an important message for central banks contemplating interest rate cuts. The Fed must show it is not prepared to allow inflation to take off. Keynes called gold a barbarous relic. It has life left in it. But it is in the interests of business and consumers that its most bullish fans are proved wrong.