The Value of the Dollar

I remember hearing from my uncle who had gone to a concert with a very wealthy individual, who runs a very successful business in Real Estate developments near and around the Disney area, as well as in family vacation packages. This guy, David, didn’t really seem all that interested. I guess your modern-day Reggae concert just wasn’t his thing.

As they got their tickets, it occurred to David that he was holding VIP passes to front row seats. Seeing all the fans waiting eagerly around him to get in, he immediately turned to an excited fan and asked if he was interested in buying a VIP pass. Here is a man, my uncle thought, worth millions of dollars, looking for a buyer of his two passes. Incredible! This man got where he is today not by simply “Buying and holding”, but by selling what he had to someone who obviously wanted it more. He understood full right the “value of the Dollar”.

Robert Kiyosaki, in an artcle titles “Go for Gold and Silver” said it best, “One of the reasons why we have this enormous gap between the world’s haves and have-nots is because the have-nots value money – they work for it, save it, cling to it, and lose it.”

The value of the dollar, per se, equals no more than the cotton-paper its written on. Its merely a symbol. An IOU, a promise. A credit labeled as legal tender explaining how any Bank will accept it as a medium of currency.

But what is money? Money is no more than an exchange of service or goods, an Interest. I give you, you give me, nothing more and nothing less. The “haves” spend their lives working for a higher worth of goods or service, while the “have nots” hide their wealth under their mattress while its “time value” deteriorates slowly but surely.

The laws of supply and demand apply to a dollar bill the exact same way they apply to any commodity or asset. This is by definition the power the Fed supposedly has to control the US currency market through Interest Rates. By driving up or down the return on the dollar, the holding of cash becomes more or less attractive.

In this way, when a country is doing well it needs not worry about the amount of dollars – or any medium of exchange – in circulation. People want goods and services, not money. When the interest for these wither, such as in a time of economic recession on contraction, then money will become more valuable.

This, nevertheless, is not always that easy to predict. Many times a government will under or overestimate the proper status of the money supply or the demand thereof. In this case running the printing press too long could result in a financial crisis, similar to what Germany went through after WWI, sending the economy into a tailspin of hyperinflation, (people were using German marks as firewood because it was cheaper).

It isn’t getting better. The United States now has a second problem as well, with a trade deficit in the trillions. Although many don’t seem to find it to be a problem, it spells clean-out financial trouble. Like Spain in the 16th Century, we no longer have any major exports. Instead Spain just used their enormous gold holdings to buy their imports from other countries. When the gold ran out they were doomed. Nothing to sell and with nothing to buy.

Today our money is no longer backed by gold. It’s backed simply by the faith and confidence of the world, since a huge chunk of US dollar holdings are now in foreign lands. If that trust is breached, or if those countries simply find another asset to be of better or safer value it could cause a run on the dollar, causing a major inflationary crisis, sending interest rates through the roof (anyone remember 17% rates in the 70s?) and driving a prosperous country into severe recession.

Could this happen? Well, as we speak countries holding extremely large amounts of US assets have indicated diversifying away from the dollar. China, Japan, Russia and Iran have all mentioned that they may move part of their assets into other holdings such as the Euro or gold.

What to do? The best way to hedge oneself against such events is to buy gold and silver. These have been considered money, by all, for thousands of years. The novelty of an unbacked currency goes back only 35 years to 1971 when, with the Bretton Woods agreement, many countries agreed to peg their currency against the dollar, instead of with gold.

Historic records show however, that no currency unbacked by any hard asset has ever survived. Not in Spain, England or even ancient Rome.

Here’s one more thought to ponder. The US government reserves officially hold (although many believe unverified) about 200 Million ounces of gold. In April the government ceased its announcements of M3 – the amount of US dollars in circulation – claiming that it was an unimportant report. M3 is thus estimated at approximately $10.5 Trillion dollars. A dollar used to represent one silver dollar and 1/16 oz. of gold. Whats 10.5 Trillion divided by 200 Million? Answer: $52,500. Divided by 16 would still equal $3,281. Even if we were to exaggerate the sums of each more benevolently we would still be facing a shocking number.

This means that either the dollar must come down to 1/3000-th of its value or gold must rise to $3000. Of course they will most likely land somewhere in between. As a matter of fact, these fundamentals have already begun their move. The dollar has already shrunk to 13-year lows against other major currencies (like the Pound and the Euro), while gold has more than doubled in its nominal value.

I would say that we still have plenty of time before gold (and silver) attains the status that it so rightfully held for centuries before. This could take time, with many small corrections in the gold price, but it’s still far safer than cash.

I’m even more Bullish on Silver than on gold, but more on that in a later article.

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