INTRO
Alasdair Macleod is the Head of Research at Goldmoney (https://www.goldmoney.com/). We have been following his work for years, and every Friday we look forward to his comprehensive weekly missive. Some say he is long-winded. But a deeper dive will show the intense detail of his work, which takes a lot of time and words to express.
Last week’s article struck a cord. We’ve read it a couple of times, and here is the link: https://www.goldmoney.com/research/gold-is-replacing-the-dollar. A ChatGPT summary is available below as well.
As you may know, we favor a multi-asset barbell approach to asset allocation, which includes a precious metals allocation. The reason we are fascinated with gold is because we feel most investors avoid this asset. Most everyone knows stocks and bonds, but there is something about precious metals that does not register with many. Not sure why this is, especially since gold has been money for over 5k years. It remains a solid hedge against the declining value of fiat, and it enhances the risk adjusted returns of a 60/40 (stock/bond) portfolio.
Maybe “they” do not want us to know about the value of gold because (1) there is not enough to go around or (2) the fiat system is preferred as it allows for grift. Whatever the case, we want to highlight this week’s article by Alasdair through the lens of tail risk. Let’s have another fun thought experiment.
We will highlight a few tail concepts below, and for the real meat on the bone, we encourage you to read Alasdair’s work. Alasdair gets into great detail about the history, the supportive arguments of how and why gold can challenge the dollar, and more. We are here to focus on risk.
THE RISK LENS
A CATALYST: there is a BRICS meeting later this month in Johannesburg, South Africa, from August 22nd – 24th. There has been speculation that the BRICS countries will introduce a commodity (gold) backed currency.
A GROUND SWELL: it is hard to argue that the world is turning away from the US dollar. We will save the (many) details for another day, but a real catalyst occurred with the freezing and seizing of Russian reserves. The world saw, and now there is a growing line to join the BRICS cooperation.
THE LEVERAGE: like fiat, the precious metals market is also a fractionalized system. With all the paper gold (swaps, futures, and derivatives) some say the paper/physical ratio is 100-1 or higher. There is no telling, as there is very little transparency in the precious metals market.
LACK OF TRANSPARENCY: there are a lot of people who have been pushing for more transparency in this space. One big promoter for answers is GATA, whose main mission is to expose and oppose the shenanigans of the paper gold market. They have taken on the herculean effort to get truth out of DC, but we are left with a Fort Knox that has not seen a full audit since 1986 (some say 1953).
THE SPEED: Alasdair used a word that resonated when describing the potential outcome, “rapidity”. Due to the high level of global interconnectedness and the amount of leverage in the system, we found this word “interesting”.
RISK/REWARD: the odds of a gold-backed currency happening or the odds of the dollar losing its world reserve currency status may be low, but because the implications are so impactful, we should pay attention, regardless of opinions. And it is worth mentioning that this is not a black or white issue. The two currencies can coexist.
CHAT GPT
For those who live off summaries, we dropped Alasdair’s article into ChatGPT and asked for a ten bullet point summary. Here it is:
- Financial developments in the Russian and Chinese axis, including the potential for a gold-backed trade settlement currency, are being overlooked by many.
- A new gold-backed trade settlement currency is expected to be proposed at the BRICS summit in Johannesburg, led by Russia and potentially incorporating work by Sergei Glazyev.
- Both Russia and China have significant gold reserves, making them capable of implementing proper gold standards and currency boards.
- The availability of above-ground gold stocks for a global return to gold standards is limited due to substantial migration of gold from the West to the East.
- China and Russia’s moves towards gold standards could undermine the hegemonic power of the fiat dollar and result in a collapse of the post-Bretton Woods fiat currency system.
- Reintroducing gold into the monetary system could become the preferred goal for China and Russia, potentially accelerating the decline of the US dollar’s purchasing power.
- Global gold distribution has been distorted by China’s and Russia’s gold policies, leaving little room for liquidity for nations outside the Chinese-Russian axis seeking to implement their own gold standards.
- The existing bullion banking system might be caught short of deliverable bullion if markets attempt to unwind their positions in the wake of gold standard implementations.
- The fiat currency regime based on the dollar has reached its limits, leading to stagflation or worse within the western alliance.
- China and Russia are well-prepared for a potential move towards gold backing their currencies, while other nations may need to piggy-back on China’s yuan through a currency board relationship.
A FAVORITE SNOWFLAKE
Several years ago we read an interesting thought on tail risk. We will quote it so nothing gets lost in translation: “Here’s a fun one – we know this entire system is fake and gonna blow at some point. In addition to not knowing when it will happen or what it will look like – everyone tries to guess the snowflake that will start the avalanche. We can all agree that there are a bazillion possibilities. My dark-horse (and I have said this for years) is gold. A run on the fractionalized real money system exposing the fake money system. Just perfect…..”
POTENTIAL SOLUTIONS
PORTFOLIO LEVEL: we argued in favor of a precious metals allocation in our multi-asset portfolio, which you can read here.
THE BETTER HEDGE: we changed the definition of volatility (from a market decline to a systemic shock) to support personal resilience as a winning solution. See our New Vol series here, or you can wait for the eBook.
A POTENTIAL TRADE: for those inclined to try to profit from this “event”, the upside calls in the precious metals space appear actionable (cheap).
DARK HUMOR: for those who want to learn more about our money system in general, we found Mike Maloney’s “Hidden Secrets of Money” series of videos extremely valuable. We credit Mike for a lot of our focus and understanding in this space. We favor dark humor as a coping mechanism for a lot of these rabbit holes that appear dark and dirty. And the dark humor aspect stems from two words Mike used to describe precious metals if and when the SHTF: “unobtanium” and “unaffordium”.
EDUCATION: always a winning investment, and this is a topic worth following.
THE CLOSE
The odds of tail events are always small. But, because some of the outcomes can be extreme, we favor the journey to explore. Money systems are always changing, so we need to be open to new ideas. Maybe Alasdair has a point, so we opened our minds, eyes, and ears and paid attention. Thank you, Alasdair.
