Gold Will Soon Replace Treasuries as the Ultimate Store-of-Value Asset

Gold Will Soon Replace Treasuries as the Ultimate Store-of-Value Asset. By Nick Giambruno.

“Treasuries” are bonds (iou’s) issued by the US Treasury. US treasuries form the world’s biggest, deepest, and most liquid market.

Most people understand that it’s not optimal to simply hold fiat [i.e. paper] currency, which the central banks continuously debase. So they put their money into other assets, primarily bonds and stocks.

In other words, fiat currency and inflation have ruined saving for most people. It has forced them further down the risk curve into stocks, bonds, and other investments in a struggle to maintain their purchasing power.

However, there is no guarantee those investments will even keep up with inflation. But suppose they do. They will then be subject to a capital gains tax, even if it’s only a nominal gain, not a real one.

That means savers face the daunting task of not only keeping up with inflation but also outpacing the capital gains tax on the nominal gain just to maintain their purchasing power.

That’s made saving an impossible task for most.

Before the era of easy-to-produce fiat currency, people could simply save in money, which was either gold or a derivation of it.

There was no need for a dentist, construction worker, or taxi driver also to become a hedge fund manager to try to keep their head above water.

Financialization of the economy began in 1971, when the last link between gold and our currencies was severed, thus removing the last constraint on money printing. See WTF Happened In 1971?

For example, 50 years ago, the market cap of all the gold in the world was roughly equal to the market cap of all the stocks in the world. Today, the market cap of gold is about 10% of the world’s equities. It’s an indication of how capital that used to be allocated to saving in gold became allocated to the stock market instead. …

Bonds in general and Treasuries in particular, became the “go-to” savings vehicles to store wealth in the fiat era. However, I think that will change soon as bonds will be incapable of storing value in the face of financial repression [i.e. deliberate inflation to whittle away the value of debt].

With 2022 being the worst year for Treasuries in American history, the shift away from bonds has probably already begun. That means a lot of the capital parked in bonds will be looking for a new home that functions as a better store of value.

Gold is the old money, used for the 5,000 years prior to 1971:

Gold has been mankind’s most enduring store-of-value asset because of its unique characteristics.

Gold is durable, divisible, consistent, convenient, scarce, and most importantly, the “hardest” of all physical commodities.

In other words, gold is the one physical commodity that is the “hardest to produce” (relative to existing stockpiles) and, therefore, the most resistant to debasement.

Gold is indestructible, and its stockpiles have built up over thousands of years. That’s a big reason why the new annual gold supply growth — typically 1-2% per year — is insignificant.

In other words, nobody can arbitrarily inflate the supply. That makes gold an excellent store of value and gives the yellow metal its superior monetary properties.

People in every country of the world value gold. Its worth doesn’t depend on any government or any counterparty at all. Gold has always been an inherently international and politically neutral asset. This is why different civilizations worldwide have used gold to store value for millennia.

From a historical point of view, using government bonds as a savings vehicle is a relatively new concept. As it fades, I expect people will rediscover the world’s premier store-of-value asset: gold. …

The shift has started:

Last year, central banks bought roughly 37 million ounces of gold — a multi-decade record. It’s no coincidence that the worst year ever for US Treasuries also saw the highest central bank gold buying spree in over 55 years.

Instead of parking their savings in Treasuries, people, companies, and countries will increasingly park their savings in gold.

We are already seeing that with central banks. So far this year, central banks have bought about 25% of worldwide gold production. …

China has dumped over 25% of its massive stash of Treasuries since 2021. … It’s no secret that China has been stashing away as much gold as possible for many years.

Why gold now?

Observation #1: The US government can’t repay its debt. Default is inevitable.

Observation #2: It will not be an explicit default.

Observation #3: The debt will continue to grow at an accelerating pace.

Observation #4: Foreigners are not buying as many Treasuries.

Observation #5: The US government cannot allow interest rates to rise much further.

Observation #6: The Federal Reserve is the only big buyer of Treasuries stepping up, which means currency debasement.

Observation #7: The US government will use financial repression to debase the currency in a controlled fashion, though it could spiral into out-of-control inflation.

Observation #8: Treasuries will no longer be the “go-to” store-of-value asset as people look for alternatives.

Observation #9: Gold is the top store-of-value alternative to Treasuries. As demand for Treasuries falls, demand for gold will soar.

In short, we are on the verge of a paradigm shift in international finance as gold replaces Treasuries as the world’s premier store-of-value asset.

The last time the international monetary system experienced a paradigm shift of this magnitude was in 1971. Then, gold skyrocketed from $35 per ounce to $850 in 1980.

I know this seems off-beat now. but a financial storm is coming. It will be centered on the meaning of money — store of value versus medium of exchange.

Electronic money in banks is brilliant as a medium of exchange (and political control). But government money is constantly eaten away by inflation, so it’s a poor store of value — and about to get a lot worse.

Extreme debt levels, the recent bout of inflation, and the whispers about the US Government entering a debt spiral are straws in the wind created by the approaching storm.

In a year or two, or maybe even a few years, it will not be feasible or sensible to ignore monetary issues any longer. The time to pay attention is almost upon us. When it comes, the storm will blow away the petty political issues we argue about now. Many people who currently feel well-off will feel poorer and threatened, and that will change everything about politics.