Last week was the 75th anniversary of the Bretton Woods agreement. The agreement was collapsing in the 1960s and finally ended during the 1970s when the US abandoned the gold standard.
Since then the price of gold has risen to over $1,350 an ounce from the value at the congressionally set price of $35 per ounce.
Time-wise, a generation (forty years), is not really a long time historically.
Without getting into the details about the Bretton Woods agreement, it created a system of exchange rates pegged to gold, and a pledge by member nations to convert their currencies as needed to enable international trade to take place. The agreement came to be during the final stages of World War II. Western policymakers wanted to take advantage of the obliteration caused by the war and develop a framework that would prevent another conflict on the scale of World War I or World War II from happening again.
The agreement lasted less than a generation.
Why it matters to you?
After WW II the US dollar became the global reserve currency backed by gold and to a lesser point silver. The world had a bi-metallic precious metal monetary system. Eventually, countries moved to free-floating exchange rates for their currencies and the price of gold and silver and other lesser-known precious metals moved up.
Since the late 1970s, all countries have expected you to have faith in their governments, their economists and their Central Banks. That is why it matters to you.
That faith has lasted so far for a little more than a generation. How long do you think it will last and where will the price of gold be if that faith erodes?
What is happening now?
Not too long ago, economists and central banks said zero percent rates would not last long. Well, now the Federal Reserve, Bank of Japan, and European Central Bank are telling us that we are now in a ‘New Normal’ era of low and negative interest rates and as far as they can tell it may last for a while (they do not know why, and they are trying to figure it out). Just today President Trump tweeted criticism of the Federal Reserve for not dropping rates fast enough.
The Fed “raised” way too early and way too much. Their quantitative tightening was another big mistake. While our Country is doing very well, the potential wealth creation that was missed, especially when measured against our debt, is staggering. We are competing with other…..
— Donald J. Trump (@realDonaldTrump) July 29, 2019
The diversification benefit of precious metals rises
Over the last few decades, modern portfolios have not really invested in gold, silver, and other precious metals because they do not produce any income and the opportunity cost of holding them was significant. You and modern portfolios could have bought government debt and the government would pay you a return. Well, that is about gone. The result is the opportunity cost holding back large portfolios from investing in gold, silver, and other precious metals is basically gone.
The diversification benefit of gold, silver, and platinum has now risen and there are trillions and trillions of dollars invested in global government debt that yields very little and depends on you believing that governments will not devalue their currencies to pay you back.
The Federal Reserve is about to lower interest rates, should you care?
The Federal Reserve is about to lower interest rates, even though growth is steady and just recently the Federal Reserve said the economy was in great shape. Now the Federal Reserve believes the economy needs lower interest rates and so does the government.
Should you care? Yes, because If the economy does not respond with higher levels of growth, the Federal Reserve will cut again and again and zero is pretty darn close already. That means your savings will get a lower return in a bank and with government debt.
When the stock markets drop who knows what will happen and that is always a risk.
Precious metals such as gold and silver have been used as a store of value for thousands of years and appear undervalued. When diversifying your investments, you should consider buying precious metals such as silver, gold, and platinum to diversify your assets. Even in normal economic times that you remember, a higher level of interest rates, and up and down economic times, precious metals have performed well over the long term. You can store the precious metals for an IRA or take possession of silver and gold coins and bars.
