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There has Been a loss of Trust and Confidence in Central Banking and fiat currencies
The recent surge in gold and cryptocurrencies is a clear indication that fiat currencies are in trouble. What we are seeing is a loss of confidence and trust, in government issued fiat currency and central banks.
This loss of trust and confidence is one of the factors leading to the fall of the US dollar. The rush to cryptocurrencies is further evidence of this loss of confidence and trust. The rise in gold prices and gold rates today is a reflection of investors seeking alternative places to invest and safeguard their monies.
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Fiat Currencies and Central Banking have Lost the Trust of People World-wide
Let me begin by recalling recent admitted wrong doings by Wells Fargo Bank. Wells Fargo admitted to creating three and one-half million (3,500,000) fake accounts in client,s name without their client’s permission or knowledge.
Wells Fargo then charged fees to these unsuspecting bank customers. Wells Fargo admitted to the fraud and the Government fined Wells Fargo. Its CEO eventually resigned.
This of course, is only one example of many recent, proven and admitted, fraudulent acts by our banking system. So it easy to see why people have lost confidence and trust in the system.
What can restore confidence and trust in the system? We discuss three possibe solutions, gold, cryptocurrencies, and US dollar.
Gold fulfills the promise as store of long term value better than all fiat currencies. There is no historical record for cryptocurrencies so it is difficult to suggest how crypto will perfrom as store of value. Gold prices have fluctuated but never gone to zero. Physical gold has been the best store of value since the 1900s. (See chart in the “MONEY” section, below)
- GOLD throughout history, has acted as a safe haven and insurance policy to investors, will it do it again?
- CRYPTOCURRENCIES Will investors to trust Bitcoin as safe and secure investment going forward?
Alternatively, can the revolutionary technology and driving force behind cryptocurrencies “Blockchain” or more accurately “Digital Leger Technology” offer a new and viable monetary method for transaction settlement?
In its short life, Bitcoin has had huge surge rising to almost $14,000.00.
However, in December 2017, Bitcoin suffered its worst week since 2013, falling below $11,000.00, it then moved back up to $14,000 with Bitcoin’s spot price leveling at $13,655.
US Dollar —
- US Dollar’s importance in this discussion is evident but the dollar has been falling and predictions that fall will continue.
There are many factors contributing to the Dollar’s fall such as inflation, interest rates, and countries such as China, Russia and the BRICS moving away from a dollar denominated world.
So how will a continuing decline in the dollar effect gold and cryptocurrencies?
No one knows for certain, however, we can look to recent financial and geopolitical events to help arrive at some idea.
Today Gold is not used as a currency, but it has been at different time in history. More importantly, gold has been source of value for over three thousand years while the British Pound, one of the oldest fiat currencies has been around for about twelve hundred years. While all major currencies purchasing power has fallen gold purchasing power has held steady or increased.
- Cryptocurrencies appeal arguably is rooted in a lack of confidence and trust in fiat currencies, and in the current monetary system (Central banking, and fiat currency).
- Bitcoin is the first digitalized, decentralized, non-government issued currency.
The sauce behind Bitcoin
- The appeal to crypto currencies is rooted in the loss of confidence in fiat Government issued currencies.
- Crypto is an alternative, enticing way of opting out of our current banking and money system. Since early 2017, Bitcoin has risen in price from less than $1,000 to nearly $20,000.
- After much research what does stick out is that this Digital Ledger technology could very well replace the current central banking and government controlled systems. Moreover, in doing so it would address the loss of confidence and trust the current system is experiencing.
It is unclear whether an individual or group published a white paper under the alias of Satoshi Nakamoto in 2008 but the paper detailed the Blockchain system to transact and the use of Bitcoin currency within that system.
- The thesis of this white paper was to address commerce’s reliance on financial institutions to process payments.
- The white paper describes new technology for transacting and a process of transaction settlements, referred to it as BlockChain, and further describes new form of currency, which it called Bitcoin.
- A White paper published in 2008 detailed an alternative, new form of currency (Bitcoin) and new technology (Blockchain) to transact with the Bitcoin currency.
“Nakamoto white paper introduced and described a concept wherein it describes:
A purely peer-to-peer version of electronic cash would allow online payments to be sent directly from one party to another without going through a financial institution. Digital signatures provide part of the solution, but the main benefits are lost if a trusted third party is still required to prevent double-spending. We propose a solution to the double-spending problem using a peer-to-peer network. The network timestamps transactions by hashing them into an ongoing chain of hash-based proof-of-work, forming a record that cannot be changed without redoing the proof-of-work. The longest chain not only serves as proof of the sequence of events witnessed, but proof that it came from the largest pool of CPU power.”
Digital Ledger Technology its potential benefit in restoring confidence and trust
Bitcoin has made some folks tremendous amounts of money but there is no production or commodity support behind the speculation in its value. Bitcoin has behind it an electronic payment system referred to as cryptographic proof. (Blockchain or Digital Ledger Technology) This technology eliminates the need use or trust a financial institution. This new technology is proving itself an answer to the current loss of confidence and trust the system is experiencing.
US Dollar –
- Clearly, at this time, the US Dollar is under attack from many areas including: market uncertainty, inflation, trade wars, moves by countries away from dollar denominated financial system and even an attack from the Trump administration.
- Irrespective of the reason, when the dollar falls one outcome is that gold rises.
The Evidence for Weakening Dollar –
Money as a store of value is one of its essential provises to investors. However, all fiat currencies have lost purchasing power. In the end all fiat currencies have failed within a few generations.
The weakening U.S. dollar is creating uncertainty. This uncertainty is leading investors to look for a hedge and protection. The US Government has indicated it will continue efforts to weaken the dollar.
U.S. Treasury Secretary Steven Mnuchin stated:
“a softer dollar was good for the United States.”
Meanwhile the dollar index shows three-year lows.” as measured by the US Dollar Index this type of uncertainty leads to chaos in the markets
Potential Trade Wars and Inflation
Increasing the potential for a weaker dollar are rising inflation and coming trade wars. If the world second largest economy is worried about trade wars then investors are to.
The current US administration is moving to a weaker dollar, which bring uncertainty into the market. Both a weaker dollar and greater uncertainty, will lead to less investment in the US dollar and dollar denominated investments.
The Fed report inflation is nominal at less than their targeted two percent. Thus, the Feds are moving to raise inflation. We are not agreeing with the Fed that there is no inflation in the US; instead, we are saying that Feds are continuing attempts to increase the inflation rate. In other words, no matter if we having real inflation or not the Feds are going to increase it. The reality is we must plan for increased inflation. In addition, increased inflation means the purchasing power of the dollar is less making the dollar less attractive to investors.
- Richard Xu, a fund manager at China’s biggest gold exchange-traded fund said, “Global investors are also concerned about potential trade wars… which is stirring up some risk-aversion trade, so that, in turn, is supporting gold,”.
- HuaAn Gold added, “I think gold prices will continue to trend higher along with other commodities, so $1,400 (an ounce) is our near-term target.”
We tend to agree with the experts who indicate that both gold and cryptocurrencies have a place going forward. What we do not know is if Bitcoin will be the surviving cryptocurrency.
We know gold has outlasted every fiat currency that ever existed and maintained value in every crisis that ever occurred. We can find no reason why gold will not continue on as a preferred safe haven. Two important points. Gold can rise and fall but will never go to zero and since gold is an asset you own that will always maintain a higher purchasing power than any currency, be it fiat or crypto.
On the other hand, it is conceivable Bitcoin could go to zero.
While we cannot see a scenario where the US Dollar will go to zero it could go loose most of its value and you would lose more purchasing power then gold.
If the dollar continues, current trends and falls off its pedestal as world reserve currency this will happen. You will then be left with, as Thomas Jefferson said, a loss of wealth through inflation or deflation.