This lower rate of interest cycle by US Central bank has created a global asset bubble in Equity, Gold & Real Estate due to easy credit.
By Amit Jain
Gold was a reserve currency for almost 1800 years before we moved to the paper currency system in late 1861 A.C. All paper currencies were pegged to Gold till the 1970s. In the second half of the 1960s, Global Economies were passing through Stagflation. To counter this, US President Richard Nixon removed gold standards Vs $ in 1971 & since then the US dollar is not backed by any Gold Standards.
This was the beginning of the fiat currency system. This system gave unlimited power to the US Fed to print money as when needed. In this new system, the US Dollar becomes reserve currency of the world & since then other currencies were pegged to $ in place of Gold.
Post-2000 dot com bubble burst, the Global Economy entered a bull run due to an unprecedented lower rate of interest policy by the US Fed since 2001. This lower rate of Interest cycle by US Central bank has created a Global asset bubble in Equity, Gold & Real Estate due to easy credit & accelerated global GDP growth rate. This bubble busted in 2008 due to the Global Financial crisis, which was the outcome of easy money & bad asset quality created by banks. To bail out the world from these financial crises, the US Fed started printing money to spur Economic growth.
Just to compare, in 2006 US Fed balance sheet was close to 900 billion dollars ( which took 200 years ) to create, however in June 2020 this balance sheet has been expanded to $ 7.2 trillion.
In the past 13 years, the FED balance sheet has ballooned by 800%. This excessive money printing by US authorities, at some point in time, shall lead to a decrease in the faith of the US dollar. If you ask me as an Economist, then US Dollar is just a piece of paper which US Fed can print any point of time.
Today $ dominates 90% of global trade as it is the reserve currency of the World. However, this may not be the case in 2030 once US Dollar index start losing its sheen due excessive global debt & reckless currency printing.
As on date, US Economy has a threat of unfunded liability of $ 148 Trillion which is almost 7 times its annual GDP. In case of any significant & sudden rift with China, it may trigger sell-off in US treasury bonds. As on date, China is leading investors in US Govt bonds with 17% allocation. There are higher chances that In the ongoing decade of 2030’s , US Economy shall be in stagflation stage. In this phase value of US dollar shall decline & gold will appreciate. If you observe closely, Global debt has doubled in the last thirteen years. In 2007 it was close to $ 140 trillion dollars & today it is close to $ 260 Trillion, which is around 300% of Global GDP.
As an Economist, we all need to ask a question to Central Banks & Political parties that who is going to pay this Global debt or else we will keep printing money to postpone the problem for future generations? Post the Covid-19 era this Global Debt will further multiply, which effectively will lead to a sovereign crisis for some Economies of the world. This existing fiat currency system is back up only on one belief & that belief is “ $ “ will never default.
However, if we analyze the above-mentioned facts about US Economy & current geopolitical crisis, then I believe we have reasonable chances of the US going into a long recession. This situation may aggravate due to current geopolitical tensions. If there is war then we will see a new world order by the year 2022. This new World order may trigger new reserve currency for World in this decade.
This decade may be an end of the fiat currency system if this Geopolitical tension culminates into World War-3. Post this era we may have a new operating system of the financial market which most likely in some form shall be back up by Gold.
This entire uncertain decade on US Economy, possible World War-3, decreasing faith is US Dollar as reserve currency shall benefit Gold in the long term. We are advising all our clients to have a 15% to 20% allocation in Gold on each correction. Gold may be hovering around $ 2300 an ounce by the year 2022 & may touch $ 10000 an ounce by the year 2035. With the above stats, I can say with reasonable confidence that “Gold is next Bazooka”.
(The author is Co-founder & CEO, Ashika Wealth Advisors)