Gold
One of my favourite topics to discuss of all time is money. Just what is money anyway? Humans are the only creature on Earth that need money to survive. It ties to every facet of the living experience. Therefore it is pivotal to understand it. And yet, most people do not understand it. It is never taught in schools. Think about it. Most people have a job and earn a wage, and call it a day without understanding what are they saving. To someone in Australian, Australian dollars is money. To an American, the US dollar is money. To a Swedish person, the Swedish krona is money. But really, what is it exactly? Are these currencies really "money"? If I take my Swedish kroner to Singapore, why is it not accepted then? If something is truly reliable money, it should hold its value across borders, even if it isn’t directly accepted everywhere. To understand the importance of money, real money, cannot be understated enough. Let me start from the beginning.
Historically, for thousands of years, money has been different things. But over time, societies converged on one thing as the most reliable form of money.
Gold.
Gold is what is known as "hard money". Which means it cannot be printed on a whim. It has to be mined from the ground and it's what is known as a precious metal. For years, gold has been money. And reserve currencies are tied to gold. In modern times, before the US dollar was the reserve currency, the English pound was the reserve currency. And it was tied to gold. The bank notes you get, are supposed to be redeemable towards gold. However should everyone go to the bank and demand their gold, the bank would go bankrupt (also known as a "bank run") as it does not have enough reserves to cover their notes. That is known as a "reserve ratio". A 1:3 reserve ratio would mean for example for 1 ounce of gold the bank is able to loan out 3 times the amount of paper notes.
During World War 2 the British had to debase their currency and print money to defend themselves from the Germans. They debased their currency, printing more paper notes than gold. After WW2, the US as the victors and more importantly, as the top holder of gold reserves in the world, succeeded the pound as being the new reserve currency. One ounce of gold was anchored to the US dollar at $35 an ounce. And in return, all currencies, were tied to the US dollar. This is known as the Bretton Woods agreement (1944-71). The world was on a gold standard.
Gold has always served as an anchor for fiscal discipline. If a country spent more than it had, money (gold) would flow out of the country and force the country to save by producing more goods for export to balance its trade. Likewise if a country was fiscally disciplined and saved, then money would flow into the country, it could then spend more in terms of imports. A country could never import (spend) if it did not export goods.
In August 1971, the gold standard was ended by Richard Nixon. The US was spending way more money than it actually had gold reserves, and countries were redeeming their currencies for gold. Spending more money than you actually have, is known as deficit spending. Or going into debt, in other words. Blaming "speculators", the conversion of US dollars to gold was "temporarily suspended" by the then US president. And the conversion became permanent. The US had effectively, defaulted. At that point, every currency became "floating". There was no more anchor. And that is the result of what we have today. Every currency is relative to another. However, the US still retained its reserve currency status, despite not being tied to gold. This exorbitant privilege prevents the US dollar from collapsing, since countries save in the reserve currency, and the sale of oil is also conducted in US dollars, putting a somewhat "floor" to the US dollar, as it will always be in demand.
Which brings us to inflation. Inflation, is the increase in the money supply.
Inflation is commonly described as rising prices. But at its root, it is driven by expansion in money and credit.
Hence the world "inflate". Remember, the entire financial system is no longer tied to gold. Removing the gold anchor means money today is created through a combination of government borrowing and central bank policy, there's literally nothing backing it. To explain, when a government issues money they do not have, it's printed by the central bank and sold as government bonds. Also known as treasury bills. Then institutions buy these treasury bills in exchange for a coupon that pays a yield, aka interest. Who buys these treasury bills? Lots of institutions. Some are mandated. These are touted "safe" since the government can always tax its citizens to death, however the purchasing power (the value of the note itself) is not guaranteed. $1 today is not the same value as $1 tomorrow.
Now you're thinking, if a government prints so much money then it's currency should fall right? Why do some currencies fall and some do not? And you're right. They should fall. Remember there's no longer an anchor (gold) which means currency values are all relative now. Some governments are printing money at a faster pace, and some less. Some are fixed. For example the Danish krona is pegged to the Euro where 1 Euro is equal to 7.46038 DKK. But all currencies are falling, albeit at different rates.
Let me provide an example.
Back to the Danish krona peg. If the European central bank suddenly decides to increase the supply of Euros overnight by 100%. The Danish krona should increase in value, since the Euros are now worth less as there's more of them. In fact, the Danish krona should now be worth 200% more than the Euro. However this does not happen. What actually happens is the Danish central bank will take action and sell their Danish krona reserves, and buy up the excess Euros. In other words, they devalue their money as well, in order to maintain the peg.
Inflation is the increase in the money supply. The actual definition of inflation.
Which brings us back to today.
As of this writing, Gold is $4500. It has risen dramatically over the past decades, just like the inflationary spiral that we are on.
Several years ago, I thought it would be terrible to live in a world where gold was $5000, which it hit not too long ago. And it is. Because the financial system has truly and utterly failed and evolved to something more insidious, an "elastic" system where money contracts and increases, but is aways increasing over time.
1971, $1 could buy you 0.028 ounces of gold.
Right now, $1 can buy you 0.000222 ounces of gold. This represents a 99.2% decline against the original price of gold. $100 back in 1971 would be $0.80 cents today
And by this measure, the dollar hasn’t completely collapsed, but it has been steadily diluted over time.
Think about that for a moment. A 99.2% decline means to breakeven the US dollar would have to rise 12,400%.
Gold has risen 12,857% against the dollar, since 1971. Gold purchased for 10K in 1971 would be about 1.29 million today. That's in 55 years. What about the next 55?
Remember gold does nothing, it just sits there maintaining its value.
Housing
Now let’s talk about houses.
You’re told it’s the safest path to wealth. Buy a home, hold it, and you’ll be fine. But that belief deserves deeper investigation.
The richest people in the world don’t build their wealth by owning the house they live in. They own productive assets, these are businesses, equity, things that generate income and scale over time.
A house does none of that. It does not produce income for its owner. It does not innovate, nor does it scale. In fact, it requires constant upkeep which means spending your income on it. Electricity, maintenance, water bills, and so on.
At its core, it is a consumption good, it's simply a place to live. A big pair of shoes for your body to put it simply.
When it comes to the price of housing, in a stable system, the price of housing should be anchored to what people can afford from real economic output.
The factors include things like what people earn (wages), what the economy produces, and what can be sustained without excessive debt. These factors serve as natural constraints.
Because ultimately, houses are paid for with income. And all income is derived from production.
But now we have a scenario where housing prices rise faster than incomes, for long periods of time. Why is that? Obviously something has changed. People are not suddenly becoming more productive at the same rate.
Something else is driving demand. This "something else” is usually credit expansion. Credit expansion is possible as we are no longer tied to gold.
And when credit becomes cheaper (low interest rates!) and more available, the following things happen:
- buyers can borrow more
- sellers raise prices
- and the entire market shifts upward
Not because houses became more useful, but because financing became easier.
Now this is where the illusion of wealth begins.
If your house doubles in price, it feels like wealth. But if everything else (food, land, assets, price of your bubble tea) rises alongside it, what has actually been gained?
Measured in currency, you are so called "richer".
Measured in purchasing power, the answer is much less clear.
Also remember for most people, buying a home means taking on a mortgage which involves decades of future income committed upfront.
A mortgage can build wealth. Sure. But it can also act as a long-term constraint, where a significant portion of income goes toward servicing debt rather than building flexibility or ownership of productive assets like businesses.
Banks are among the biggest beneficiaries of this structure. And the longer the mortgage duration, the more interest is paid. To them. Out of your pocket. Is this really "wealth"?
Exponential inflation
So when people say "I bought a house and it went up by X%" and feel good about it, they often think in a single dimension.
But how does it measure to gold? Because remember, we're riding an inflation tsunami. Every thing goes up in price. Not because you're brilliant. But because we're on an inflation tsunami globally.
And yes, if you were early, the price of your house rose more. Naturally. Even a "measly" 2% inflation per year will cause a prices to double in 36 years.
2% is what central banks target as inflation. But wouldn't prices going down be better for everyone? Is feeling rich more important than being rich? This 2% number is frankly ridiculous.
That's why today's generation are unable to buy a house. Prices are going up exponentially, and wages are not keeping up.
An exponential system doesn’t need to beat you overnight. It just needs time. And over time, it quietly wins.
Asset prices rise, wages get left behind, new buyers need to take on ever larger sums of back breaking debt to enter the market. Successive generations get stretched further than the last as this type of system demands it.
The modern system has traded long-term stability for short-term flexibility, and the fact is most people don’t realise the cost.
A system with no constraints will always drift toward expansion. The question is not whether discipline is needed, but what can enforce this discipline.
For most of history, that role was played by gold.
Now I don't know if this will happen again, if ever. But I've outlined the underlying issues on why this is happening. And until these issues are addressed, nothing will change. Prices will keep increasing, regardless of which party or government is involved. Regardless of what policies are involved. You can hire the most brilliant minds in the world, but the fact is the system needs to be changed.
Money today is printed in unlimited quantities, whereas assets and goods are always in limited supply and cannot be printed. For stable prices to return, money itself has to be anchored back to its roots, and that is historically gold.
Until then, expect instability and continuously rising prices. The ones with money will keep getting richer, and the ones without will keep getting poorer.
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