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Back From the Brink (with Gold & Silver)

Back From the Brink (with Gold & Silver)

May 11, 2023900 view(s)

We reached a tipping point when the U.S. Treasury felt they could no longer issue debt in our own currency, the dollar. Because of this, they reached out to Switzerland and issued American debt denominated in Swiss Francs in order to find enough demand to keep financing American government operations (45 years ago). With all the negative news out there regarding the dollar losing its place as the world reserve currency, it might be worth looking at another period of time when dollar-based bonds were in low demand. How did we recover then, and how will we recover now? Also importantly, what happened to gold and silver during that period, and where might they be headed moving forward from here? Similar results could mean $8,000 gold and $160 silver (+/-) within just a few years.    

It was a period of national humiliation that included Americans held as hostages overseas and a failed military intervention to rescue them. There was rampant inflation amidst a slowing economy when the investing public lost value on U.S. Treasury securities. 

It got so bad that many would not buy U.S. Treasuries unless they were denominated in something other than dollars. 

The period birthed what became known as “Carter Bonds,” which were U.S. Government debt instruments denominated in Swiss Francs and West German Marks from 1978-1979. The dollar had been removed from the peg to gold during the “Nixon Shock” in 1971 and quickly lost value and credibility on the world stage. At that time, Swiss Francs were still considered to have a connection to gold backing and held their value over time. Even if the Carter Bonds paid the same interest rate as other U.S. Treasury Securities, they outperformed because the currency (Francs) did not depreciate like the dollar-denominated bonds.

The Good ‘Ole Days

Many felt then, as some do today, that the best days for the U.S. were behind us, financially speaking. In just a few years, however, good times were back again. The journey from fiscal hopelessness to economic abundance included financial pain for some and financial gain for others. We may see similar effects this time around for various reasons. Today we will discuss some similarities between then and now and why conditions can be considered even more extreme today. Hardly a day goes by without hearing a report about another nation seeking to move away from using the U.S. dollar as either a reserve currency or as a means of conducting international trade. In 1978-79, the U.S. government confronted a similar circumstance that led to the humiliating strategy of issuing American debt in a foreign currency. 

In the case of the Swiss Franc, it was almost like backing the dollar with gold again. Those who purchased these “Carter Bonds” gained not only the stated interest rate on the bonds but also the inflation protection of a gold-backed currency. While dollar-based treasury securities offered similar interest rates, they lost half their value in a few years due to rising interest rates and inflation. 

In a similar fashion, the banking crisis of today is due in part to inflation and rising interest rates. 

Some treasury securities on bank balance sheets have lost 30-50% in 2 years, requiring intervention by both the treasury and the FDIC to encourage confidence and maintain solvency. While the Swiss Franc was required to have at least 40% gold backing when the Carter Bonds were issued, that requirement was canceled in the year 2000 for Swiss Francs. 

Gold Better Than Carter Bonds

Today if you want to protect your savings from dollar devaluation, one of the best ways is to buy physical gold directly. While there has been much talk about various nations offering new gold-based currencies, it has not materialized so far. Even here in the United States, many states are moving towards recognizing gold and silver as constitutional money and useful for creating financial contracts and/ or valid payments for debts. If we looked back to pre-pandemic times, such as Spring 2019, we would find gold around $1,300/oz. Today, gold is north of $2,000/oz. This is an increase of 54% in 4 years. We have also seen significant inflation during this period, as evidenced by the highest COLA increases in over 40 years. From 2019 until today, COLA has increased annually by 1.6%, 1.3%, 5.9%, and 8.7% - the most recent increase. 
COLA has increased retiree incomes by 17.50% since 2019 to help individuals deal with inflation. 
Interest rates have not kept up with COLA increases, as the most recent interest rate increase brought the Fed funds rate to 5.0%. 
Meanwhile, the average bank account earns far less. This is important to understand, as neither interest rates nor COLA increases have been keeping up with inflation. In this article, we compared the performance of gold and silver to COLA rates since the inception of COLA. As pointed out in the article, those owning gold and silver fared better than those depending on COLA or interest rates at the bank to keep up with inflation. While that article took a historical view, the same is true when looking back only four years, as the 54% increase in gold prices trumps the 17.5% increase in COLA over the same period. Even though gold earns no interest, it often performs better over time than assets that do. 

Another thing to keep in mind is the devaluation of purchasing power exhibited by the dollar over time. If earning interest rates of 6-7% saved in a currency depreciating by 9-10%, for example, what do you really gain? As we wrote about here, even the stock market can be a losing proposition in the long run when we balance stock market gains with currency depreciation. 

Back From The Brink

Today we are facing not just a hostage crisis involving 53 Americans but risks of a major conflict with a nuclear power on the European continent. We are facing not only issues with demand for treasury debt here at home but demands to dethrone the dollar as the world reserve currency abroad. And today’s political climate rivals anything that happened during the Nixon Watergate, and Carter years. Some believe the political scandals of today make Watergate look mild. My point in mentioning that is the United States came back from the brink of economic catastrophe in the 1970s and early 1980s, in part by reintroducing gold to the financial system indirectly, with Carter Bonds. Then as now, families that owned gold directly for themselves were well protected as the mayhem developed.

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