I have long advocated a two-bucket approach for managing money with one bucket containing assets that will perform well in a deflationary environment and another bucket containing assets that will perform inversely to the US Dollar. In other words, as the US Dollar loses purchasing power, assets in this bucket will preserve purchasing power.
To fully understand this, one needs to think about currency properly.
Currency IS NOT wealth. Currency is merely a claim on wealth.
As the currency is devalued, it claims less real wealth and it is that dynamic that has been emerging as one of the biggest threats to a comfortable financial future whatever that happens to look like to you.
I believe that prudent investors will begin to look more and more at tangible assets. To put that another way, I think that having more tangible assets or real wealth is going to become very important in the days, months and years ahead.
In past posts, I have discussed this in great detail. For today’s discussion, I will consider this topic briefly for context.
Currency is one option for storing economic energy. Economic energy is what is earned through our own labors or by assets we put to work for us.
You go to work and earn a paycheck which is delivered to you in the form of currency. You have three choices when you get the check; you can spend it for living expenses, you can save it in its current form by depositing the check in a bank account or you can save it by exchanging it for a tangible asset, a.k.a real wealth.
Let’s turn the clock back 20 years.
You earned $250 by working or by putting wealth to work for you. If you used the money for rent or food, it’s gone. If you saved the money by putting it in a savings account and had earned 3% interest on the money, you would today have about $450.
On the other hand, had you put the money into a tangible asset like gold or silver, you would have preserved more of your economic energy. In the case of gold, one would have about $1400 and in the case of silver about $950.
If we move the decimal a couple of places to the right and look at how much of that economic energy one would have preserved by converting the currency to another tangible asset, real estate, one would find a better outcome even though real estate values suffered a massive devaluation a bit more than a decade ago.
Here’s my point.
This currency devaluation is going to continue and pick up steam.
While there are undoubtedly some politics involved in this statement, this past week, Russian President Vladimir Putin made this statement (Source: https://www.zerohedge.com/geopolitical/vladimir-putin-sums-new-world-order-5-words):
“The Dollar enjoyed great trust around the world. But, for some reason, it is now being used as a political weapon to impose restrictions. Many countries are now turning away from the Dollar as a Reserve Currency. US Dollar will collapse soon.”
While the US Dollar is still used in the majority of international transactions, that share is shrinking.
History teaches us that reserve currencies change over time.
This chart illustrates.
Notice from the chart that going back to the 1400’s, the world reserve currency has changed. Portugal, Spain, Netherlands, France, and Britain have all had reserve currencies.
A reserve currency doesn’t change until the world discovers a better place to store economic energy until it is ready to be deployed.
And, given the continued devaluation of the US Dollar the rest of the world is looking for alternatives.
The rapid rise of cryptocurrencies is one example of this trend. The rise in the price of gold and silver is another example.
“Bloomberg” recently reported (Source: https://www.bloomberg.com/news/articles/2019-09-09/russia-s-massive-gold-stash-is-now-worth-more-than-100-billion?srnd=premium) that Russia’s gold reserves increased 42% last year.
The chart on this page shows the growth of Russia’s gold reserves since 2006.
It’s not just Putin suggesting that the US Dollar’s days may be numbered when it comes to serving as the world’s reserve currency.
The World Bank’s former Chief Economist wants to replace the US Dollar as the reserve currency with a single, global super currency.
Justin Yifu Lin made this statement while speaking to Bruegel, a think tank (Source: https://www.zerohedge.com/news/2016-06-12/nothing-lasts-forever)
“The dominance of the greenback is the root cause of global and financial economic crises. The solution to this is to replace the national currency with a global currency.”
This chart, also from “Bloomberg” shows that the world’s US Treasury reserves are falling while gold reserves are rising. When looking at the growth rate of gold reserves on the chart, it’s easy to see that 2019 is the year that this trend has really picked up steam.
The rate at which Treasury reserves have fallen in 2019 is nearly a reverse mirror image of the rate at which gold reserves have grown.
To say this trend is picking up steam would be a severe understatement.
While it’s impossible to pinpoint when the US Dollar falls completely out of favor as the world’s reserve currency, the trend is easily recognized.
So, what should you be doing?
Here are a few things to consider.
One, transition to more tangible assets in your portfolio. Even if you have IRA’s or Roth IRA’s, there are strategies to allow you to use these assets to hold non-paper assets.
Two, if you have a traditional IRA or 401(k), think about doing Roth IRA conversions. This strategy can make a lot of sense for many folks since tax rates are lower today than they will be in 2026. While business and corporate tax cuts were made permanent when the last tax package was passed, individual tax cuts were temporary and will expire on December 31, 2025 under current law.
A Roth IRA is totally tax free and in my view, given the debt dynamics that exist in the country and the loose money policies that have become more extreme, it would not be surprising, in my view, at some future point to see tax rates become more extreme as well. For many IRA and 401(k) owners, divorcing themselves from the IRS can make a lot of sense.
I close with two words for you to consider this week “Tax-free and tangible”. At least on some of your investments.