Part One: For Gold Skeptics

In 2022, just a few months after the Russian invasion of Ukraine, I had a brief conversation with a skeptic about Gold. For the sake of confidentiality, I’ll refer to him as “Mr. Bond” in this 3 Part Commentary. It was mostly a unilateral conversation, given the very few words I was able to get out. I was aiming to convey our thesis of the changing economic environment mainly from a monetary perspective. Mr. Bond, with an investment portfolio of about $4M at the time, was challenging my investment philosophy from a purely equity markets driven perspective. His argument, in a nutshell, if you have a portfolio comprised of good companies with long history that pay a dividend, just ignore the volatility and collect your dividends. The market will come back, and "you’ll be ahead". Those who know me are very much aware that our investment philosophy deeply contrasts this line of thought.

Sure, it’s a lot easier for an advisor to “follow the flow”, to tell you to be patient and “ride through it” in times of corrections and recessions. It is much simpler to explain to clients, fluctuations and volatility in a portfolio when the rest of the investment world is fluctuating and volatile at the same time; it’s much easier to match the numbers as seen on television broadcasts. It’s much harder – and very time consuming- to teach and educate clients about monetary policy, M2 supply, Tiers 1 & 2 Capitals, banking principles, the effects of fiscal policy, Quantitative Easing, Quantitative Tightening and overall evolution in economic history. It is much more cumbersome to invest as a “contrarian” when the rest of the world is ignoring reality and pushing a “flock” narrative.

Mr. Bond shares a very common thought process even with many advisors I talk to, and I couldn’t -nor did I try to- argue that over the last 25 years, this buy and hold “strategy” – if you can call it that- did in fact work fine for many. But it was his conclusion of why this view worked that I found deeply flawed. If his assumptions were right, then why did Gold & Silver – non dividend paying assets, no leadership or management and no revenues and expenses- outperform the equities markets over the same period by 646.4% and 267.4% respectively? See for yourself in the chart below.

To me it was clear; Mr. Bond had failed to recognize the economic environment that allowed him to deploy a “Buy & Hold” strategy and come out of it unscathed so far- hopefully, I haven’t talked to him since. I do believe that equity markets recover in due time. I also believe in mean reversals after the peak of every economic cycle- although I would argue that the mean, from a quantitative analysis point of view, changes over time.  The concern I relayed to him was that in an event of deeper economic disruption than the ones faced during the Pandemic, if he failed to recognize a changing economic order or system, his strategy may not yield him the same outcome he’s used to, and at this stage of his life -he’s in his 70s- portfolio recovery may not happen during his or his wife’s remaining lifespan. He did not want to hear more. But maybe you do.

The saying goes like this: “follow the money”; at no point, anyone I know, in my lifetime has ever said “follow the stock market”. 

To start, I must reference a few historical moments that morphed our monetary system into what we have today. And I will try to simplify for those who are not interested in finance lingo. Understand that this is extremely relevant information to give context to our current economy, policy changes and to analyze where do we go from here.

1944- Understanding Bretton Woods Agreement 

Prior to World War I, nations conducted economic trade based on the Classical Gold Standard system, where countries linked the value of their currencies to a specific amount of gold. But the Classical Gold Standard became difficult to maintain after World War I as political ties and alliances perished, along with increasing national debts around the globe. Understand that gold has nuances including difficulty of transfer, metal scarcity and it’s challenges in to keeping pace with higher supply/demand due to the extraction and mining process. Unlike paper money, you can’t print gold.

Pegging Gold to each individual currency became an even greater challenge as World War II ensued, countries pursued bigger economic sanctions against each other and the destruction of cities from war demanded unprecedented amounts of capital for rebuilding, especially in less economically developed countries.  For purposes of this discussion, I will highlight the most important results from the Bretton Woods Agreement which established a new economic order (or system) aiming to maintain foreign exchange currency pricing stability among 44 member countries.

1.      The International Monetary Fund (IMF) - created to provide oversight over exchange rates among member countries and lend reserve currency to countries with deficits.

2.      The World Bank Group - the organization in charge of sourcing financial assistance for reconstruction and economic development post-World War II; throughout the years, the World Bank has been entrusted in finding lending resources for emerging economies.

3.      The U.S. Dollar became the reserve currency- to provide for ease and stability of foreign monetary exchange and trade, the U.S. Dollar became the main currency pegged to gold. The United States was responsible of safeguarding the physical gold in our New York Fed vault (and other secure establishments), maintaining the price of gold fixed and produce a supply of dollars (printing) for redemption. Lastly, and probably the most important, it was supposed to maintain global confidence in the convertibility to gold. Hello Globalization!

In essence, all currencies were pegged in some form to the US dollar’s value (with a 1% diversion range allowed), and the U.S. dollar was redeemable for the equivalent in physical Gold. This prevented a disproportionate suppression of any currency value, promoting equal international growth and cooperation. The U.S. Dollar was fixed to the price of Gold at $35 per ounce during the Bretton Woods agreement. Keep this in mind for later.

1971 – U.S. fails on its promise

When the U.S. became the reserve currency of the world that meant the U.S. could print dollars to finance our balance-of-payments deficit. (If we spent more than the revenues that came in, there was an imbalance in the Gold to dollars ratio, but the US could print more dollars to offset that imbalance.) But other countries couldn’t (can’t) print another country’s currency to offset their own imbalances, they had to produce or earn it and buy more dollars instead. And so, this economic order maintained until 1965, when the President of France, General Charles de Gaulle challenged the agreement, arguing that the US could continuously run a disproportionate deficit to other countries under the principal of printing more dollars. Therefore, he announced France had sent war ships to NY to redeem their Gold, as he feared the US did not have enough Gold to maintain their promise. And General de Gaulle was not incorrect; as the US deficit rose, and printing of currency increased, there was a global growing lack of confidence that the US did not have enough Gold to meet the commitment to other countries of convertibility.

That’s when President Richard Nixon stepped in. In a desperate measure, in 1971 President Nixon decided to suspend the convertibility of U.S. Dollars to gold, effectively ending the Bretton Woods Agreement, and defaulting in our promise and apparently admitting that the U.S. in fact didn’t have enough gold to back the supply of dollars. This marked the start of a new monetary era, the evolution of an economic order purely based on fiat currency -legal tender that’s not backed by a tangible asset-. This system, our current fiat system, gave countries the ability to determine (and manipulate) their currency exchange rates.

From an accounting perspective, the amount of gold held in vault would not have been a redeeming issue if the dollar had been devalued against it. This would have been the simplest solution to maintaining the Bretton Woods Agreement, although a very unpopular option to publicly convey for any politician that risks re-election. Just imagine tuning in the news and the President announces a purposeful currency devaluation…not exciting news.

Why would a country want to devalue their currency? Well, to address imbalances and to make exports more “competitive”, as the domestic goods become “cheaper” relative to the buyer’s currency. Think about when you travel abroad for vacation in let’s say Mexico. Converting your U.S. Dollars to Mexican Peso will allow you to buy a greater amount of products and services, than if someone travelled from Mexico, and converted their Mexican Pesos to U.S. Dollars to purchase goods in let’s say New York City.  

But from here on began the era of “price stability” through “stable rate of inflation” that the Central Banks preach ever since, and hence where the 2%-3% inflation rate target was born. In my opinion, not more than just a narrative to publicly justify persisting deficits, continuous printing of dollars, and hidden underneath, the result remains the same: currency devaluation.

This is what economist & author Judy Shelton explains about the problems of not having currency prices fixed:

“We have the Olympics, and countries from all over the world are going to compete. But whether the athletes are supposed to swim or jump 100 meters, or run, or bike… A meter is a meter; that is the standard for performance, it’s the same for all the countries… Money is a measure, so if the measure is changing... to the advantage of a competitor because you’re going to judge their performance in different terms now, that’s inherently irrational, I think. That’s what undermines the basic principles of free trade…When people talk about the Gold standard and I say yes there are good things about a gold standard, that’s one. Everyone was using the same standard of measurement of value, and it was the same across borders and through time.” ¹

For instance, in 2021, it took $1,800 to buy 1 ounce of gold, which equals a 98% devaluation of the dollar, from the end of the Bretton Woods Agreement in 1971. ² As of April 18, 2025, 1 ounce of gold is priced at $3,343, which explains the jump on inflation. From this ratio disparity I conclude, and a handful of others agree with me, that in theory it’s not so much that the price of gold is going up, -inflation is not driven up by high prices-, but rather that the value of the paper has gone down significantly, (you’re not buying more ounces of gold, you’re not buying “more house” for your dollars, you need more paper dollars to buy the same amount of the tangible assets). This dichotomy proves an inherent distortion of our current paperbacked monetary system and an obvious disconnect between perceived growth and reality. When Gold does well, it means the existing paperbacked system is failing.

2019 – Gold gets reclassified as a Tier 1 Capital

If you don’t know what Tier 1 Capital is, in banking it is the core equity assets ⁴ in other words, the amount of capital that regulators require banks to maintain to conduct business. Tier 1 Capital represents the bank’s most readily accessible capital it needs to meet its obligations, through a risk weighted ratio determined by regulators. There’s Tier 1 and 2 capitals and they represent different assets that banks use to fund operations, create revenue and profits; Tier 1 Capital can be viewed as the safest and most liquid of the Tiers, and Tier 2 would represents the “riskier” assets or the least reliable either because the assets fluctuate in value more often or because it’s derived of lower quality debt/financing. ⁴ Tier 3 Capital was the riskiest of the assets, usually comprised of unsecured debt and such, but it was removed in 2019 as part of the Basel III Accords due to its role in the Great Financial Crisis from unsecured debt.

Why does this matter?

In 2019 changes in international banking regulation resulting from Basel III Accords, and international collective agreement on banking regulation, made Gold a Tier 1 Capital asset, from a previously Tier 3 Capital asset (bypassing Tier Capital 2). Banks could now hold a greater amount of physically allocated Gold that counts towards their safest pool of capital requirement. ⁵ This was (is) a significant shift in how Gold was viewed by regulators and central banks. It suggests a lack of confidence in the existing monetary paperbacked system, and a preference for tangible assets.

I’m not trying to suggest that we are or should return to a Classical Gold Standard, or that Bretton Woods System should resurrect. I’m also not interested in convincing you of what asset is a better store of monetary value. You can come up with those conclusions yourself. Sure, gold is unattractive at times; it does not pay a dividend, it can go years with no substantial movement in price (this would suggest that the system is working or that monetary manipulation is in effect), it does not issue financial reports to revise like public companies do.

Government intervention 

Reflecting on my conversation with Mr. Bond, it was clear that in his view the growth of his portfolio was attributed to his stock's corporate leadership and management, new products and services, revenue and profits, even though he admittedly had not reviewed the financial statements and reports of any of the company stocks he owned in recent years. And he wasn’t entirely wrong. There’s a great number of companies that have caused positive disruption in many industries, especially in the technology sector. But it would be foolish to ignore that the suppression of interest rates, the printing of dollars, government stimulus during the most recent 3 financial crisis (“Dotcom bubble” in early 2000s, Great Recession in 2008 and Covid 19 Pandemic in 2020), easy lending practices and the regulatory environment didn’t play a crucial role in the development and growth of equities. If you think about it, every significant economic change has involved substantial and constant government intervention (like the critical events I've named throughout).

I question had we not had government interference, from the Federal Reserve through monetary policy or the U.S. Treasury through Quantitative Easing and Tightening and financial stimulus packages, the regulatory environment, would the growth stocks of the 2000s still be considered growth stocks today? Would they have survived without borrowing at very low interest rates? Would they survive if the Bretton Woods promise was reinstated -or a new version of it, where money is backed by tangible assets at a fixed rate?

Currency matters. Monetary policy matters. Domestic and foreign agreements and consortiums matter. Trade agreements, the Fed, the Treasury, it all matters, and I would add that it trumps the private sector's efforts. Since the end of 1990, interest rates have trended downward on a consistent basis, up until 2022 when the Fed aggressively hiked the overnight lending rate. The “buy & hold” strategy worked well during that period, but it doesn’t mean that the economic distortion created in 1971 was invisible. 

The "buy & hold" strategy also implies in its name little effort; it suggests little to no deviation from its original stance. It encourages no action, no reaction and no adaptation. When investors can’t get yield (interest) on safer investments, they begin to accept risk. Investors go as far as to even justify it. And so, the markets expanded during the last 34 years, naturally, as the result of a meticulously orchestrated post Bretton Woods System. Did growth in equities derive purely from innovation and growth? Mostly not, I argue. (I am not declining that there was innovation and growth, however). But was it a function of low yields and currency debasement? I argue that yes, it was. But, see for yourself in the chart below.

To be continued…

Note: A comparison of the 3 major equity indexes against the 10 Year Treasury Note and the US Dollar (DXY) from the years 1990-2025. We use the 10-Year Treasury Note as the yield is closely linked to 30-year mortgage rates (which impacts a greater number of households).

¹. Trump vs Powell - New Gold-Backed Sound Money Plan Revealed | Judy Shelton - YouTube

²   Fifty Years Without Gold - R Street Institute

³. Tier 1 Capital: Definition, Components, Ratio, and How It's Used

⁴. Tier 1 Capital vs. Tier 2 Capital: What's the Difference?

⁵. Gold and Basel III - EFG International