Dalio: “The World Has Gone Mad And The System Is Broken”

Augee,

This is going out to my grandson today. (I also want his parents to read it).

Big Boy,

Keep this letter, as you get older re-read it as I want to pass on to you some history, truths, and facts about Gold and Silver.

Seeing how you are accumulating some Silver Coins I want to explain their value as money and how both Gold and Silver has been a store of wealth throughout history.

There is a take on an old saying I like:

Gold is the money of Kings
Silver is the money of Gentlemen
Barter is the money of Peasants
And
Debt is the money of Serfs and Slaves

GOLD
Gold and silver have occupied a unique social status for thousands of years. Both have a long history as valuable money and their history is far from over.

From the ancient Egyptians to the modern U.S. Treasury, there are few metals that have had such an influential role in human history as gold and silver.

Gold and silver are mentioned in the Bible many times. In Genesis 2:10-12 (the very beginning of God’s book) it describes the lands of Havilah, near Eden, as a place where good gold can be found.

There’s one common trend across all ancient civilizations: gold is a status symbol used to separate one class from another. From emperors and kings to skilled engineers and corporate managers (like your Father and Mother) to the extreme wealthy and upper middle class, those who held gold also tended to have generational wealth and hold power and most important to me, they had independence to live how they wanted to.
1792 – THE UNITED STATES ADOPTS A GOLD AND SILVER STANDARD
In 1792, the United States Congress made a decision that would change the modern history of gold and silver. Congress passed the Mint and Coinage Act. This Act established a fixed price of gold in terms of U.S. dollars. Gold and silver coins became legal tender in the United States, as did the Spanish Real (a silver coin of the Spanish Empire).

At the time, gold was worth approximately 15 times more than silver.
This ratio of 15 ounces of silver being worth one ounce of gold, had been the traditional ratio throughout most of history. I will say more about that later on in this letter.

Silver was used for small denomination purchases while gold was used for large denominations and large purchases. Silver was used for day to day transactions, like going to the market and buying food, and Gold for storing wealth and big transactions like buying horses or lumber to build a house or even a house or a farm (like mine and your grandmother’s).
The U.S. mint was legally required to buy and sell gold and silver at a rate of 15 parts silver to 1 part gold. As a result, the market rate for gold rarely varied beyond that range.

That ratio would change after the Civil War. During the Civil War, the U.S. was unable to pay off all its debts using gold or silver, it didn’t have enough of both. In 1862, paper money (its also called fiat – that means it is just paper) was declared to be legal tender, marking the first time a fiat currency (paper like the dollar – not convertible on demand at a fixed rate) was used as an official currency in the United States. (I know that is complicated but you will figure it out when you get older).

Remember this: Paper money like the dollar is call ‘currency’. Gold and silver are considered ‘money’. As you get older I believe these differences will become important.

Just a few years later, silver was officially removed from the U.S. Mint’s fixed rate system in a bill called the Coinage act of 1873 (and criticized by American citizens as the Crime of ’73 and I believe it was a terrible thing to do). This removed the silver dollar from circulation, although coins worth less than $1 still contained silver.

The United States would never use silver dollars again. Throughout the late 1800s, the issue remained an important political topic. In 1900, the gold dollar was declared to be the standard unit of account in the United States and paper dollars were issued to represent the country’s gold reserves.

1870S GOLD RUSHES
A number of gold rushes occurred throughout the 1800s. Since a single gold nugget could make someone a millionaire, prospectors rushed to far-flung corners of the planet in search of riches

Notable gold rushes included:
• North Carolina (1799): The first major gold rush in America occurred in 1799 in North Carolina, when a young boy discovered a massive 17 pound gold nugget in Cabarrus County. Not too far from where we live!

• California (1848): The San Francisco 49ers football team is famously named after the gold rush of 1848/49 in California. Prospectors came from across the world to San Francisco. Before 1848, only about 1,000 people lived in San Francisco then. Within two years of gold being discovered in the region, the population had swelled to 25,000. There were so many recent migrants to San Francisco, in fact, that the massive San Francisco harbor was filled with empty ships. Nobody wanted to sail away from the bustling boom town!

• Klondike (1896): Gold was discovered in the Klondike River in the Yukon Territory and in other parts of British Columbia. Prospectors travelled far north and fought harsh winters to claim their fortune in the land of the midnight sun.

• Australia (1850s onward): Australia hosted a number of major gold rushes throughout the latter half of the 19th century. Gold was discovered in New South Wales and Victoria in the 1850s and in Western Australia in the 1890s. Gold rushes helped to populate empty areas of the Australian Outback. Towns throughout Australia owe their existence to the gold rushes of the 1800s.

1944 – BRETTON WOODS PEGS THE GLOBAL PRICE OF GOLD
Here is more history you will probably won’t be learning in school. The two World Wars wreaked havoc on the gold standard and world financial markets. Of course, it didn’t help matters that the Great Depression occurred in between those two wars. (This is a history lesson as well as Gold & Silver lesson, your Father can fill you in on the details).
After decades of war and conflict, world leaders came together under the Bretton Woods Agreements. This system created a gold exchange standard where the price of gold was fixed to the U.S. dollar. This was a radical experiment that had never been done before and it made the United States very powerful on the world’s markets.

The U.S. dollar was chosen for the Bretton Woods system because the United States was easily the world’s strongest economy coming out of the Second World War. Unlike previously strong European nations, the United States did not have to rebuild its cities that had been bombarded throughout World War 2.

The day the price of gold was pegged to the U.S. dollar is one of the most important points of U.S. history because it helped make the United States the global superpower it is today. I will tell you more about that as you get older.

1970S – GOLD STANDARD ENDS WITH THE VIETNAM WAR
In 1944, gold was fixed at $35 per ounce for the foreseeable future. In the early 1970s, another war – the Vietnam War (that’s the one I fought in) – caused the gold exchange standard to collapse. America’s budget was in ruin and in 1971, President Nixon suddenly decided to end the Bretton Woods system with a moment known in history as the Nixon Shock. (I was just 21 then, four years before I met Honey, and before your Mom was even born).

Between 1971 and 1976, a number of attempts were made to salvage the gold standard. However, the price of gold continued to rise beyond what any currency could sustain.

That’s why many gold pricing charts begin around 1970. Between 1970 and 1971, the price of gold was relatively flat before skyrocketing to a record high of $800+ an ounce in 1980. If you were to look at a gold pricing chart from the 1940s to 1970s, it would be a flat line of $35 per ounce, which is why you don’t see too many gold pricing charts that extend before 1970.
PRESENT DAY – NO COUNTRIES IN THE WORLD USE A GOLD STANDARD
As of 2019, no countries in the world use a gold standard. In other words, no paper currency (or fait – including the dollar) in the world is backed by gold.

Of course, that doesn’t mean that countries have sold all their gold or that their currencies are based on nothing. Most countries in the world maintain large gold reserves in order to defend their currency against possible future emergencies.

America’s gold reserves are famously held at Fort Knox, Kentucky. The heavily-defended location holds an unknown amount of gold, as the amount is officially classified by the United States government. However, it’s widely accepted that the United States holds more gold bullion than any other country in the world (approximately 1.3 times as much gold as the next leading country, Germany). I do not know if that is really true…we will see.

MODERN DAY – GOLD INVESTMENT RISES
Gold has been seen as a smart investment for thousands of years. However, the use of gold as an investment became hugely popular after the end of the Bretton Woods system in 1971.

Since the 1970s, the price of gold has steadily increased. In 1970, gold was pegged at $35 per ounce. In August 2011, that number had risen to nearly $2000 per ounce. However, the years in between were not a smooth upward slope and gold –it has gone through a number of ups and downs over the past few decades.

When looking at gold investment charts, it’s important to recognize inflation. Some charts show the price of gold as virtually a straight line from the bottom left corner of the graph to the top right corner.
However, the price of gold has experienced two major spikes since the 1970s: once in 1980 and the other in 2011.

By carefully weighing all of this information and current trends, you can build an accurate view of the present value and future value of gold.
2000s and 2010s – Gold in modern times

Over the past two decades (a decade is 10 years) gold has gone through a number of major changes. August 1999 was a landmark moment in the price of gold as it dropped to a price of $251.70 per ounce. I knew that was a great time to buy some Gold, and I did!

This occurred after central banks around the world were rumored to be reducing their gold bullion reserves and at the same time, mining companies were selling gold in forward markets.

By February 2003, outlook on gold had reversed. Many viewed gold as a safe-haven after the U.S. invasion of Iraq in 2003.

Geopolitical tensions between 2003 and 2008 continued to raise the price of gold. And in 2008, the global economic crisis (it is called the Great Recession) increased the price of gold even further. After reaching a high of over $1,900 per ounce in 2011, gold has fallen to between $1,200 to $1,400 in recent years. But, then in 2019 it started rising again and as I write this it is worth over $1,500 an ounce.

Many people believe Gold and Silver are going to continue to rise in value and I am one of them.

WHY IS GOLD VALUABLE?
This simple question comes with a complex answer. There’s no single reason why gold has been seen as valuable money throughout all of human history.

REASONS WHY THE PRICE OF GOLD IS HIGH INCLUDE:

• Scarcity: Gold is difficult to find and mine in the real world. In the late 1800s, any town with a single gold nugget was instantly transformed into a gold rush town. Today, only about 2,000 tons of gold are created per year. To put that number into perspective, about 10,500 tons of steel are produced in the United States every hour.

• Physical characteristics: Gold has some phenomenal physical characteristics – especially when used in electrical applications. It’s an excellent conductor, for example. Furthermore, no metal is more malleable than gold. That means that just a small bit of gold can be hammered into many smaller sheets. In fact, one ounce of gold can be stretched to form a wire that is 50 miles long. Gold plated copper wire sounds expensive but it only requires one ounce of gold to plate a 1,000 mile long thread of copper.

• Aesthetic attributes: One of the simplest reasons why gold is valuable is that it looks cool. Over time, rulers have loved displaying gold in throne rooms, tombs, and on top of Egyptian pyramids. Its unique coloring and luster have fascinated humans for thousands of years.

• Wealth storage: The times when gold has increased in value are almost always coupled with extreme economic circumstances. These extreme circumstances cause people to lose faith in their country’s paper currency (like the dollar) and buy a more concrete form of wealth: gold. Gold is seen to be a good wealth storage tool around the world. That is one of the major reasons I like it, and want you to understand that fact about it.
WHY IS SILVER VALUABLE?

Silver (like gold) is a precious metal and therefore is widely known to be valuable. When examining silver it’s easy to see why silver is valuable, it’s all about the many uses which silver has, these include:

• Investment asset – silver is widely used as an investment asset, both for making silver coins and bars

• Use in medicine – silver has very high anti-microbial qualities and therefore is used in medicine for wound dressings and treatment of infections

• Solar panel industry – tapping into solar energy is an important part of green energy initiatives. It’s therefore interesting to know that due to its reflective qualities silver is used in photovoltaic cells within solar panels. This creates a very high demand for silver worldwide

• Use in electrical components – silver has very high levels of conductivity, which is why it is so actively used in many electrical components. Often copper is used as a cheaper alternative, but for some applications, even with a higher price, silver is preferred.

The above just gives a flavor of the uses of silver. There are other uses too. What’s important to remember that the price of a ‘commodity is all about supply vs demand’.

Due to the high demands for silver worldwide, which exceeds mining production – many Analysts are predicting a rise in the price of silver in the years to come.

I believe there is more potential for silver to rise in value than gold.
Today the ratio of silver to golds is over 80 to 1…so it takes 80 ounces of silver to be worth one ounce of gold. That ratio historically is usually 15 to
one. One day the 15 to 1 ratio will return and the value of silver will skyrocket.

Today the ratio of silver to golds is well over 80 to 1…so it takes 80 ounces of silver to be worth one ounce of gold. That ratio historically is usually 15 to one. One day the 15 to 1 ratio will return and the value of silver will skyrocket.

OK Big Boy, keep this letter and as you get older re-read it. I put a copy in your ‘Legacy’ trunk in the Little House, it’s with my prayer journals…those are for you to, someday.

Love,
Dad-Doo
XXXOOO

That has been happening to me as well Mark! Beyond F ing frustrating to say the least! Especially when a good conversation was going on with Flea yesterday on the LLPOH thread.

Flea,

So true but lots of nuggets of knowledge and wisdom there. Hope others take the time and deal with the frustration to learn themselves something and expand their worldviews.

+100.
I love it. With your permission, may I copy, paste and print to accompany my gifts this holiday?
Nit picking, but maybe worthy of addition:
-1913 and its importance to the story re: Fiat;
-FDRs confiscation at $20, then reprice to $35.
-the modern trend of movement in bullion purchases, from West to East; i.e., Russia & China stockpiling.

Nevertheless, a fantastic keepsake read, for those you’d wish to educate. Well done.
Bravo.

Mark.
Allow me to add one more item.
If as Lynette Zang said yesterday, that the dollar is now .04 cents of the 1913 dollar. What does that say about how high silver has to go to even out!
When the price begins finding it’s true roots. Nobody will touch dollars with somebody elses hands and nobody will sell PM’s without a swat team in their living room. It will be like hearing the door of the Ark closing