'Why you must own gold and Bitcoin'

Since World War II, the two landmark events in the evolution of money were Bretton Woods in 1944, when the dollar became the de facto global reserve currency, and then the Nixon Shock of 1971, when the US abandoned the last vestiges of its gold standard. There is a shift currently taking place in the global financial landscape, the ramifications of which might, I suggest, prove equally significant.

You might feel it is unimportant. You might feel it is hugely significant. Either way, before making your mind up, you need to understand what is taking place, so that you can position yourself and your family, if you deem it appropriate. You may even be able to profit handsomely from the transition. Here I explain US dollar policy: what is going on and, more importantly, where it is all heading.

Donald Trump solves Triffin’s Dilemma

The US government, as we know, wants to bring manufacturing back on shore. President Donald Trump has said it repeatedly, his vice-president, J.D. Vance, has said it, and so has his Treasury secretary, Scott Bessent, who keeps reminding us that it is now time to prioritise Main Street over Wall Street.

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Part of the reshoring of US manufacturing involves tariffs, as we now know all too well. Part of it involves weakening the US dollar to make US exports more competitive. Again Trump, Vance and Bessent have all said this. However, there is a problem, and that problem has a name: Triffin’s Dilemma, named after Robert Triffin, the Belgian-American economist who first identified the paradox in the 1960s.

You might think it’s an advantage to issue the global reserve currency. You can issue dollars. Everyone else has to work for them. The French called it “America’s exorbitant privilege”. But this was a status the US engineered for itself during the Bretton Woods Agreement that determined the monetary order at the end of World War II. What has happened, however, is that it has made the US fat and lazy, especially since 1971 when the US abandoned the ties of the dollar to gold.

To supply the world with dollars, the US must run trade deficits. That is to say it must buy more than it sells in order that US dollars can make their way out into the world. Persistent trade deficits have, over time, eroded its industrial base. Factories and jobs have gone offshore. Foreign nations have used their profits to invest in US capital markets and its debt. At the same time, financial markets – aka Wall Street – have grown and grown. Part of this process was the financialisation of America.

The Trump administration gets this in a way its predecessors did not. Vance has actually called the dollar’s reserve status a “tax” on American producers. What’s more, as this process has continued, more and more the credibility of the dollar itself is being cast into doubt. This tension forces the US to choose between its own domestic economic needs and the stability of the international monetary system. This is Triffin’s Dilemma. Trump wants to revitalise America’s “rust belt”. But there is more to it than that.

The Covid pandemic pulled back the curtains and revealed the extent to which the US has been operating with its trousers down: an excessive dependence on China and its supply chains for too many strategically essential products, especially those related to health, technology and the military. Then, during the Ukraine conflict, Nato found itself unable to match Russian munitions production. The US, in short, is struggling to produce critical goods. It’s why Trump keeps harping on about rare-earth metals. It is vulnerable.

Moving away from dollar towards gold and bitcoin

The answer is to engineer a “managed decline” of the dollar and reduce its role as a global reserve asset. This was already happening organically. China, for example, has been reducing its holdings of US Treasuries for 10 years now – quite gradually – although its US dollar holdings remain above $3 trillion. Meanwhile, China – and many other countries along the Silk Road besides – have been increasing their gold holdings, and quite dramatically. (In my view China has at least four times as much gold as it says it does. You can read more on this in my book, The Secret History of Gold: Myth, Money, Politics & Power.) The process is known as dedollarisation. Just a few months ago, gold overtook the euro to become the second most-held asset by central banks; the dollar itself fell beneath 50% for the first time this century. In fact, gold has just overtaken US Treasuries as a percentage of central-bank holdings worldwide.

We are not seeing a move towards any other national currency as global reserve. There is not one that could take up the role, despite what the bureaucrats in Brussels might try to tell you about the euro. The move is towards the neutral but universal asset that is gold. That suits all the main players. Gold is neutral and both the US (assuming it has all the 261 million ounces of gold that it says it does) and China have lots of it. (US gold has not been audited in over 60 years, hence the doubts.) Indeed, a gold revaluation would be a “win-win” for both China and the US. A higher gold price would strengthen US fiscal flexibility while boosting Chinese consumers’ wealth, encouraging domestic consumption and reducing trade imbalances. (China has been encouraging its citizens to buy gold since 2007.)

There is the potential to leverage the US’s 261 million ounces (8,133 tonnes) of gold reserves, currently marked to market at just $42/oz. There are two ways this might be done. Economist Judy Shelton has proposed issuing Treasuries that are in part backed by gold to offset the inflation/debasement risk to make them more attractive to buyers. The other possibility (which has gone from, as Bessent put it, “we are not doing this” to “we are not doing this yet”) is to revalue the gold from $42 to the current price of $3,400/oz, which would create more than $850 billion of reserves without having to incur any extra debt. That would help with the US’s current fiscal challenges: true interest expenses (including entitlements and veterans’ affairs) currently exceed 100% of Treasury receipts. In short, the US administration is leaning into a weaker dollar and the neutral reserve asset that is gold to rebalance trade and rebuild domestic industry, even at the cost of short-term economic pain.

A showdown between gold and bitcoin

Bitcoin, as the world’s best neutral digital currency, is going to have a role to play in all of this as well. The US is quite happy with that, too, as evidenced by its pro-Bitcoin rhetoric. At the national, corporate and individual levels the US has a lot of Bitcoin. The US itself has 198,000 coins, the most of any nation; Strategy (NYSE: MSTR) has 630,000 and many other companies besides also hold the asset; and 15%-20% of US citizens are thought to own some Bitcoin. Of the eventual 21 million supply, probably 15% has been lost and another 1.3 million are locked up by Satoshi Nakamoto and will likely never appear (he is almost certainly dead) – a hefty chunk one way or the other.

Which brings us to the recent Genius Act. This effectively nixed central bank digital currencies (CBDCs): the Federal Reserve Bank is now not allowed to issue them just as, irony of ironies, the EU’s Christine Lagarde was planning to phase them in. However, the act supported stablecoins (that is, coins backed by dollars) as a private-sector alternative. The more bitcoin grows, the more the stablecoin market will grow. Today, roughly half the entire US dollar stablecoin market, estimated at $250 billion, is invested in US Treasuries (maybe 2% of the overall Treasuries market). Tether is the world’s seventh-largest buyer. As the stablecoin market grows, so will its demand for Treasuries.

The market is small, but growing rapidly. Projections of its growth range from $500 billion in 2035 (JPMorgan’s guess) to $2 trillion (Standard Chartered) and $4 trillion (Bernstein). “If the stablecoin market meets these growth projections,” says the Kansas City Fed, “it could lead to a substantial redistribution of funds within the financial system.” In other words the stablecoin market is going to help the US fund its debt, just as other nations move away from Treasuries to gold and bitcoin. Gold might suit the US as a neutral currency, but bitcoin suits it better, especially if there are complications surrounding the Fort Knox gold, which it seems there are. Why no audit yet?

It’s likely a few years from now, there is going to be some sort of showdown between gold and bitcoin in the battle for primary reserve asset status. It’s unlikely to be both. Governments will favour gold, as they have lots of it. Tradition is on their side. Eternal gold has a track record that is unrivalled. But it is an analogue asset in a digital world. Bitcoin is much more practical. Which will win out? Practical digital or impractical analogue? This is a contest that is still a way off. For now all roads lead to gold and bitcoin as the world dedollarises. Own both is what I say.

Britain left behind on both gold and bitcoin

Needless to say the UK is absolutely clueless in all of this. The government sold two-thirds of its gold in 1999 and the Financial Conduct Authority regulator has made it near impossible for UK citizens to buy bitcoin. Word is that the chancellor is now planning to sell the country’s bitcoin holdings – though as these are confiscated this is legally problematic. The UK has recently overtaken China to become the largest holder of US Treasuries in the world after Japan, just as everybody else is dumping them. It is making no attempt to buy any gold either. We really have clueless clowns running the show.

Meanwhile, with the threat of AI and automation to America’s jobs – especially in jobs that involve driving, where millions work – there is the risk of mass unemployment coming quite quickly, and with it plentiful defaults on mortgages and loans. This could force the US to print money, driving inflation and providing yet another reason to own gold and bitcoin, which cannot be debased.

In short, the dollar will weaken significantly over the next three years. The pound is a basket case. National currencies are not stores of wealth. Gold and bitcoin are. Own both as the Trump administration addresses Triffin’s Dilemma through a managed dollar decline. They will use gold and potentially bitcoin to restore US industrial and military strength. This is the shift that is taking place.

Dominic Frisby writes the investment newsletter The Flying Frisby.

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