The dollar bulls are using the wrong metrics to make their case.

April 7, 2021

Dear Fellow Investor,

Just because someone’s ignorant doesn’t mean that they’re stupid.

These days we’re seeing a lot of very smart people proclaiming “this time is different” and touting how Modern Monetary Theory will allow us to spend with reckless abandon and zero repercussions.

Ok, maybe there is some stupidity involved in all of that.

But there’s also plenty of ignorance about the role of money — real money — and how it’s different from currency.

These people have no conception of gold’s role as real money and a store of value. Moreover, they gauge the value of the dollar not in relation to gold, but by that fiat currency’s price relative to other fiat currencies.

This was brought home again yesterday, when our friend Danielle DiMartino Booth, a brilliant commentator on the financial world and a valued alumna of the New Orleans Investment Conference, retweeted an essay on the dollar by noted money manager Barry Ritholtz.

Now, Ritholtz is quite successful at what he does and is indisputably a very smart guy. But he’s also woefully ignorant…and you don’t need to get past his opening statement to realize it:

“Its (sic) one of the more annoying claims we see among the Fed-bashers, hyper-inflationists, bond bears and gold bulls: The irreversible death of the U.S. dollar . . . Its (sic) coming imminently, just you wait and see.

“Unless you look at a chart. Then, not so much.”

Of course, the chart he’s referring to is of…the U.S. Dollar Index (DXY)!

You will, dear reader, immediately see the fallacy of his argument: basing the value of the dollar against other fiat currencies.

As I noted in a tweeted retort, Ritholtz “Completely misses the point. Using the dollar index to measure the dollar’s purchasing power is like using the other boats floating in the bay to measure the falling tide.”

Instead, one needs to gauge the tide by a fixed point, an unmoving standard…not something that floats along with the rest of the fleet.

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A Gold-Centric View Changes Everything

To understand what’s happening around us, we need to adopt a gold-centric view of the markets and values.

Even long-time gold investors often don’t fully appreciate this point.

Instead of worrying about the daily fluctuations in how gold is valued in various fiat currencies, we should consider the relative values of currencies in terms of gold. It is those values that are fluctuating, as gold remains the constant standard of value.

Just as Copernicus changed our view of the universe when he put forth the helio-centric model of the solar system, so does a gold-centric view of the markets change our understanding of the economy.

From this standpoint, gold isn’t worth over $1,700. It’s the dollar that’s worth less than 1/1700th of an ounce of gold.

Consider Ritholtz’ argument that the U.S. dollar is fine and dandy, because the Dollar Index “is in the middle of its range over the last 30-40 years. Its (sic) far above where we were during the Great Financial Crisis (GFC), but below far below where we were during the dot-com bubble days.”

If we look at this argument properly — from a gold-centric point of view — we see that the dollar has actually lost 60% of its purchasing power as measured against gold since the GFC (dropping from 1/705th to 1/1,740th of an ounce of gold).

That’s a big difference from his argument that the dollar has actually gained in value over that time period.

Now let’s use Ritholtz’ comparison with the dot-com bubble value of the greenback.

Even though the so-called Dollar Index was far higher in 1999, the dollar’s value against gold has plummeted by 86%! (From 1/252^nd to 1/1,740^th of an ounce of gold.)

Ritholtz and others making this basic mistake are using a figurative yardstick to measure weight. Again, it’s not that they aren’t smart. They’re just ignorant and misguided.

Let’s pity them…and try not to make the same mistake ourselves.

All the best,

Brien Lundin
Editor, Gold Newsletter
CEO, the New Orleans Investment Conference