The Monetary Reset and the Dollar to Silver Ratio

Government currencies do not last forever. History shows that every dominant currency eventually fails.

For centuries, dominant world currencies have come and gone. On average, each currency has held a dominant position for around 100 years. If this pattern continues, we can expect to see a shift to a new reserve currency sometime in the coming decade.

Although the dollar is currently up relative to other global currencies, some cracks in dollar dominance are beginning to appear. Russia is moving to pressure Europe to pay for gas in rubles, and China is pushing for renminbi (RMB) denominated trade deals.

BRICS, an international organization seeking to compete with the World Bank, is potentially expanding its membership and working toward an alternate world currency. At the same time, cryptocurrencies like Bitcoin are gaining popularity with people who are sick of high inflation and looking to get rich quick.

In an earlier post, we also explored how the current policy of the Federal Reserve is going to further fuel de-dollarization. The end of the US dollar’s privileged status is a matter of when. not if.

This begs the question “What is going to happen when the dollar’s reign as world reserve currency ends?” Is the transition going to be fast and violent, or gradual and slow? And perhaps most importantly, how can we prepare?

Why is China hoarding gold?

When people ask what the post-dollar world will look like, one of the first places they turn to is China. China’s rapid economic growth and the world’s increasing dependence on Chinese exports put China in a position to challenge the dollar’s dominance.

There is a clear motive for China to try to overtake the US as the issuer of the world currency. China’s economy is based mainly on exports, and trade denominated in RMB carries less exchange rate risk for traders. Having fewer dollars would also mean that they are not at the mercy of reckless US monetary policy. Finally, world currency status would likely mean more investment in denominated in RMB and more credit for Chinese companies.

There is plenty of evidence that China is taking steps in this direction. Since around 2008, China starting lifting capital controls and allowing the export of RMB to Asian countries. In 2015, China launched the China International Payment System (CIPS) to compete with SWIFT. China moved to further internationalize its currency by establishing RMB clearing houses in 21 different countries.

China is the world’s largest gold producer after overtaking South Africa in 2007. Gold exports from China are prohibited, and at least half of the production is state-owned. Since 2000, approximately 6,830 tons of gold have been mined in China. In the same period, China imported 6,700 tons of gold. Adding this to the gold that was already in China, a number of experts estimate there may be over 30,000 tons of gold inside China by now.

For comparison, the US’s official gold reserves are around 8,133 tons.

After the Russian invasion of Ukraine, China accelerated its gold purchases. Some believe China intends to use all of this gold to issue a gold-backed currency and compete with the US dollar.

The Monetary Reset

The US dollar started out as a silver coin, and the first banknotes intended to be used as money were not introduced until the 1860s during a coin shortage caused by the American civil war. Soon after, the US began circulating silver certificates which were redeemable for silver dollars.

Convertibility to silver and gold, along with the ability to use them to pay taxes, is what convinced Americans to use paper dollars. This was effectively a credit line between the people and the government.

The US government has effectively decided to abuse its credit line by devaluing the dollar, more than doubling the money supply between 2012 and 2022. The money supply (M2) increased by approximately 117% during this period, but the value of goods and services increased by only 59%.

If growth in the money supply of a currency is faster than growth in the value of goods and services purchased with that currency, devaluation can be expected.  As dollar devaluation continues, so too does international demand for the dollar — the share of US dollars in foreign countries’ currency reserves recently reached a 25 year low.

Viewing the dollar as a credit line, what is going to happen when it finally gets cut off? In the past, the breakdown of credit has always meant a return to sound money.

The Dollar to Silver Ratio

When testifying before congress in 1913, J.P. Morgan once famously said:

“Gold is money. Everything else is credit.”

Silver, however, may be more deserving of this description than gold, for reasons that will be mentioned below. In any case, understanding that paper notes are actually a form of debt rather than real money can help to understand what will happen in a monetary reset.

Think of it this way: the US dollar started out as a kind of bank account. Bank notes were deposit slips for physical silver or gold. In other words, people loaned silver and gold to the government. When people buy gold and silver with dollars, they are moving currency out of their account with the government, and into real money.

So what will happen if confidence in the dollar continues to decline? That’s what China is very possibly preparing for, and it’s also what may make silver a better investment than gold.

The dollar-to-silver ratio describes the number of dollars in existence compared to all above-ground silver. In 1913, when the Federal Reserve system started, there was about $2.65 for every ounce of silver. That number now stands at $873 per ounce.

Adjusting for inflation, the purchasing power of $2.65 in 1913 would be about $79.45 today. A major movement of currency into silver would drive up the price far more now than it would have in 1913.

What this means is that the economy is getting more and more out of touch with reality. Any major crisis leading to default or a breakdown of confidence in governments’ fiat currency could lead to a “reality check” where currency flows into real assets like gold and silver.

Silver over Gold?

For comparison, let’s look at the dollar-to-gold ratio. There are approximately $6,432 dollars for every ounce of gold, while there were $28.85 ounces in 1913.

At the time of writing, the gold price was $1,649 per ounce. If all of the purchasing power of dollars were to flow into gold, an ounce of gold would be approximately 3.9 times more valuable than it currently is.

The current silver price is $19.26 per ounce. If all dollars were to flow into silver, silver would be approximately 45.3 times more valuable than it currently is.

If there is a major move toward real money in the future, silver may have a much higher potential for price growth than gold. This, along with many other factors (like price manipulation) lead many analysts to conclude that silver is massively undervalued.

It’s impossible to predict what the future will bring, but the dollar is clearly in decline. Even if China does seek to create a gold-backed currency, it’s likely to be in the context of a confrontation with the West which would probably come along with major sanctions which would limit the amount of currency flowing into it.

At the same time, if China or other countries seeks to build confidence by way of a gold-backed currency, it will further constrict the circulating supply of gold, driving up gold and silver prices even further.

This high-profit potential along with high stability makes silver a very low-risk, stable investment with exceptionally high growth potential in a crisis. With SilverToken, it’s possible to have all of the advantages of blockchain — including high speed, privacy, and security– along with silver’s excellent investment properties. Learn more today about how to participate in (and profit from) bringing money back to reality.