Debt and the monetary system; I invest in a gold mining stock

What follows is a modified version of (a part of) a personal email which I sent recently to a friend who had asked about my views on the current economic situation. He is a fan of Andrew Yang. I am not…

I listened (on YouTube) to an interview with Andrew Yang. He is right about jobs and automation but I find him to be very naive on economics. He doesn’t seem to understand money and debt. He talks about America as the richest nation in the history of the world when the country is actually in dire economic straits. The real economy has been hollowed out and ultimately the status and purchasing power of the dollar is at risk.

I agree with Yang that there will not be anywhere near enough jobs in the future. This will inevitably lead to trouble. I don’t pretend to have a solution, but to get to a solution we need to understand economic realities at a deep and basic level.

My friend asked: “[W]hat about other currencies? Are they all fiat, rather than backed by something?”

They are all fiat. Most float; some are pegged to the dollar.

There are a whole bunch of other names I could mention but George Gammon (accessible on YouTube and Twitter) has a good grip on the way the monetary system works. At least he is interested in understanding what is going on and uses evidence and reason and communicates well. It’s not rocket science, but most people can’t be bothered.

On recent monetary history, my understanding is that the petrodollar replaced the gold-backed dollar in the early 1970s. It involved an understanding with the Saudis. Before Nixon was forced to abandon the gold-backed dollar (because France and other countries wanted gold for their dollars and the US had nowhere near enough gold to pay them with), the USD was pegged to gold at $35 an ounce and all other currencies were pegged to the dollar. This was the Bretton Woods system. Since Bretton Woods fell apart you have had the current debt-fuelled system which has now gone completely crazy and exponential.

Gold is now about $1900 an ounce. It’s not so much that gold has gone up in value. It is that the dollar and other currencies have lost value (i.e. purchasing power). Technological advances (especially robotics and AI), debt defaults and current demographics (aging population) are all disinflationary but debt-ridden governments can’t allow deflation because it increases their (and every other debtor’s) debt burden. They have to print more money and create inflation in order just to keep things going. You can see where this is headed.

I have started buying shares in a smallish gold miner (ASX: SBM). I try to base my decisions on research and reason. But there seems nothing wrong with letting sentiment come into it a little. After all, everything is uncertain and there is so much data out there it can be overwhelming. Sometimes sentiment can help push you to act, to take the plunge. After all, nowhere is safe. Staying in cash long term is certainly unwise.

So this is the personal and quite irrelevant detail that helped to get me moving: my father was born at Gwalia, a small Australian gold mining town in a very inhospitable region. Mining eventually became unprofitable and the town was abandoned. However, the Sons of Gwalia mine around which the town had been built – and with which a young Herbert Hoover (future American President) had been directly involved – was reopened and extended and currently represents St Barbara Limited’s chief Australian operation.

The basic numbers for the company look okay to me, though I don’t pretend to have a grasp of the details. Their other two operating mines (both gold mines) are in Nova Scotia and Simberi (an island in the Western Pacific). Currently I am down a few thousand dollars on my investment but am quite optimistic for the medium and longer term. If there are declines in the share price and the fundamentals stay the same, I will be buying more over the next year or so.