Lessons from Ancient Rome

Montreal, Canada

The global exchange rate system as we know is a pathetic mechanism that relies on an outdated monetary regime that must be replaced. The U.S. dollar is no longer a reliable anchor and other majors, like the EUR, the pound and the yen, are the equivalent of a “bunch of drunks” sharing the same drink as the United States. The system is no good.

Every year, a host of currencies — both developed and emerging economies alike — are devalued or revalued. Currency volatility is out of control.

This, more than any other underlying variable, explains why gold prices are in a bull market since 2000. Yet, amazingly, many sophisticated investors haven’t been convinced, despite a fourfold increase in the price of the yellow metal since 1999. Even the amazing Warren Buffett doesn’t like gold. He’s not alone. Many shrewd investors don’t own gold.

To not understand gold and its relationship to money, inflation and money-supply expansion is not to understand how your long-term purchasing power is in decline. It doesn’t matter if it’s the dollar, the EUR, yen, Brazilian real — whatever. Paper money is buying less and less.

Gold as the Alternative Currency

Unless the world’s largest trading partners come to some sort of understanding on trade issues, fiscal balances and exchange rate differentials, the endgame will be almost devastating. Gold sniffs trouble. Smart investors view gold as an alternative currency outside of the confines of the debt-plagued financial system and no one else’s liability.

Currency devaluations are nothing new. The Romans were infamous for devaluing their coins as the empire grew financially stretched and the cost of never-ending wars devoured its treasury. And ever since the demise of the Roman Empire around 400 A.D., other great nations that followed Ancient Rome have gone down the same path of fiscal ruin.

The United States is now on the same path. I would be very surprised if Congress deals with these monster-sized deficits in the absence of a fresh financial crisis, which would force the government to deal with massive spending cuts and, perhaps, introduce a deficit consumption tax. And that’s how I think this will play out eventually. The United States won’t deal with deficits until the markets force the issue. And force it they will.

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