Welcome to our Friday mailbag edition!
Every week, we receive great questions from your fellow readers. And every Friday, I answer as many as I can.
This week, the conversation turns to topics I’ve written a lot about in these pages – China, gold, and Bitcoin…
I have noticed a trend of several countries attempting to reduce their reliance on the dollar by trading in other currencies. And China has been accumulating huge amounts of gold for some time now. Is it possible that China could launch a gold-backed currency, considering that we are already in an undeclared financial war with China?
I would think that this would cause multiple countries to abandon the U.S. dollar for a gold-backed Yuan. In order to respond to this, America would have to raise the interest rates on Treasury bills to at least 12–15% to continue attracting investment to service the $34 trillion national debt.
I think a gold-backed Yuan would be the perfect counterpunch to send America backpedaling for decades. I hope this does not happen as a United States citizen, but how would we prepare financially for something like this?
– Todd L.
Hi, Todd. Thanks for your questions!
You make an interesting observation about the Chinese yuan and gold… specifically that China might issue gold-backed yuan.
Now, let me preface this by saying there is no crystal ball to tell us how any of this will ultimately play out. Anyone who says otherwise is misinformed or, frankly, lying to you.
The key word here is that China “might” issue a gold-backed yuan. And even that is stretching it a little.
Some people are even under the impression that the Chinese yuan is already gold-backed. So, let me clarify that first.
No, China has not issued a gold-backed yuan. In China, you can convert yuan into physical gold if you trade crude oil futures.
The backstory is that China launched its crude futures contract on the Shanghai International Energy Exchange in March 2018.
This enabled any oil producer in the world to sell its oil for the Chinese currency, giving birth to the petroyuan. But most producers didn’t want to accumulate a large yuan reserve. China knew this.
That’s why it linked the crude futures contract with the ability to convert yuan into physical gold.
That’s without touching China’s official reserves, mind you… but through gold exchanges in Shanghai (the world’s largest physical gold market) and Hong Kong.
But that doesn’t mean the yuan is backed by gold.
Now, China’s yuan is often cited as the closest contender to the U.S. dollar’s long-lasting reign as the world’s primary currency. And, yes, one argument for this is the possibility of China eventually backing the yuan with gold.
But I think this theory misses an important point.
For any country to back its currency with gold, it must have sufficient gold reserves to provide ironclad backing. And with China’s gold reserves at 4.3% of central bank holdings, it simply doesn’t have enough gold.
And keep in mind that for a currency to become popular, gold-backing alone isn’t enough… it also has to be safe, have a stable value and market depth, and have the ability to move without restrictions.
Unfortunately for China, its capital controls complicate the international use of the yuan. And as long as the Chinese Communist Party is in power, there will always be questions of trust and transparency.
Now, none of this is to say that China won’t try to push more yuan out into the global economy. This is already happening. It won’t stop. And it will put a dent in U.S. dollar dominance.
However, given the general makeup of trade and reserve currencies around the world, it will still take decades, if ever, for the yuan to take over that post from the U.S. dollar.
But if you’re still concerned, I suggest that you look into putting some of your hard-earned cash into gold. Remember, gold is the ultimate form of wealth insurance. It has preserved wealth through every kind of crisis imaginable.
The best way to buy gold is with a combination of physical gold and gold stocks. You can buy physical gold online through accredited places like the U.S. Mint. I wrote a piece detailing the best places and practices to buy physical gold (catch up here).
You can also buy a gold exchange-traded fund (ETF) that is backed by physical gold. Gold ETFs offer the advantage of holding gold without the hassle of storing, securing, or transporting it. (I covered this in more detail in one of our previous mailbag issues.)
Bitcoin’s acceptance breakthrough, supported by its growth restrictions, will drive up its price while AI looks at exponentially fast-growing power – an increasingly promising target for experts and geopolitics!
How long can its “secure” crypto software withstand such power? Is someone working right now on making it crack-proof before it’s too late? Or do we have to resign to the fact: “Mankind is the unsuccessful attempt of nature to create an intelligent species, which does not ultimately seek to annihilate itself the further advanced it gets”?
– Gary H.
Thanks for your thoughts and questions, Gary.
You’re tapping into a pretty hot topic here. The thing about Bitcoin is, it’s kind of like the internet in the early days… A lot of people are watching to see where it goes.
But, yes, I expect Bitcoin’s journey to be an exhilarating climb upwards, and its scarcity – only 21 million can ever exist – is one of the reasons people will continue to bet on its price going up.
In fact, I believe that Bitcoin will double from current prices – pushing it toward $100,000 as early as this year. I laid out the reasons for this in one of my prediction pieces (read it here if you missed it).
On the security front, the worry you’re alluding to involves quantum computing. In theory, quantum computing could potentially break the cryptographic backbone of many digital currencies.
Quantum computers could be powerful enough to solve the complex mathematical problems that currently keep cryptocurrencies secure much faster than today’s computers.
That said, the technology is still in its infancy. In other words, today’s quantum computers are not capable of hacking Bitcoin or other cryptocurrencies. It is estimated that a large-scale, practical quantum computer capable of breaking Bitcoin’s encryption is still decades away.
It’s also worth noting that the broader Bitcoin community is well aware of these potential future threats. The crypto industry in general, and Bitcoin in particular, has shown resilience in the face of various challenges, and it is likely to adapt to the new realities of quantum computing.
Thanks to the decentralized and open-source nature of Bitcoin, the technology can evolve as new threats emerge.
So, if and when a quantum threat becomes imminent, it is likely that the Bitcoin protocol will be updated to include quantum-resistant algorithms. (The Bitcoin protocol is the set of rules that Bitcoin runs on.)
As for your point about humanity’s knack for self-sabotage…
It’s true we’ve got a history of two steps forward, one step back. But we’re also pretty good at pulling rabbits out of hats when we need to.
So, maybe instead of the gloomier outlook, we could say we’re the species that doesn’t give up, always finds a way forward, and keeps pushing the envelope – hopefully, without pushing it off the table.
Bottom line: If you’re thinking about your wallet with all this, you never want to dive in headfirst with Bitcoin or anything else.
Instead, consider investing a small amount of money on a regular basis. That could be as little as $15 every two weeks. That way, you can “dollar-cost average.”
Block’s Cash App and PayPal offer a convenient way to do this. With these popular apps, you can start your Bitcoin portfolio with as little as $1.
But, again, remember that Bitcoin is a speculative asset. A small investment can go a long way. So, never invest more than you can afford to lose.
For more on how Bitcoin can help you preserve and even grow your wealth as trouble spreads through the financial system, watch this free presentation I put together.
And that’s all for this week’s mailbag. Thanks to everyone who wrote in!
If I didn’t get to your question this week, look out for my response in a future Friday mailbag edition.
I do my best to respond to as many of your questions and comments as I can. Just remember, I can’t give personal investment advice.
And if there are any other topics you’d like me to write about, I’d love to hear from you. You can write me at [email protected].
In the meantime, happy investing… and have a fantastic weekend!
Editor, Inside Wall Street with Nomi Prins