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.

Up first this week, readers Ron R. and Aaron K. have questions about the future of money – including precious metals, the dollar, and cryptocurrencies…

With all this talk about inflation and the attraction to cyber currencies, what is the prospectus for gold, and especially silver?

Silver has been beaten into the ground for years and nothing seems to change that, not even the present panic about inflation. Has it lost any significant value indefinitely?

Cybercoin is an “imaginary form of value” that is intangible and only worth what people think it is worth. There is no “common value” among the various cybercurrencies.

So how will that replace the U.S. dollar for millions of Americans? Cybercurrencies are nothing more than a number inside a bunch of computers linked together. Will everyone turn in their paper money for cybercurrencies? Hard to fathom.

This idea that the young people are drawn to it because it is so safe, away from being scrutinized by the government while the government is creating their own cybercurrency. Talk about two opposite extremes. So will there be room for both, or which one will be gone with the wind?

– Ron R.

A dollar is still statutorily defined as about 1.1 ounces of silver, very much the same way a dollar was defined in the Coinage Act of 1792.

What we generally carry on our person are Federal Reserve notes that are stamped with a nominal value in dollars. Nonetheless, they are not dollars. This point is extremely important and never discussed.

What is truly needed is the actual use of gold and silver coins that the U.S. still mints. The issue is the capital gains tax involved in exchanging the coins for the market value versus the absurd nominal value stamped on them.

Get the power of the states involved with legal claims to eliminate those taxes (reference McCulloch v. Maryland for relevant case law) and watch the market set the actual price of those coins as they begin to circulate.

You won’t need a government measuring stick of CPI, or any other measurement, to see the rate that Federal Reserve notes are being expanded. It’ll be readily evident in the price of those gold and silver coins in the marketplace.

Politicians and their enablers at the Federal Reserve system will have no reasonable excuse as to why consumer prices are rising.

It will be readily apparent that their creation of trillions of Federal Reserve notes, which are certainly not (cannot be) dollars, is the cause for the exploding prices of consumer goods.

– Aaron K.

Hi Aaron and Ron. Thank you very much for your comments and questions about precious metals, the path of cybercurrencies, and wealth preservation during these distorted times.

This gets to the heart of our September 9 mailbag edition, where I looked at what gives the U.S. dollar its value. 

I’ve been an advocate of silver for years. Silver has possessed that long-standing relationship to the dollar stemming from the Coinage Act of 1792.

That said, though Federal Reserve notes, or dollar bills, aren’t backed by silver or gold anymore, I believe they should be.

Beyond that, though, silver also has use value. And I believe that’s more important in terms of its longevity than where inflation is right now.

For instance, we need silver to build solar panels, and increasingly wind turbines, in the transition to New Energy. Silver is also used to build electric vehicles (EVs) due to its clean conductivity properties.

Now, as you mention, silver has been beaten down recently. But for those reasons, it still has a solid upside path.

In fact, every year, I purchase silver coins for my niece and nephews on their birthdays. It’s a way to establish a small investment of their own, and for which they can watch price activity as they get older.

With respect to gold, right now, gold has been underperforming the dollar.

That’s because the dollar has had the benefit of being the strongest currency on the global block due to its prevalence as a reserve currency and as a trade currency.

The dollar also benefited from being a “safe-haven” currency in the wake of the pandemic.

The Fed’s current rate hiking policy will continue to ensure that the dollar retains that comparable strength relative to other currencies. And therefore relative to gold in the near term as a result.

That said, right now is an excellent moment to purchase gold.

That’s because ultimately, as I’ve written, the Fed will have to pivot back on its aggressive rate hikes. First, it will pivot to reducing the pace and size of its rate hikes, then to neutrality, and then to cutting rates.

I believe that these three stages will all unfold by sometime in 2024, with the first stage potentially happening as early as this year.

I still believe the dollar will remain strong. But it may recede in value relative to other currencies – and especially to gold – once that happens.

That’s why I believe it is an important time to buy gold.

As for cryptocurrencies, I’ve written before that Bitcoin especially has a path to being used on a wider scale. That’s despite the volatility we’ve seen during this past year. It’s just not there yet.

As a result, I also believe that the millennials are right in wanting to support Bitcoin as an alternative to the fiat system. And in small measure, Bitcoin has positive investment potential, alongside gold and silver.

Next, reader Roger F. wonders why gold is struggling this year, even though inflation is running hot…

I frequently hear gold is about to go up. My question is, with inflation as high as it is, why isn’t gold much higher? I believe there has been a significant disconnect between the dollar and gold.

– Roger F.

Thanks for writing in, Roger. It’s an important question.

As we all know, inflation has taken off in the last 12 months. At 7.7%, we’re living with a level of price inflation we haven’t seen in decades.

Meanwhile, gold is down about 6% since November 2021. So, why hasn’t gold followed suit?

Well, for one, gold is facing headwinds from the U.S. dollar. As you may have noticed, the dollar has remained firm this year, relative to other currencies.

And, more importantly, gold’s growth has been hindered by the Fed’s six interest rate hikes so far this year.

You see, rising interest rates are considered a bearish sign for gold and gold stocks. That’s because, as legendary investor Warren Buffett once said, “gold doesn’t pay any interest.”

So as interest rates rise, folks often choose to invest in interest-bearing accounts instead of buying gold.

That said, let’s compare gold’s performance with the performance of the major stock market indexes.

The S&P 500 is down 15% since November 2021. And the Nasdaq has fallen nearly 30%.

So in comparison, gold has held up pretty well amid the market turbulence of the last year. And I think we may well see it go much higher in the coming years.

Historically, gold thrives in an environment of financial uncertainty or inflation. Despite the Fed’s recent efforts, I don’t see either one letting up soon.

Am I absolutely certain this will happen? No. But gold’s average annual rate of return since 1971 is about 10%. So if history is anything to go by, mathematically, it could hit $3,000 within five or six years.

Or it could go much higher. For instance, while gold fell in the initial shock of the 2008 financial crisis, the financial chaos that ensued triggered a massive rise in gold prices.

Between September 2008 and October 2011, gold soared about 170% to $1,900 per ounce. Meanwhile, the S&P 500 returned a meager 6.9% in the same period.

All that said, physical gold isn’t a crypto-like speculation that could soar hundreds or thousands of percent overnight. And it never will be.

But, if history is anything to go by… wherever gold goes next in the short term, it will continue to be a safe store of value over the long term.

And finally, reader Paul B. follows up on a question I answered in last week’s mailbag edition

One of your readers raised a good question: do we have any information comparing the interest income of the Fed and the interest expense of the Treasury? Is it a wash or could it become a wash under the scenario where the Fed is the only one buying government securities?

Will we see the day when all government securities are held by the Fed (except for those securities that banks are obliged to maintain on their balance sheets for reserve purposes)? Thank you for your thoughts on the matter.

– Paul B.

Hi Paul. Thank you for your question, and also for pointing out the question from one of your fellow readers.

I don’t think we’ll get to the point of the Fed owning all U.S. Treasurys or government securities on their books.

The U.S. national debt is at $31 trillion and rising. And nearly $24 trillion of that is marketable Treasury securities. So I just can’t fathom the Fed owning all of that.

Globally, the nation with the highest percentage of owned government bonds is Japan. The Bank of Japan owns around 50% of all government bonds there.

But that’s mostly because Japan has been in the QE business for several more decades. And during all that time, the Bank of Japan’s book has been rising fairly steadily alongside the issuance of government bonds.

But here in the U.S., the Fed has been very hesitant about letting bonds roll off its books. To me, that’s a sign that a Fed pivot will happen sooner rather than later. 

As I’ve said before, and I mentioned briefly above, I believe the Fed’s full pivot will occur in three stages.

Stage 1 will be a reduction in the size of rate hikes. I think we could see this as early as December.

In Stage 2, the Fed will move to neutrality. That means it will pause its rate hikes. I see this happening by next summer.

By Stage 3, there will be negative economic ramifications building up, due to the higher cost of debt for the average citizen (for mortgages, auto, personal, and small business loans).

At that point, the Fed will begin cutting rates. I expect Stage 3 to happen by 2024. But the Fed may possibly expand its QE activities before that.

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].

Happy investing… and have a fantastic weekend!



Nomi Prins
Editor, Inside Wall Street with Nomi Prins