High Risks of Fiat Currencies Prompt Investors Towards Precious Metals

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Written By Keziah Monique Gayo

In the ever-evolving landscape of global finance, the inherent risks associated with holding fiat currencies have become increasingly apparent.

These risks, underscored by potential devaluation and instability, have prompted investors and central banks alike to seek refuge in the more stable and reliable stores of value provided by precious metals such as gold and silver.

The Devaluation Dilemma of Fiat Currencies

The recent uptick in the value of gold and silver is not an isolated phenomenon but rather a response to the heightened currency risk that has come to the forefront, particularly with actions like the U.S.’s threats to seize Russian dollar assets.

This situation exemplifies the broader challenges undermining fiat currencies, including the U.S. dollar, which are plagued by governments and central banks’ tendencies to excessively print money.

Credit: DepositPhotos

This practice, often politically motivated, leads to inflation, economic distortions, and an alarming accumulation of debt.

Unlike their fiat counterparts, gold and silver do not suffer from the lack of physical backing, which allows for unchecked monetary expansion to fund government expenditures.

This discrepancy was starkly highlighted during the COVID-19 pandemic, where the printing of massive amounts of money exemplified the cyclical nature of debt and devaluation, significantly undermining currency stability.

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The Fiscal Irresponsibility Effect

The ease with which fiat money can be created has led to unsustainable levels of government spending, particularly in times of crisis.

This spending habit results in a ratchet effect, where expenditures continuously escalate, never returning to pre-crisis levels.

The United States serves as a prime example of this phenomenon, where government spending significantly exceeds revenue, contributing to a national debt that surpasses $34 trillion, with the global figure reaching an astounding $82 trillion.

Precious Metals as a Financial Safe Haven

In light of these concerns, BMO Capital Markets projects higher prices for precious metals, positioning them as a hedge against the escalating instability of fiat currencies.

This perspective gains further validation from the substantial gold purchases by central banks worldwide. These institutions are increasingly diversifying their reserves to mitigate risks associated with fiat currency devaluation and economic crises, emphasizing the enduring appeal of gold as a dependable wealth repository.

The Ripple Effects of US Dollar Inflation on Dollarized Economies

Dollarized economies, which either use the US dollar as their official currency or are heavily dependent on it, face unique challenges in the wake of US dollar inflation. This situation can lead to increased import costs, inflationary pressures, economic instability, and heightened exchange rate risks.

Such economies have limited tools at their disposal to counteract these effects, often necessitating policy interventions to cushion their financial systems against the adverse impacts of US dollar fluctuations.

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Gold’s Bright Outlook

Gold presents a bullish narrative, underscored by its strong upward trend and position above key indicators such as the 9-day Simple Moving Average (SMA).

Credit: DepositPhotos

This trend suggests a continued bullish momentum, offering traders opportunities to capitalize on corrections and establish long positions.

With key dates and price levels identified, traders can strategize to maximize their returns, leveraging gold’s enduring value in a landscape marked by fiat currency uncertainties.

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