For the majority of U.S. history, we have stood behind a currency backed by gold. That all changed on August 15th, 1971 when President Richard Nixon discontinued the gold standard in order to deal with a number of issues ailing the U.S. at the time. But since we have come off of the gold standard many would argue that our fiat currency is one of the primary reasons why our economy is currently suffering. Recent years have seen the Fed print money at will and pump back into the economy in an attempt to kickstart the recovery, an action that is simply not possible with the gold standard [see also Warning: Ignore Bill Gross’ Hard Money Prediction At Your Own Risk].
But as the days wear on, it seems that more and more experts and analysts are hopping on the gold standard train, as it seems like our troubles are only mounting with the fiat dollar and our absurdly unattainable debt levels. One such person is Stephanie Pompoy, an economist and founder of the MacroMavens research boutique. Pompoy successfully called the U.S. housing bubble and its subsequent burst back in 2006 and sometime after, she laid out the consequences of that burst. Now, she is predicting that our current financial disaster will lead us to the end of fiat currency, as the economy will not be able to endure the current system.
What Does it Mean For Commodities
Pompoy feels that there are a number of assets that one can use to protect themselves from the inevitable negative reaction to such a switch, and many of these options are commodities investments. First and foremost, Pompoy recommends gold. Obviously if the dollar is backed by gold, the precious metal becomes that much more coveted and has more use than just as a store of value. The flight to gold in this scenario would likely be dramatic, so it would not be surprising to watch the commodity make a similar run as it did in 2011 when it touched its historical high [see also How to Play Schiff’s $5,000 Gold Prediction].
Pompoy also comments that “oil would be an absolute-return asset: Central banks are amassing strategic resources like oil. Companies tied to mining and commodity production are absolute-return areas”. Though her prediction is bold, it may not be as far-fetched as some investors think. The economy is currently in the toilet and we certainly aren’t getting any help from Europe or the economic slowdowns in the world’s biggest emerging markets. With our financial situation looking worse and worse as the days go on, we may very well be nearing the end of fiat.
Ways to Play
For those of you who buy in to Pompoy’s theory on the U.S. reverting to the gold standard or some sort of asset-backed currency, we outline several investing options to cash in on the trend [for more commodity news subscribe to our free newsletter].
- SPDR Gold Trust (GLD): This ETF tracks physical gold bullion and is one of the largest funds in the world. GLD will make an excellent play for those looking to hop in to gold prior to any sort of switch from the current currency system. Also note that the fund is extremely active and has a healthy options market for those looking to make a short term trade.
- PetroChina (PTR): Though most oil producers are already multinational firms, PetroChina provides a great global play on Pompoy’s oil strategy. She also noted that she feels playing for emerging market consumers is a strong way to combat the negative reaction to any policy changes regarding the dollar, making PTR a great stock to look at. The firm has a market cap of over $200 billion and pays out a healthy dividend yield of 3.7%.
- BHP Billiton (BHP): BHP is one of the biggest miners and commodity producers in the world. According to 2011 revenues, BHP is the largest mining company on the globe with headquarters residing in Melbourne, Australia. The stock boasts a market cap of over $150 billion while paying out a handsome yield of 3.4%.