PART ONE
Financial assets and real assets - excessive debt, monetary expansion, inflation and currency debasement.
All the rest1. J P Morgan’s Distinction Between Money And Credit
2. What Morgan Was Really Saying
3. Gold As Settlement, Fiat As Accounting
4. Why This Matters Today.
PART TWO
What to expect next in the Commodity Capital Rotation?
1. J P Morgan’s Distinction Between Money And Credit
As J P Morgan observed in 1928: “Gold is money; everything else is credit.”
This wasn't so much a rhetorical flourish as a precise financial distinction.
By money, Morgan meant an asset with no counterparty risk. Gold exists independently of any issuer, promise, or legal framework. It is not someone else’s liability. Its value does not depend on trust in an institution. "Trust" In an institution means you trust that institution to take care of your interests by maintaining the purchasing power of its currency. With gold, there is no institution to trust, there is no counterparty risk, we rely on 5,000 or more years of history where gold has kept its purchasing, which in turn gives us confidence that gold will continue to maintain its purchasing power (though it is rather front-running inflation these days).
The oft-cited example of how gold keeps its purchasing power is that of a suit or toga, bought by a senator in the days of Ancient Romeat a cost of one troy ounce of gold, and today a suit for a senator sitting in Congress will still cost one troy ounce of gold.
By contrast, credit is a claim on the future as it relies on the ability and willingness of a borrower to honour a promise in the future.
2. What Morgan Was Really Saying
So under a gold-backed system, money is anchored in physical reality and confidence in this anchoring comes from human history. Mining does add a small annual amount to world gold reserves, although gold is a scarce, durable, and costly-to-produce commodity - it is the top precious metal, for its monetary value alone. Silver comes next, part monetary, part industrial use.
Precious Metals
Fiat currencies, by contrast, are credit instruments. They are issued by governments and backed not by a commodity, but by:
• The taxing power of the state
• Confidence in political stability
• Confidence in future fiscal and monetary policy discipline.
They function well so long as trust remains intact, but when that trust weakens, credit instruments are re-priced and gold takes the rains as most widely accepted store of value.
3. Gold As Settlement, Fiat As Accounting
Gold historically settles balances. It ends the transaction, aswhere fiat money exists to record balances. Transactions may be settled in paper money, but these are only promises which only defer settlement into the future.
Note that at one time final settlement could be made by taking your paper money to the bank and demanding its value in gold. However Richard Nixon prevented this final step when he broke the link to gold in 1971. Thereafter the paper currency was backed only by confidence in the American monetary system itself. The government has been abusing this trust ever since by printing more money in percentage terms than the economy could grow.... ie expanding the money supply faster than the system was creating value, thus devaluing each dollar in purchasing power terms.
That's the essence of the argument.
To rephrase, this is a distinction between financial assets and real assets, involving excessive debt, monetary expansion, inflation and currency debasement:
Financial assets - promises to pay
Real assets - useful in the real world, real assets become critical during periods of fiscal stress when government receipts are less than its expenses
Excessive debt - excessive because borrowing is to repay previous debt and interest due... reasonable borrowing is for the purposes of investment
Credit expansion - credit creation by banks exceeds the economy’s real productive capacity, pushing up asset prices and debt service costs through inflation, while at the same time raising the cost of living for those without assets, aka "the K-shaped economy".
In such environments, credit proliferates faster than real output, and claims multiply faster than underlying value.
But gold is final settlement and it now sits outside that process, so there is nothing restraining the ability to print other than confidence in the government not to do this. Well that confidence is wearing thin today.
4. Why This Matters Today
In a world of expanding sovereign debt, persistent twin deficits of trade and fiscal, and resultant policy-driven money creation, Morgan’s observation is very relevant.
"Gold is money all the rest is credit" ie just promises to pay.
Financial assets like a one dollar note or government treasuries or options and derivatives on expected future values, all these are are layered claims on expected real-world future cash flows.
Fiat money is anchored in the immediate and therefore a senior claim within that system. Treasuries come next. Corporate bonds are in there somewhere lower down. And so we have a system of credit ratings - ultimately about purchasing power of your money holding its own, or worse the likelihood of you're getting all your money back - managed by the credit rating and indexing agencies like Standard and Poor's or Fitch.
Gold is not a claim at all, it is for real, with no counter party.
That is why, in periods of currency debasement and declining confidence in institutions, gold tends to reassert itself as a store of value - not as a speculative asset, not for trading, but as monetary bedrock, for protection of purchasing power, as we go through the trauma of economic regime change. This has been the time to buy - from the chart of XAUUSD, Oct 22 was when the dollar peaked and it became clear that in spite of sticky inflation the fed was starting a rate cutting cycle; it signalled the start of financial repression when policies capping real returns on savings to manage debt burdens began to be expected; after bowling out billions for covid it was now apparent that the war with Russia would drain the Treasury further and further significant borrowing could be expected; Central Banks took to net buyers of gold, anticipating a move out of the dollar into gold as an upcoming secondary reserve currency.
So in sum, Inflation came to be seen as structural, debt levels wood move the line on government interest expense further up the budget and constrain policy, and by this time it was clear that currency debasement would be the only way out.
And finally by this time, sellers were exhausted and the buyers could now move in.
XAUUSD
So this article should give us an idea for the thinking behind long-term investment decisions on when to buy gold, when to hold gold and when to sell your gold. Sell for investment in other assets, time perhaps to move through the commodity rotation sequence... and such decisions depend on where we find ourselves, in which quadrant of Ray Dalio's economic cycle.
PART TWO
What to expect next in the Commodity Capital Rotation?
Has gold peaked at ~$4,500? A Real Asset Repricing Sequence has maybe begun, it can be observed as capital rotates along the monetary-to-industrial-metals line.
Anyone looking for answers based on price action could use technical analysis - try the FinancialWisdom YouTube channel.
A Real Asset Repricing Sequence or - another name - the Commodity Capital Rotation describes the typical sequence by which capital exits financial assets and moves into physical, as confidence in fiat money weakens.
This begins with gold as the primary monetary hedge; then broadens into silver as a hybrid monetary-industrial asset, as we can see in the next chart; and finally will rotate into industrial metals and energy, as inflation shifts from monetary debasement into real-world scarcity and supply constraint.
XAGUSD
Gold moves first because it prices monetary risk, then silver follows as liquidity expands and speculative participation increases (you could see this happening as the gold-silver ratio fell from, from memory, about 90 to roughly 20 today), and then on from precious to base (industrial) metals and commodities in general last, as capital begins to price physical shortages, underinvestment, and rising input costs, rather than financial repression alone.
Glossary
Monetary debasement - erosion of purchasing power through sustained monetary expansion.
Real assets - physical assets whose value is tied to scarcity and production, not "promises to pay" or claims on future cash flows.
Capital rotation - the systematic reallocation of investment flows across asset classes as regimes change.
Regime - a prevailing economic and policy environment that shapes how markets behave, persistently and applies across all asset classes. For example, Ray Dalio creates four regimes using two dimensions : one is growth the other is inflation - this gives four quadrants, A B C and D.
Try Jeremy Grantham, GMO, on Resource scarcity and late-cycle inflation at https://www.gmo.com.
General Glossary and References
Counterparty Risk - The risk that the issuer of an asset fails to honour its obligation.
Fiat Currency - Government-issued money not backed by a physical commodity.
Final Settlement - Payment that extinguishes obligation with no future claim.
Currency Debasement - Erosion of purchasing power through monetary expansion.
Triffin’s Dilemma - the structural conflict faced by a country issuing the world’s reserve currency: it must supply global liquidity by running trade and capital deficits, but doing so gradually undermines confidence in the currency’s long-term value.
Reserve-Currency Failure Cycles - historical pattern in which dominant global currencies rise through trade and financial trust, peak through overuse and debt accumulation, and ultimately lose their reserve status as confidence erodes and real assets reassert themselves.
Reserve Status - a currency’s role as the primary store of value and medium of exchange held in reserves (govt treasuries) for global trade, finance, and central-bank reserves, based on trust in the issuing state’s economic size, financial depth, political stability, and willingness to supply liquidity to the world
Dollar Milkshake Theory (Brent Johnson) - argues that global dollar-denominated debt and liquidity demand, pull capital into the US financial system, strengthening the dollar in the short term, but at the cost of intensifying global stress and accelerating the conditions for eventual monetary reset.
Triffin’s Dilemma - To keep the world economy liquid, the reserve-currency issuer must export its currency, but the more it does so, the less credible that currency becomes as a stable store of value.
Liquidity - the ease with which an asset or currency can be used, exchanged, or sold at scale without materially affecting its price, reflecting the depth, accessibility, and trust of the market in which it circulates.
Ray Dalio’s economic cycle - describes how economies move through repeating phases driven by the interaction of productivity growth, debt accumulation, and monetary policy; progressing from expansion, to credit excess, to deleveraging, and ultimately to reset.
In Dalio’s framework, short-term business cycles sit within longer-term debt cycles, where excessive borrowing eventually forces either austerity, default, inflationary money creation, or some combination of all three.
Value-Rotation Wave (Financial To Physical Assets) - This describes the tendency during periods of monetary expansion and inflation for capital to migrate away from financial assets into physical assets, beginning with precious metals and later spreading to industrial metals and other commodities.
This occurs because precious metals respond first to declining confidence in fiat money, while industrial metals and commodities reprice later as inflation moves from financial markets (demand weakens as it is realised that supply can be printed without especially in our digital world) into the real economy and production costs (ie demand refocuses on real assets whose supply is limited).
Precious Metals - Monetary metals valued primarily as stores of value (e.g. gold, silver).
Industrial Metals - Metals valued mainly for economic utility and production (e.g. copper, aluminium).
Monetary Expansion - Growth of money and credit beyond real economic output.
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