Voima Weekly #31 – Why Gold Has No Price Ceiling in a Fiat Monetary System

With this button, new money is pumped into the markets. Photo: Arttu Timonen / Yle

In 1971, the global monetary system underwent a historic shift.

The United States suspended the dollar’s convertibility into gold, effectively ending the system in which the international monetary order rested on a physical anchor. From then on, money was no longer redeemable for gold at a fixed price; its value would depend primarily on trust and economic policy.

This system is known as fiat currency¹.

The word fiat simply means “let it be done.” Money has value because the state declares it so, and because the economy is legally required to accept it as a means of payment. The fiat monetary system has given central banks greater flexibility and has enabled a more debt-driven economic structure.

However, it is difficult to argue that fiat money itself was the primary driver of modern economic growth. Much of the foundation for that growth had already been laid earlier through industrialization, energy development, and technological progress. Yet the system has one unavoidable feature: money can be created. In a fiat system, most money is created through debt. When debt expands, the money supply expands with it.

A few decades ago, the single-income household was a common model in many Western countries. In the United States, for example, around 60% of families in the 1960s lived on the income of a single earner². From the 1970s onward, this began to change rapidly. Dual-income households gradually became the norm, and today fewer than one third of American families rely on a single breadwinner.

Many explanations have been offered for this shift, rising housing costs, urbanization, and the increasing cost of education among them. At the same time, however, another, less discussed change was taking place: the economy was becoming increasingly debt-driven and the growth of the money supply accelerated: particularly after the 1970s, when the monetary system detached from its remaining commodity anchors.

When money is created in the system through debt, it does not spread evenly throughout the economy. It tends to flow first through the financial system into assets such as housing, land and equities, and only later into broader consumer prices³.

As a result, a pattern often emerges in which asset prices rise faster than wages over the long term.

When money and debt are continuously created, another familiar effect appears from the perspective of savers: the purchasing power of money gradually declines over time. Inflation does not always feel like a tax, but it often functions like one—it reduces the real burden of debt while eroding the purchasing power of savings.

This development cannot be attributed to a single policy decision or a single institution. Still, it is difficult to ignore the timing: as the world moved fully into a fiat monetary system in the 1970s, the global economy increasingly became structured around debt.

Many long-term charts and datasets illustrate these trends. One well-known collection can be found here⁴. The site brings together dozens of charts showing how many economic indicators—debt levels, money supply, asset prices and wage dynamics - began to change around the same time the monetary system detached from its remaining commodity anchors.

When looking at the past few decades, one trend becomes very clear: the global money supply has grown much faster than the supply of gold.

The physical supply of gold has historically increased by roughly 1–2 percent per year. This is because gold must be discovered, mined and refined; a process that is slow and capital-intensive. Money, by contrast, is relatively easy to create. As a result, the global money supply has often grown at an estimated rate of around 5–8 percent per year⁵.

The difference between the two is crucial. If money is created faster than physical reserves grow, the measuring stick itself begins to move. This dynamic becomes visible in the long-term price of gold.

It is often said that gold rises. In reality, something else is often happening: currencies are weakening relative to gold. That alone, however, does not fully explain recent developments. In recent years, demand for gold has also increased for another reason.

Gold is one of the few global assets that carries no counterparty risk. It is not a bank’s liability. It is not a government bond. It is not someone else’s promise to pay. It is a physical asset.

This characteristic has always been one of gold’s strengths, but the geopolitical environment has made it even more relevant in recent years.

Central banks have been steadily increasing their gold reserves. The reasoning is straightforward: diversification of reserves. When parts of the global financial system fall within the sphere of political influence, a neutral reserve asset gains value.

For this reason, the rise in the price of gold is not driven solely by investor speculation. It also reflects structural demand.

In a fiat system, gold has no natural price ceiling. If this is difficult to grasp, a simple comparison helps illustrate the point: one kilogram of gold costs roughly 25 million Japanese yen, over one billion Guinean francs, and more than 200 billion Iranian rials. If your goal is to become a millionaire, choosing the right currency certainly helps. This does not mean that gold is inherently “expensive” or “cheap.” It simply means that the measuring stick itself is moving.

That is why the rise in gold should not be seen merely as a market phenomenon. It reflects something deeper about the structure of the monetary system—and why demand for a physical, counterparty-risk-free reserve asset continues to grow.

If the current debt-driven monetary system continues without meaningful reform, the long-term direction of gold is not difficult to see: upward.

For those living in the euro area in particular, it is worth paying close attention to European fiscal and monetary policy when thinking about protecting one’s wealth.

In a fiat system, gold has no ceiling - currencies simply lose purchasing power.

–Marko Viinikka
Founder, CEO
Voima Gold Oy

Disclaimer: Voima Weeklies are the personal writings of the undersigned. They do not necessarily represent the official view of Voima Gold Oy or any other company, nor do they constitute investment advice or a recommendation to purchase securities.