The Hierarchy of Money and the Case for $8,000 Gold
The Hierarchy of Money and the Case for $8,000 Gold
Expert analysis reveals why gold's superior position in the monetary hierarchy points to dramatic price increases ahead
Introduction
In the hierarchy of money, gold is superior to fiat money. From a historical perspective, the past decades have been characterized by trust in fiat money, whereby fiat made up the lion's share of global international reserves. The war between Russia and Ukraine (and by extension West and East), inflation, and systemic risks are reversing this trend.
A long-term gold valuation model, which assumes gold will account for the majority of international reserves, suggests the gold price to exceed $8,000 in the coming decade. This analysis examines the fundamental forces driving this monumental shift and what it means for investors looking to position themselves in gold ahead of this historic revaluation.
Table of Contents
Understanding the hierarchy of money framework
Reading Zoltan Pozsar's analyses led to exploring the work of his intellectual mentor Perry Mehrling, Professor of International Political Economy. According to Mehrling, there is a natural hierarchy of money, best visualized as a pyramid structure that reveals the true nature of monetary systems.
Top Tier: Ultimate Money
Gold sits at the pyramid's apex as the ultimate money—scarce, universally accepted, with no counterparty risk because it's no one's liability.
Second Tier: National Currencies
Below gold are national currencies issued by central banks, backed by government credibility and monetary policy.
Third Tier: Bank Deposits
Commercial bank deposits created through the fractional reserve lending system form the next layer.
Bottom Tier: Securities
Bonds, equity, and other financial instruments occupy the pyramid's base, representing the most leveraged forms of "money."
Mehrling's Key Insight
"In a boom, credit begins to look like money. Forms of credit become much more liquid, they become much more usable to make payments with. And in contraction, you find out that what you have is not money, it's credit actually. In a contraction, you find out that gold and currency are not the same thing. That gold is better."
The monetary pyramid: from gold to securities
Because everything underneath gold can be created out of thin air, the base of the pyramid can be easily widened. Throughout the business cycle, balance sheets (assets and liabilities) are extended—credit is created—causing an economic boom. During a recession, balance sheets contract and the pyramid's shape is remodeled.
Horizontal Dimension
The pyramid's horizontal aspect represents quantity and leverage. During boom periods, this base expands dramatically as credit creation accelerates and financial instruments multiply.
Vertical Dimension
The vertical aspect represents quality of money—the higher up the pyramid, the better the quality. Gold represents the highest quality, most reliable form of money.
Crisis Revelation
During contractions, the true hierarchy emerges. Investors discover that deposits and currency are not the same thing—that currency is better. Similarly, gold proves superior to currency.
Post-1971 Pyramid Distortion
What has happened in the past decades, after severing the gold standard in 1971, is a massive increase in supply of fiat money, credit, and securities. The pyramid is out of shape with a tiny tip and a fat debt belly. Global debt to GDP is near its all-time high established in 2020, creating unprecedented systemic risk.
Long-term gold valuation model and methodology
Policy makers won't allow debt to default—a contraction of credit—because the global financial system has grown too big and intertwined. One default too much could risk the stability of the entire arrangement. The only way to restore the pyramid's shape is by an increase in the price of gold.
Historical Analysis
By examining archives, we've created a long-run data series of gold as a percentage of international reserves from 1880 to present, revealing profound shifts in monetary preferences.
Current Imbalance
Central banks hold only 16% of reserves in gold (2022) versus a historical average of 59%—an unprecedented faith in foreign exchange reserves.
Trend Reversal
In 2022, central banks bought a record 1,136 tonnes of gold while foreign exchange reserves declined by a record $950 billion, signaling a historic shift.
Critical Trend
The trend of central banks increasing gold reserves is likely to continue. Large purchases by central banks on all continents indicate how they believe the system will stabilize: through a rising gold price, confirming they have no intention of designing a new monetary pyramid.
Central bank reserve composition trends
Central banks in aggregate have an unusual faith in foreign exchange, as gold's percentage of total reserves accounted for just 16% in 2022, against a historical average of 59%. However, these central banks are starting to lose confidence in currencies issued by their peers.
| Time Period | Gold % of Reserves | Key Drivers | Implications |
|---|---|---|---|
| 1880-1913 | 60-70% | Classical Gold Standard | Monetary stability |
| 1950-1971 | 45-60% | Bretton Woods System | Dollar-gold convertibility |
| 1980-2000 | 15-25% | Fiat confidence peak | Central bank gold sales |
| 2020-2022 | 15-16% | Crisis response, QE | Record low gold allocation |
| 2023-Present | 17%+ (rising) | Geopolitical tensions, inflation | Reversal toward gold |
Geopolitical Catalysts
In light of the war, which caused the US to freeze Russian central bank dollar holdings, persistent inflation, and systemic risks, the trend of gold increasing its share of total reserves is logical and accelerating. When considering precious metals allocation, these macro trends provide compelling fundamental support.
$8,000 gold: mathematical basis and timeline
Should we extend current trends and assume gold makes up a conservative 51% of global international reserves, the price of gold would need to be $10,000 per troy ounce. However, the dynamic process of central banks increasing gold weight while selling foreign exchange results in a more realistic target.
Conservative Scenario
$8,000 per ounce would make gold's share of total reserves exceed 50%, representing a ballpark figure for when the monetary hierarchy rebalances.
Aggressive Scenario
$10,000+ per ounce if central banks rapidly accumulate gold to reach historical average percentages of 59% within this decade.
Timeline Factors
Central bank balance sheet growth and urgent revaluation needs could accelerate the timeline, making these prices achievable within the current decade.
Private Sector Dynamics
We use central banks as a proxy for the entire economy. The private sector is in a similar position as central banks: they have little exposure to gold versus credit assets. It's definitely not just central banks that will drive up the price of gold—private investors recognizing this trend early can position themselves advantageously.
Investment implications and strategic positioning
Throughout the ages, the price of gold always rises as the amount of physical metal available is insufficient to meet mankind's liquidity needs. National currencies devaluing against gold to increase liquidity is a fact of life, making strategic gold accumulation essential for wealth preservation.
Historical Precedent
- Coins debased by lowering bullion content
- Post-1971 fiat creation "by stroke of a key"
- Gold price adjustments to reset pyramid shape
- Current moment represents major reset opportunity
Current Catalysts
- Geopolitical tensions and currency weaponization
- Persistent inflation above central bank targets
- Systemic risks in overleveraged financial system
- Central bank gold accumulation acceleration
Strategic Actions
- Monitor live gold price movements
- Consider silver as complementary metal
- Track central bank reserve compositions
- Position ahead of institutional recognition
Portfolio Allocation Strategy
Given the mathematical basis for dramatically higher gold prices and the accelerating trend of central bank accumulation, investors should consider meaningful precious metals allocation. The current moment—characterized by war, inflation, and systemic risk—represents one of those rare periods when the gold price must adjust to restore monetary hierarchy balance.
Conclusion
The hierarchy of money framework reveals gold's inevitable reassertion as the premier monetary asset. With central banks holding only 16% of reserves in gold against a historical average of 59%, and record gold purchases coinciding with foreign exchange reserve reduction, we're witnessing a fundamental shift in the global monetary system.
The mathematical case for $8,000+ gold prices rests on solid foundations: the need to restore proper pyramid proportions, accelerating central bank accumulation, and the inherent instability of an over-leveraged fiat system. For investors, this analysis suggests that strategic gold positioning before this revaluation becomes widely recognized could prove to be one of the most important financial decisions of the decade.
The Bottom Line
Now—given war, inflation, and systemic risk—will be one of those moments for the gold price to adjust. The only question is whether investors will position themselves ahead of this historic monetary reset or scramble to catch up once the trend becomes undeniable to mainstream markets.