Gold Rush

“A U.S. dollar is an IOU from the Federal Reserve Bank. It’s a promissory note that doesn’t actually promise anything; it’s not backed by gold or silver.” P. J. O’Rourke

P. J. O’Rourke passed away in 2022. He was a NY Times bestselling author and well-known political satirist, and as you can tell from the above quote, not a fan of non-commodity currency. He understood that inflation is the inevitable consequence of any fiat currency as it is based on nothing more than the dictates of a corrupt government looking for a way to tax without having to go through an inconvenient and unpredictable legislative process. The dollar states that it’s a “Federal Reserve Note”; in other words, it represents debt, but as a fiat currency it has no redeemable value.

The British Pound is the oldest fiat currency at 93 years. The US dollar has been a fiat currency for 53 years. Historically, fiat currencies do not have a long life as the average is only 27 years. Over time both the pound and the dollar have depreciated enormously to the point of losing 95% of their purchasing power. Eventually, when fiat currencies cease to function as a store of value, people seek alternatives. The most trusted commodities as money for millennia have been gold and silver. While there are now cryptocurrencies like Bitcoin, their long-term viability as money is yet to be determined; however, Bitcoin is non-inflationary as its algorithm ends at 21M Bitcoins, whereas it is painfully obvious given inflation that the dollar has no such limits.

Why should people accept the monopolistic government control over money to begin with? The answer is they shouldn’t since real money is a commodity, which makes it a medium of exchange and a store of value, which is how money came to exist to begin with. (Please see the post of 07/12/19 titled “Gold Myths” for the requirements for a commodity to be money.) Despite government decrees contrary to the nature of money, reality provides for a true appreciation for the decline of fiat currencies over time.

There have been various monetary standards since the invention of money around 600 BCE; some are simply direct coinage, others indirect as in the case of the US Dollar, a paper money redeemable in gold until 1933. At that time FDR unconstitutionally issued Executive Order 6102 making it illegal for Americans to own gold; he gave them 30 days to hand it over or face a ten-year prison term and/or a $10K fine. At the time of this confiscation, the gold price was fixed at $20.67/oz. Shortly thereafter, FDR’s administration declared that the price of gold was $35/oz. This provided the government with $105M compared with the $63M confiscated; however, this did little to shore up the Federal Reserve’s balance sheet, and it seriously devalued the very dollar he disingenuously claimed he was protecting. Given the amount confiscated and the estimated amount of gold in circulation at the time of FDR’s decrees, historians estimate that about 80% of Americans ignored the order and retained their gold privately. 

In 1971, President Nixon declared the dollar off the gold standard altogether. In 1974 President Ford repealed FDR’s order making it legal for Americans to own gold. Since then, gold has appreciated against the dollar to the point where today it’s at $2,400/oz., an increase of 6,800%. Gold has not changed as an ounce of gold in 1933 is an ounce of gold today; what has changed is the dollar. This divorce from a gold standard enabled such a monetary inflation that makes the US Treasuries many countries hold worth less than what they bought them for, and the US policy of economic sanctions as a political weapon presents a threat to their sovereignty; coupled together the US Dollar, and its reserve status, have become less meaningful or attractive as time goes on.

The central banks of many nations have been buying large quantities of gold over the last few years, principally China and India, who also encourage their citizens to buy gold. There are two principal reasons for their rush to do so, one being the huge monetary inflation of the world’s reserve currency, i.e. the US dollar, and the other being the sanctions utilized as part of US foreign policy, freezing the US Dollar assets of any country it holds in disfavor, virtually a confiscation of a sovereign country’s wealth. While these reasons are accountable for the modern-day gold rush, the question is what will these countries do with all that gold?

There are about 212K metric tons of gold in the world, about 60% of which is jewelry and other precious artifacts held privately. Then there’s about 22% held as coins and bullion, also held privately. The balance is held by sovereign state central banks. Currently the United States government holds about 8K metric tons in gold reserves, the largest in the world, representing about 45% of all central bank gold reserves. With that kind of leverage, why would the US maintain a fiat currency that is near the end of its useful life as a store of value? Why the dichotomy between these two policies, especially with some of the world’s central banks on a gold buying spree and making it obvious that they are moving to replace the dollar as a reserve currency?

The answer to these questions is that fiat currency provides government central banks with control over how much “money” is printed, and that means control over an economy. If a currency is based on a commodity, it becomes money, the issuance of which is limited by the amount of that commodity underwriting its value and redeemable to the holder of that currency. Fiat currency is based on nothing more than the creditworthiness of the issuing government; how much creditworthiness does the US have with $35T in debt, the largest in the history of any nation, and with no plan to pay the debt down with other than selling more debt and printing more dollars?

“An almost hysterical antagonism toward the gold standard is one issue which unites statists of all persuasions. They seem to sense that gold and economic freedom are inseparable.” Alan Greenspan