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14 February 2020

Governments and Gold

Money isn't worth a thing - blog image.

Imagine this.

You wake up one morning, and with your freshly brewed cup of coffee, you ready yourself in front of your shiny new MacBook Pro to consume the latest on current world affairs…

“Under the Executive Order of the President, issued 5 April 2020, all persons are required to deliver on or before 1 May 2020, all GOLD COIN, GOLD BULLION, and GOLD CERTIFICATES now owned by them to a Reserve Bank branch or agency, or to any member bank of the Reserve Bank system.” the headline reads.

You almost choke on your coffee!

Imagine having the foresight to protect yourself from an economic or monetary crisis by investing in gold, only to have that protection confiscated and stripped away by your government.

As a gold owner, I bet you’d be pretty outraged. Maybe not surprised (with expropriation (read: theft) being all the rage now), but certainly outraged.

Either way, this is exactly what happened to US citizens in 1933 when US President Franklink D Roseveldt issued the above Executive Order on 5 April 1933, under the guise of fighting the Great Depression.

When those in power decide they want the fruits of your labour for themselves, a simple order (backed up by their monopoly on violence with the police and army you pay for) will do the trick.

Evidently, this isn’t unique to developing nations and has happened to “Western” nations a few other times throughout history:

1933 – 1975 – USA

1959 – 1976 –Australia

1966 -1979 – Great Britain

And then, of course, you had the Musolinis, Hitlers and Husseins of the world all pulling the same tricks throughout their tenures.

So, why would a government want your gold? Well, the simple answer is: competition.

As we’ve discussed in previous articles, gold is money; it has been for thousands of years – and, in sharp contrast to State-issued, fiat currencies, no overlord can simply print more gold.

Now, if government plans to fund whatever new “magnanimous” initiative, naturally it may look toward the printing presses for the financing mechanism (as it’s a far neater and invisible form of taxation that won’t directly rile up the constituency).

Problem is, you have this pesky thousands-of-years-old alternative money as your competition. Why would the people want to continue holding your devaluing paper when they could hold history’s time-tested money?

In the days when gold was the reserve money and fiat currencies were simply the paper receipts for the underlying gold, this “problem” was especially pernicious as gold served as the anchor that limited the governments’ inflationary tendencies.

So what did world governments do to ultimately relieve themselves of the chains of austerity? As we know, they simply separated the paper tickets (read: fiat currency) from its actual monetary roots – the ol’ switcheroo trick masterfully pulled off – starting with Richard Nixon’s 1971 closing of the “gold window”.

So will this gold confiscation happen again in the near future. Well, with gold having effectively been delinked from its monetary roots and reserve currency status, we think it’s unlikely.

But we think it’s hugely important to still keep an eye on what’s happening currently in this arena..

According to the World Gold Council, central banks have turned from net sellers of gold to net buyers for the 10th consecutive year since 2010 and, more recently, they have purchased multidecade record amounts of gold, using the asset to diversify their foreign reserves. See below chart.

Central bank already own roughly 17% of the total gold stock and are evidently increasing these holdings.

So what’s behind this record buying spree?

It’s no secret that central banks worldwide are struggling to maintain the integrity of their national currencies.

We can easily see this by looking at global interest rates – interest rates are simply the price of money – and with these prices at effectively zero, it surely communicates something about the value these national currencies.

I feel we don’t have to belabor this point: If your competition is starting to buy your product in record amounts, then you know you’re onto something!

See the stats below for a more scientific depiction of this statement.

The trends are clear pretty clear in that we’re once again moving in a direction of enormous monetary debasement.

While the monetary system has been purposely moved away from its golden monetary roots, you see a natural gravitation toward it by those in the know, or rather, those doing the printing (read: central banks).

Let’s hope that [direct] gold confiscations remain an anachronism. That way, we can continue to protect ourselves from the unsolvable debt levels, runaway government spending and continual central bank money creation by investing in gold.

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