Recently by Gary North: Europe’s Botox Bailouts
I wish this were not necessary, but articles like this one keep popping up. So, from time to time, I push one of them down. Here is a recent one.
The Greatest Threat to Gold Ownership
If you hold precious metals in your portfolio, there is a good chance you fear hyperinflation and the crash of fiat currencies.
You probably distrust governments in general and believe they are self-serving and have no interest in your economic well-being. It is likely your holdings in gold are your lifeline; your hope to get you through these times while holding on to your wealth.
But have you ever given it any thought to the possibility of having this lifeline confiscated by the authorities?
In my conversations with friends and associates, I have often raised this question. The typical responses:
“They’d never do that.”
“I’ll deal with that if and when it happens.”
“I just wouldn’t give it to them.”
I consider these wishful thinking responses.
It’s an interesting thought that the greatest threat to gold and silver investment might not be the possibility of losing on the speculation, but the government taking it away from you. It’s a thought that I’ve found few want to even think about, let alone discuss.
If you fall into this camp, you’re in good company. Some of those forecasters whom I respect most highly also treat it either as “unlikely” or, at best, “something we may need to look at in the future.” To date, in conversing with top advisors worldwide, the two primary reasons they believe gold will not be confiscated:
1. “Confiscation would mean the government acknowledges the reality of the value of gold.”
Yes, this is quite so. They would be changing their official view… which, of course, they do all the time. But I submit that all that they need to do is put the proper spin on it.
2. “They would meet greater resistance than they did back in ’33.”
I expect that this is also true, but that a plan will be put in place to deal with that resistance.
The advisers he consulted are correct. There are lots of other arguments that support them. I shall cover some of these arguments in greater detail here.
The mark of someone who has no clue about gold is that he goes back to 1933, when the USA was the last nation on a gold coin standard. There was a massive depression. Prices were falling. People held gold coins for the same reason that they held currency. Its price was fixed by law. The price would not fall. They did not hold it as an inflation hedge. They held it as a deflation hedge.
The gold newbies then equate that era with ours: inflationary, no trace of a gold standard for 40 years, and a population that does not use gold. In short, they argue from a world in which gold was money, and draw conclusions for a world in which gold has not been money for almost 80 years.
We’ll address both of these assertions in more detail shortly, but first, a bit of history.
In 1933, Franklin Roosevelt came into office and immediately created the Emergency Banking Act, which demanded that all those who held gold (other than personal jewelry) turn it in to approved banks. Holders were given less than a month to do this. The Government then paid them $20.67 per ounce – the going rate at the time. Following confiscation, the Government declared that the new value of gold was $35.00. In essence, they arbitrarily increased the value of their newly-purchased asset by 69%. (This is enough reason alone to confiscate.)
You know this guy has no concept of history or money. The world of 1933 was radically different from today.
Today, the US Government is in much worse shape than it was in 1933 and they have much more to lose. The US dollar is the default currency of the world, but it’s one that’s on the ropes, which means the US economic power over the rest of the world is on the ropes.
The US dollar is not on the ropes. Its status as the world’s reserve currency is challenged only by the euro, which really is on the ropes.
I think that readers will agree that they will do anything to keep from losing this all-important power.
I hope no reader takes any of this seriously. It’s nonsense. Power over gold has nothing to do with reserve currency status, since no currency is connected legally to gold. You cannot walk into any bank and demand gold for any nation’s currency at a fixed rate. This has been the case ever since 1933.
The US has essentially run out of options. At some point, the fiat currencies of the First World will collapse and some other form of payment will be necessary.
He is arguing for universal hyperinflation in every Western nation. This has never happened. I mean not ever. To argue this way shows an ignorance of history that is astounding. He is predicting the suicide of all Western governments and currencies. It’s easier for governments to default selectively on targeted interest groups, such as oldsters, than to commit suicide. He does not understand this.
Yes, the IMF is hoping to create a new default currency, but that, too, is to be a fiat currency. If any country were to produce a gold-backed currency in sufficient supply, that currency would likely become the desired currency worldwide. Fractional backing would be expected.
It’s all hypothetical. No nation is anywhere near doing this. No exporting nation would dare do this. It’s currency would skyrocket. That eliminates Asia. So, who’s left? Latin America? Does he think Brazil is going to introduce a gold coin system? His whole argument is just plan nuts.
As most readers will know, the Chinese, Indians, Russians and others see the opportunity and are building up their gold reserves quickly and substantially. If these countries were to agree to introduce a new gold-backed currency, there can be little doubt that they would succeed in changing the balance of world trade.
Substantially? Utter nonsense. They have been building reserves from hardly anything to slightly more than hardly anything. He needs to present figures: the dollar value of gold holdings compared to the dollar value of IOUs from Western governments. He doesn’t, because the figures would show that gold is an afterthought to central bankers. It’s hardly worth mentioning in terms of total reserves for those nations’ domestic currencies. But he talks as if it were a big deal. It’s marginal buying. They are not selling IOUs issued by Washington.
But, just for the record, at $1800 an ounce, India has 8.7% of its foreign reserves in gold. This does not count its holdings of domestic IOUs from the government. Russia has 7.7%. China has a piddly 1.6%. To launch a 100% gold-backed currency, the size of their holdings of domestic assets would have to plummet by 100%, and their holdings of foreign reserves would have to plummet by over 90%. They would have to sell these assets. To whom? The market for government debt would collapse. This would create domestic depressions in all three of these BRIC countries. Domestic prices would fall by 95% or more. Their commercial banking systems would collapse within weeks.
Is there some other plan to create a gold standard in each of these countries? If so, what are these plans? These nations have never publicly discussed such a plan. I know of no Keynesian economist who has suggested one. I know of no monetarist/Friedmanite economist who has done so.
Is there the slightest possibility that the Keynesian central bankers of these three nations are contemplating the establishment of a gold standard? No.
Maybe Robert Mundell is advising these countries. But how will they figure out what he is talking about or how his plan could be implemented? Nobody in the West ever has.
That said, the US Government is watching these countries just as we are and they are aware of the threat of gold to them.
Who says? There is not a shred of evidence that Obama or anyone in his Administration is paying any attention to the gold holdings of BRICs. Why should he? These nations are exporting nations. They want to sell for dollars, not gold. They want foreigners with dollars or euros to buy their products.
The US ostensibly has approximately 8,200 tonnes of gold in Fort Knox, although this may well be partially or completely missing. Additionally, they ostensibly hold a further 5000 tonnes of gold in the cellar of the New York Federal Reserve Building. Again, there is no certainty that it is there. In general, the authorities don’t seem to like independent audits.
True, but so what? There will be no audit of Ft. Knox. Congress will not even audit the Federal Reserve. But if the government confiscates the public’s gold, there could be – probably would be – demands to audit this gold. “What is the government hiding? If gold is this important, is the government’s gold really there?”
In any case, the gold in Ft. Knox and the Federal Reserve Bank of New York is worth about $500 billion at $1800 an ounce. Of course, it really isn’t. If the government tried to sell it, the dollar price of gold would fall. Here are the figures. You can read them here. The government could sell the gold and do only one of the following (add 20%, because gold’s price is up).
At $1,500 per ounce, the total value of U.S. gold reserves is about $393 billion. Sound like a lot of money? Enough to get the U.S. out of the debt/spending crisis that we are in? Here’s what the U.S. could do with an extra $393 billion.
Pay off 2.75% of the national debtPay less than one year’s interest on the national debtReduce the estimated 2011 budget deficit of $1.645 trillion by about 23%Reduce this year’s U.S. budgeted spending of $3.8 trillion by about 10%Pay for 40% of the $1 trillion dollar cost of the wars in Iraq and AfghanistanCover about 33% of the estimated cost of the bailing out Fannie Mae and Freddie MacCover half of one percent of the estimated unfunded U.S. government liabilities for social security and medicarePay off about 4% of total mortgage debt held by American families
The author of the confiscation article ignores all of this. The largest hoard of gold on earth – if it’s really there – is a drop in the fiscal budget.
September 22, 2011
Gary North [send him mail] is the author of Mises on Money. Visit http://www.garynorth.com. He is also the author of a free 20-volume series, An Economic Commentary on the Bible.
Copyright © 2011 Gary North
