The Importance of Gold
The importance of gold to nations and individuals.
Fractional American Gold Eagles in 1/10, 1/4 and 1/2 oz Sizes for Smaller Budgets
Why is Gold Valuable?
Countries and Individuals, Especially in the East, are Diversifying their Assets with Gold.
Gold’s Importance to Countries.
“ For us (Russia and China) it is important to deposit those (gold and currency reserves) in a rational and secure way,” he said. “And we together need to think of how to do that keeping in mind the uneasy situation in the global economy.” Russia’s President Vladimir Putin
“We are buying metal and will continue to pursue this course,” “This is a course of asset diversification in a situation when investing in securities or deposits remains risky.” Alexei Ulyukayev, First Deputy Chairman of Russia’s Central Bank
In contrast, you will most likely never hear United States President Barack Obama or U.S. Federal Reserve Chair Janet Yellen discuss “the nation’s gold” or their plans to preserve it or obtain more.
Janet Yellen recently gave a speech on monetary policy and financial stability and made not one reference to gold.
Indeed, in the twenty-five speeches given by Fed members in 2014 so far (including ten by Ms. Yellen) there have been NO references to gold.
Who Thinks Gold is Money?
There is a difference in attitudes towards gold in the west and and in the east. Gold is scoffed at in the west when it is referred to as money, especially in the United States. While in the east, nations and individuals accumulate gold as a store of wealth and in some countries like India, it is revered.
Ms. Yellen’s predecessor, former Federal Reserve Chairman, Ben Bernanke also down played gold as part of the monetary system, relegating it to “tradition”, but not money. You can see Mr. Bernanke’s feigned bemusement that Congressman Ron Paul considers gold to be money in this exchange:
Why are United States officials and the U.S. Federal Reserve representatives relecutant to mention or give any credibility to gold as a monetary asset?
UNLESS you are a retired Federal Reserve Chairman
Is it a case of “When you got it, you don’t talk about it”?
As the chart below shows, the United State purports to hold the world’s largest gold hoard, most it supposedly held at Fort Knox, Tennessee.
Gold Reserves by Nation – Top Twenty
Russia and China Have Increased Their Gold Reserves And Are Now In The Top 10.
Or perhaps, it’s the case that gold is considered competition to the U.S. Dollar and worse, that maybe the U.S. doesn’t have the gold it purports to have, so not mentioning gold, changing the subject or dismissing gold is a better strategy. Some believe the United States’ gold is long gone, having been sold or leased to protect the value of the dollar by supressing the price of gold.
Whether the U.S. has the gold it claims or whether the price of gold is manipulated are not subjects of this post. For excellent overviews on the mystery of the whereabouts of the United States’ gold that hasn’t been audited since the 1950’s click to see the History Channel’s -The History and Secrets of Gold and Gold and Bad: A Tale of Two Fingers, a film by Grant Williams.
For an overview on suspected and actual gold and silver manipulation click to review our two part series on the topic.
Background- Paper Money vs. Gold
The International Monetary System, Bretton Woods, Gold, The Petro Dollar and Quantitative Easing
1944-1971 – The Bretton Woods Agreements and The Gold Standard
According to the Bretton Woods agreements of 1944, the dollar was designated as the world’s reserve currency and could be redeemed by other countries’ central banks for gold from the United States Treasury upon request. This “gold standard” coupled with the United States’ preeminent military and economic position, gave the world confidence that the dollar was as good as gold. Click here for a short monetary history from Bretton Woods to the present day.
1971-2008 – Enter the Petro Dollar
On August 15, 1971, in response to increased dollar for gold redemption requests, U.S. President Richard Nixon ripped up the Bretton Woods Agreements on national television and ordered the Secretary of the Treasury to “suspend temporarily the convertibility of the dollar into gold” and redefined what the U.S. Dollar meant:
Nixon purposely deemphasized the value of gold by substituting a dollar backed by gold for the unbacked dollar itself. In Nixon’s words: “the strength of a nation’s currency is based on the strength of that nation’s economy.”
Following Nixon’s closing of the gold window, the United States worked out agreements with Saudi Arabia and eventually with the Organization of the Petroleum Exporting Countries (OPEC) such that their oil would be priced only in U.S. Dollars and only U.S. Dollars could be used to purchase their oil. In return, the U.S. would provide the Saudis with military protection and hardware.
This arrangement created the “petro dollar” and re-established global demand for U.S. dollars and U.S. dollar denominated securities like U.S. Treasuries.
While many countries were not happy with Nixon’s breaking of the Brettons Woods agreements, the dollar remained the world’s reserve currency as there wasn’t a viable alternative to the dollar.
It’s Our Currency And Your Problem
Later in 1971, then Treasury Secretary, John Connally summed up the cram down nature of Nixon’s closing of the gold window when he told his G-10 counterparts: “It’s our currency and your problem”.
2008-2014- Quantitative Easing, De-Dollarization & Increased Gold Reserves
In 2008 a financial meltdown took place, causing a stock market crash and near failure of the U.S. and global banking system. During the crisis the dollar became the defacto safe haven asset. In order to ensure the financial stability of the banks, a bailout of the banks deemed “too big to fail”, was arranged by Congress.
Gold, which had risen from $200 -$800 an ounce during much of the 2000’s post dot com bubble low interest rate environment, fell initially during the crisis.
In early 2009, Chairman of the Federal Reserve, Ben Bernanke began a unique program known as quantitative easing (QE) whereby the Fed would print dollars to buy U.S. Treasuries and mortgage backed securities from the banks in order to drive interest rates lower to stimuluate economic activity. Mr. Bernanke conceded in a television interview on “Sixty Minutes” that printing money was necessary but would end once the economy began to recover.
On the announcement of the first round of QE, gold continued its ascent from $800 an ounce and climbed to a high of $1900+ in 2011. When countries, especially those with large U.S. Treasury holdings started to realize that the Fed’s dollar printing scheme wasn’t a one off emergency measure but rather a multi year multi trillion dollar endeavor, they became concerned with the debasement of their holdings and started to look for ways to diversify their assets away from the U.S. Dollar and to create alternative means to conduct international trade.
These countries inevitably looked to gold.
Since 2008 countries have become less comfortable holding their reserve assets in the U.S dollar and holding their gold reserves in the United States. This has led to an increase in interest in gold as countries are moving to increase their physical gold reserves by purchasing, mining and repatriating gold.
Russia and China have been the most vocal regarding de-americanizing/dedollarizing their reserves and trade currencies.
China Calls for a De-Americanized World
China, the United States’ largest creditor, wrote in its state run news agency on October 13, 2013 about the United States “such alarming days when the destinies of others are in the hands of a hypocritical nation have to be terminated“. China has been diversifying its reserve assets out of U.S. Treasuries for the past few years.
China has been moving to internationalize their own currency by entering into large currency swap agreements with the European Central Bank and other countries.
Russia is at the center of an accelerating “de-dollarization” campaign as part of the Brazil, Russia, India, China (BRICS) alliance, which has also recently formed its own BRICS bank.
Russia’s de-dollarization plan includes:
1. reducing its U.S. Treasury Reserve holdings;
2. conducting more non dollar trade. To that effect Russia is working on a non dollar oil deal with Iran and has signed a long term gas deal with China; and
3. boosting its gold reserves.
Countries Are Adding to Their Gold Reserves
Central banks around the world have been net buyers of gold since 2008, driven in part by the perceived potential fiancial instabiilty of the U.S. dollar due to the seeming open ended nature of QE. QE has gone through several iterations and while the current program is set to end this year, some commentators believe the Fed may start it up again if economic activity doesn’t accelerate as they have projected.
Russia Has Boosted its Gold Reserves 300+% since 2008
Part of Russia’s de-dollarization strategy is to add to its gold reserves. As tensions over Ukraine continue to rise between the United States and Russia to levels last seen during the Cold War in the late 1970’s and early ’80s, Russia continues to add to its gold reserves at feverous pace and in 2014 started to lower its U.S. Treasury holdings.
Russia added another 300,000 ounces to its gold hoard in July 2014.
China Boosts its Gold Reserves Through an Increase in Production and Imports
In recent years, China has ramped up its mining production of gold and boosted its imports of gold through Hong Kong and is now the largest gold producer and importer of gold in the world.
Countries are Increasing Their Gold Mining Production
In 2014, Russia surpassed U.S. in gold production and is now the third largest gold producer in the world, and may soon be the second.
China is the world’s largest gold producer and they export practically none of it.
Chinese Gold Production
China has doubled its gold production since 2000 to become the world’s largest producer.
Top Ten Gold Producing Countries
Russia and China are boosting their gold production.
Reserves in Dollars
Meanwhile, countries are reducing their dollar reserves.
Gold Moves West To East
In 2013 we noted that the world’s gold is moving east to west as the west sells paper gold and the east produces and imports physical gold. This trend continues as evidenced by the chart below showing how the gold reserves of eastern countries are increasing vs. the west’s gold reserves:
Gold continues to move from west to east
Gold Repatriation Requests
Countries ask where is our gold?
The movement of gold from west to east doesn’t mean that western nations no longer care about gold. Countries have become interested in gold as they lose confidence in fiat currencies and would prefer to have gold as a greater percent of their reserves and close to hand in the event of a currency crisis.
Click here for gold repatriation updates.
In January 2013, Germany requested the return of part of the physical gold it held on deposit at the Federal Reserve in New York and in Paris at France’s Central Bank, citing the need to have the gold close to hand in the case of a currency crisis. The German gold repatriation request and subsequent events raised two issues – did the Fed still have Germany’s gold and was Germany losing confidence in the European Monetary Union and the Euro?
Germany’s requested anticipated a repatriation of a total of 674 tons of gold from the Fed and the French Central Bank. The Fed informed Germany that they could not inspect their gold and that their gold would be delivered over a period of 8 years, raising eyebrows why it would take so long to make the requested repatriation. A year after the original request Zero Hedge reported that Germany had received just 37 tons, or about 5% of the 674 tons requested.
Curiously, only five tons were delivered by the Fed with the other 32 tons coming from Paris. The five tons of gold delivered to Germany were different gold bars than the ones that Germany had placed on deposit with the Fed a few decades earlier.
In June 2014, however, according to a Bloomberg news report, Germany suddenly dropped its gold repatriation request. “The Americans are taking good care of our gold,” said Norbert Barthle, the budget spokesman for Germany’s Christian Democratic party.
Austria, located in central Europe bordering Switzerland, has about 280 tons of gold of which 150 tons are held in vaults in London, England. Austria recently announced that they are sending auditors to London to check on their gold.
A populist movement in Switzerland has led to a gold repatration ballot initiative to be voted on by the Swiss at the end of November this year. It’s hard to imagine Americans getting worked up enough to force an initiative to audit the gold in Fort Knox.
In 2011, Venezuela requested that the majority of its 160 tons of gold held in New York and London be repatriated. Venezuelan Central Bank chief Nelson Merentes said regarding the repatriation of his nation’s gold: “It has historic value, it has symbolic value, and it has financial value,” “The country’s finances will be backed by autonomous wealth, so we are not subject to pressure from anyone.”
At least five other countries have also made gold repatriation requests, including Finland, Romania, Poland, Venezuela, Ecuador. Yahoo finance has reported that the Netherlands and Azerbaijan are also considering repatriation of their nation’s gold.
China Operates the Largest Physical Gold Exchange in the World – The Shanghai Gold Exchange
In order to compete with the west’s gold trading markets – the London Bullion Market Association and Comex – China has established and promoted the Shangahai Gold Exchange. The Shanghai Gold Exchange is now the world’s largest physical gold exchange in the world. The chart below shows the rapid rise of the Shanghai Gold Exchange.
The Shanghai Gold Exchange Continues To Grow
Gold Reserves Are Still a Small Part of Reserves
While Russia and China are adding to their gold reserves, those reserves as shown by this chart compiled by Casey Research, are still a small percentage of GDP.
Gold, unlike debt, represents a small percentage of the GDP
Gold’s Importance to Individuals
The vast majority of American don’t care about gold and believe in the ‘almighty dollar’. What horrifies foreign individuals and central banks about the dollar and U.S. monetary policy seems to delight most Americans – because the dollar is the world’s reserve currency (whether they know it or not) the United States can borrow and spend as it wishes simply by printing dollars to buy U.S. Treasuries.
Americans themselves share the same mentality as their government that items that are desired such as cars, consumer goods, education and homes, can be obtained by borrowing at low rates of interest.
Savings are a Barberous Relic
Savings are the new barberous relic that stunt demand. Any item can now be purchased irrespective of savings due to the availability of credit. The Fed’s QE program is designed to stimulate spending by making the cost of credit as low as possible.
Former Chairman of the Federal Reserve Alan Greenspan in a moment of stunning honesty admitted that the United States can pay ANY debt because it can always print dollars to pay:
Compare Mr. Greenspan’s comments to his sentiments written in “Gold and Economic Freedom” and published in Ayn Rand’s “Objectivist” newsletter in 1966:
‘Deficit spending is simply a scheme for the confiscation of wealth. Gold stands in the way of this insidious process.’
Mr. Greenspan’s easy money policies as Fed Chairman belie the statement he made in the Objectivist. Such is the addictive and destructive power of easy money and credit. After all, if you could just print more dollars to pay off your debts and your creditors accepted your newly printed dollar, why wouldn’t you?
Prior to ditching the gold standard in 1971, the United States removed the silver from its coinage in the mid 1960’s. A quarter with the silver removed and replaced with base metals would clearly make the base metal coin worth less than its silver counterpart. Not, however, if you can convince people that the base metal coin is worth just as much as the silver coin.
U.S. President Johnson was aware that people might hoard the silver coins and issued a statement in July 1965:
“Our present silver coins won’t disappear and they won’t even become rarities. We estimate that there are now 12 billion–I repeat, more than 12 billion silver dimes and quarters and half dollars that are now outstanding. We will make another billion before we halt production. And they will be used side-by-side with our new coins. Since the life of a silver coin is about 25 years, we expect our traditional silver coins to be with us in large numbers for a long, long time.
If anybody has any idea of hoarding our silver coins, let me say this. Treasury has a lot of silver on hand, and it can be, and it will be used to keep the price of silver in line with its value in our present silver coin. There will be no profit in holding them out of circulation for the value of their silver content.”
A small minority of Americans never believed that the base metal coins were as valuable as the silver ones and began to hoard them. Despite minting nearly 4 billion silver coins dated 1964, these coins were all but removed from circulation in a few years by hoarders.
The decision by small numbers of Americans to hoard the 1964 and earlier dated U.S. silver coins paid off as a silver quarter dated 1964 or earlier is worth $3.50, while a base metal 1965 quarter is still worth just $.25 and a silver dime dated 1964 or earlier is worth $1.40.
The value of the metal in the coin trumps what the U.S. government has written on it no matter the strength of the United States’ economy or military.
Sales of Gold at the United State Mint
The United States Mint has produced American Gold Eagle (AGE) coins since 1986. Prior to 2008, AGEs held interest only for collectors. After the financial crisis of 2008, sales of American Gold Eagles skyrocketed as people purchased them to protect their wealth against the potential of further financial turmoil.
The total number of AGE’s sold however, is very low when compared to the size of the population of the United States and does not reflect widespread buying of gold by the American public.
Sales of American Gold Eagles have increased dramatically since the financial crisis of 2008 and the onset of quantitative easing in 2009
Chinese Housewives Hoard Gold
In contrast, Chinese housewives en masse have been buying gold to preserve their wealth. This short video shows the mania surrounding Chinese housewives’ purchasing over 300 tons of gold.
Gold vs. Argentine and Ukraine Currencies
What happens when a country borrows too much and can’t print the difference to pay its bond holders?
The news from Argentina is not good as the country is having difficulty paying its bond holders and has defaulted.
This circumstance has a direct impact on the value of the Argentine peso, which has dropped significantly this year and some argue may drop another 25% this year.
Argentines who held gold would have been insulated from the decline in purchasing power of the Argentine peso as this chart shows:
Political instability can also cause a country’s currency to decline in value or collapse. The uncertaintly surrounding the battle over Crimea and eastern Ukraine has led to a sharp drop in the value of the Ukraine Hryvnia (especially vs. gold) as this chart shows.
Who Cares About Gold?
Certainly not many Americans!
Interest in gold is greater outside the U.S. While 86% of Smaulgld.com’s visitors are from the U.S., about 90% of those viewing the Smaulgld blog post on which countries have the greatest gold reserves were from outside the U.S. as these Smaulgld.com visitor logs show:
Conclusion: It’s Our Currency And Our Problem
Most Americans don’t understand that gold is not an investment– it is an asset or an insurance policy.
Gold is money.
A country’s currency not backed by gold is only as good as the soundness of its monetary and fiscal policy. The Fed’s QE’s dollar printing scheme is a clear abuse of monetary policy and running trillion dollar deficits and having unfunded liabilities in the hundreds of trillions of dollars is a sign of imprudent U.S. fiscal policy.
The average life expectancy of a fiat currency is 27 years.
In contrast gold has been money for thousands of years. Gold knows no political instability, conducts no reckless monetary or fiscal policy, doesn’t defaut or threaten to default on its obligations, doesn’t rely on electricity or a network to retain its value and doesn’t require trust in human institutions or human stewardship.
The United States can no longer ignore or dismiss the complaints that other countries have about the debasement of the dollar. It’s time to realize: It’s our currency and our problem.
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