Send this article to a friend:
February
18
2025
|
Send this article to a friend: February |
|
A Problem So Big Not Even 8,000 Tons of Gold Can Fix It
Your News to Know rounds up the most important stories about precious metals and the overall economy. This week, we’ll cover:
Not even 8,100 tons of gold can fix our fiscal problems Before anything else is said, let's remember that every U.S. government fiscal problem is fundamentally a dollar problem. When you read, hear or see something weird or unbelievable about U.S. monetary policy, that translates directly to the dollar. The U.S. dollar is the American economy. The economy’s status depends on the dollar – on the “dollar vibes,” as the kids say. And what has the dollar vibe been lately? One story that has been making the rounds recently is the notion of revaluing our nation’s gold reserves. For the purposes of this analysis, we will accept the claim that there really are 8,100 tons of gold bullion fully unencumbered, owned outright by the nation, tucked away in secure vaults. Even that’s not a majority opinion at the moment…
Regardless! The whole gold revaluation concept is not new, nor something we haven't discussed previously. Here it is in a nutshell:
Updating the value of the gold reserve to the current price of gold would result in an addition of $750 billion to the nation’s balance sheet. Sounds like a lot, right? It’s four times more than the government collected in tariffs and excise taxes in 2024. For me and you, $750 billion is an unimaginable amount of wealth. On the other hand, $750 billion isn’t enough to cover even half of a single year’s budget deficit. That’s how bad our nation’s financial situation has become. The annual budget deficit is over $2 trillion. A new spending bill being proposed would amount to $6.5 trillion, doubling said deficit. Consider that we’re already $36 trillion in the hole, and a one-time airdrop of $750 billion just doesn’t help that much. Furthermore, consider this fact for just a moment: The total above-ground gold supply (that’s all gold ever mined throughout human history!) is about 216,265 metric tons (7 million troy oz). At today’s prices, that’s worth a little over $20 trillion. Our nation’s created a pit of debt so deep that not even all the gold in the world can solve it! Against figures like these, what is $750 billion as a one-time payment, especially given how it's to come from? Pretty much nothing. The Treasury has been borrowing about $6 billion per day – about $2.6 billion of that is debt service payments! Now that we've covered the bad, we have to get to the worse… To actually make any use of this “new” $750 billion asset, the U.S. would have to sell some (or all) of its gold. This is a terrible idea! The whole reason nations have gold reserves is to provide a stable store of value to their currencies. (Theoretically, if a nation did default on its borrowing, creditors could lay claim to its gold reserve in compensation.) In other words, even though we’re no longer on the gold standard, our national gold reserve provides collateral that underpins the value of the dollar itself. But even if we, again, imagine our national vault does indeed have 8,100 tons of dusty gold bullion bars sitting securely, we are as ill-positioned as ever to part with it. That gold is what's giving the U.S. its clout, or the claim of the gold anyways. Emptying our vaults and officially stating "Hey, we've parted with our gold" would leave us exceptionally vulnerable to any international attempt to return to a gold standard. You don't want to be a global superpower with no gold when another country (or, ahem, BRICS) launches a currency backed by gold! That's a quick path to loss of global reserve currency status. What this discussion has highlighted, more than anything, is just how badly positioned the government’s money management really is. Think about it – an extra $750 billion still leaves us heavily in the red. And that’s it. We burned through the nation’s emergency fund, so what’s next? Without a balanced budget and a plan to pay down the national debt, the annual deficit and rapidly-compounding debt are still growing. One more interesting bit from the article above was that instead of a currency devaluation race, there could be a global monetary system reset where currencies are deliberately devalued against gold. It would be a second, better Bretton-Woods, and end most currency problems. It's a very interesting idea. But it won't happen. Why? Because countries prefer currency devaluation! In a global race to the bottom, every nation that finances its spending with debt and currency devaluation has a chance to “win” the game. They can destroy their own external debt – at the cost of impoverishing their citizens, sure, but no real patriot is going to fuss too much when it’s an existential crisis. Right? Meanwhile, their central banks can hoard real money -- gold bullion -- in the background. As I said before, what does Russia care about a weak ruble so long as their gold vaults are getting filled up? Eventually, the world will return to sound money. History shows us that the world always returns to gold. But not voluntarily! The way the return-to-gold happens involves economic collapse, social mayhem and (quite often) international conflict. That's how the Bretton-Woods agreement started in the first place, after all. It wasn't a bunch of central bankers deciding after a few calm years that it's enough money nonsense. No, it took a global world war and entire nations reduced to rubble to get there. Let’s hope war isn’t necessary this time. The good news? No American citizen needs to wait for an official return to a gold standard, to sound money. Here in the U.S. we’re free to put ourselves on our own personal gold standard whenever we choose. Who’s emptying the London bullion vaults, and why? My colleague Phillip Patrick recently appeared on War Room to discuss this story – here’s the interview with Steven Bannon:
It's really worth watching! Please check it out. For another take on the same story, Katie Martin and Robert Armstrong dove deep on the latest episode of the Unhinged podcast, mostly relating to gold. But there was one part that really stood out to me, and that should stand out to everyone interested in what money actually means. The pair spoke about the recent shipments of gold to New York and London and the havoc it caused. They correctly note that it costs a fortune to deliver large quantities of gold bullion, and that effort is disrupting the financial system. In Armstrong’s words:
He also went over as to why the process is even more difficult than it looks on the outside, because New York wants gold bars in different shapes and sizes than London. (Yes, really!) Loco London gold bars are 400 oz. monsters costing about $1.16 million each today – while COMEX gold bullion bars are most commonly a slightly more modest 100 oz. priced at approximately $290,000 today. So for London gold to enter the American commodities market, every London gold bar first goes to Switzerland to be melted down and repoured to meet COMEX standards before making the final leg of its trip to New York. Why is this asset not like others? Why such a prolonged and bothersome process? We've replaced pretty much everything else with digital certificates that can be bought and sold internationally at the click of a button on your iPhone, right? Couldn’t the geniuses of financial engineering do away with clunky old analog gold bullion, given how cumbersome and inconvenient it is? No. No we cannot. Long before the invention of the iPhone, or even the spreadsheet, gold was money – in exactly the same form. In fact, the digitalization of the entire world has made physical gold even more important as an asset than it was, say, 500 years ago. It’s details like these that I want you to pay special attention to – we cannot simply assume that the gold and silver we want will be available when we want it. These precious metals are physical assets that can’t be summoned into existence even by the sharpest spreadsheet wizard. This is also why Birch Gold Group doesn’t offer customers any form of financial asset other than physical precious metals. There’s a reason that global central banks demand physical gold – and you should, too. Here’s what happens when the banking sector wants what you have“Dead gold.” That is the term Alexander George Muthoot, Joint Managing Director of Muthoot Finance, used in reference to India's household gold savings. No, he doesn't mean gold is going out of style. (That would be silly – especially in India.) But there’s no lack of silliness here… Muthoot is suggesting that India's 25,000 tons of gold held in households, often in the form of jewelry, is wasted capital. By the way, “wasted capital” is what financial engineering types call your savingswhen they can’t convince you to buy what they’re selling. What they really mean is that your savings would be better off if you gave it to them – and paid them to invest it for you. Of course, what could also happen is that they lose your money. Never forget, in William Bernstein’s words, “In investing, risk and reward are joined at the hip.” Muthoot wants his fellow citizens to monetize their “dead gold” by borrowing cash against it. So they can open a business, go on a trip, speculate in markets or just buy a bigger TV. Is it worth the risk? Obviously not, otherwise there wouldn’t be so much pressure from the banking sector promoting the national gold loan scheme! Despite my misgivings, this effort has been going well so far, if for no other reason than the destruction of the rupee and the lowering of life standard for many Indians. The gold loans business is booming, and Muthoot's company is seeing massive year-on-year gains. However, one gets the sense that a lot of the gold loan business is growing due to need, not want. In other words, it's cash-strapped Indian households needing some capital, more likely than not. Again, Indians are among the world's biggest gold hoarders, and getting them to part with their gold is no easy task. So no, we're going to have to disagree. None of the 25,000 tons of gold in Indian households is dead capital. It's sitting there, appreciating in value, providing security both mentally and financially, on top of securing future generations. That sounds lively to us. Unfortunately, given the overall economic situation in India, it is anyone's guess as to how much household gold will be left by the time India's money managers are done with the populace.
|
Send this article to a friend:
 |
 |
 |
Despite massive outflows in the mid-20th century, the U.S. still officially has the world’s single largest gold reserve. About 8,100 tons of gold altogether – or 3.3% of all gold ever mined in human history. Today we ask, can the federal government mobilize the nation’s gold reserve to patch up our fiscal position? What could we gain – and, equally importantly, what might we lose by trying?