Investors are impressed by the remarkable surge in gold prices, which have doubled in the past year when priced in US dollars. This performance far exceeds that of the stock market (despite also reaching historical highs) and Bitcoin (which has been trading sideways for several months). Bitcoin, often dubbed as “digital gold,” is a cryptocurrency that serves as a hedge asset, replacing constantly devaluing fiat currencies like the US dollar.
The soaring price of gold should be accompanied by a disturbing realization. Gold’s impressive performance is a worrying signal, indicating deep-rooted issues in the global geopolitical, economic, and monetary environment—or at least the brewing of such issues.
Investors are seeking refuge, yet risk assets priced in US dollars continue to rise. Central banks around the world are increasing their gold reserves and decreasing their US dollar reserves while preparing for economic, technological, and military conflicts. As long as holding and trading gold is legal, it remains a safe haven for individual investors. This is something most of us have become accustomed to.
However, Americans should never forget that the US government, under then-President Franklin Delano Roosevelt (FDR), signed Executive Order 6102 in April 1933, using coercive measures (including the threat of hefty fines and up to 10 years of imprisonment) to confiscate gold coins, bars, and certificates held by ordinary Americans worth around $1.5 billion, equivalent to about 5% of the currency supply at the time, or approximately $11 trillion in today’s financial system liquidity terms.
Subsequently, during the Great Depression and related banking crises, the US dollar was pegged to gold at an artificial low rate of $20.67 per ounce. Anyone could walk into a bank and demand to exchange their paper money for gold. Due to the loss of confidence in the banking system, people did so en masse, leading to significant reductions in the US government’s and banks’ reserves.
With the US dollar fully backed by gold and the exchange rate fixed, the Federal Reserve could not increase the money supply to help alleviate the credit crisis and prevent the deflationary spiral the US was facing—because it lacked gold reserves.
President Roosevelt then declared a national emergency, confiscating citizens’ gold holdings at $20 per ounce. The following year, he swiftly raised the official exchange rate by 67% to $35 per ounce, expanding the money supply while devaluing the US dollar in the international monetary system, thereby strongly supporting US exports.
All of this occurred against a backdrop of escalating geopolitical tensions, trade wars, rumors of European rearmament, competitive currency devaluations, and governments worldwide aggressively increasing their gold reserves. Does this sound familiar?
Today, we find ourselves in a geopolitically similar yet distinctly different environment. Countries worldwide are transitioning to a “war economy.” Central banks are once again acquiring significant amounts of gold. Protectionism and resource nationalism are on the rise. Fiat currencies are heading towards devaluation, governments are eroding people’s purchasing power amid inflation as a form of hidden taxation.
I am not implying that the US government is considering gold confiscation. I am simply cautioning that “black swan” events often come unexpectedly and abruptly. Military intervention against Iran could be one such event, with its economic and financial ramifications likely far exceeding the restrained actions taken against Venezuela. When black swan events occur, the propagation patterns of shockwaves are unpredictable. When deemed to be in a state of emergency, governments employ various means to seek unprecedented solutions.
The years 1914 (at the outbreak of World War I), the 1930s Great Depression, 1971 when President Richard Nixon “temporarily” halted the conversion of US dollars into gold by foreign banks and governments to stem the outflow of foreign exchange reserves (which actually lasted 55 years), and the 2008 global financial crisis all attest to this. During such times, government interventions distort currency and financial markets as well as the real economy, with the effects of these distortions persisting to this day.
We are currently in an extraordinary period. I still believe that gold is a crucial component of the financial system. For centuries, when fiat money inevitably fails, gold has proven to be the true currency. Yet I remain vigilant that in a national emergency, everything could change. History shows that to escape seemingly thorny strategic predicaments, governments will consider any action.
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