Since the inception of central banks, Western powers have debased their currencies. Government economists are predominantly Keynesians, and some are even disciples of Modern Monetary Theory promoting government deficit spending for perpetuity. On the other side of the aisle, we find very few proponents of Austrian economics, where sound money and small governments are vital ingredients. Unfortunately, our political elites embrace Keynesianism because it provides the intellectual justification for unlimited government spending. Current financial politics are based on printing money out of thin air. It is unsustainable, irresponsible, and a significant threat to future Western prosperity. The obituary of free markets is on full display, but most are oblivious to what is going on.
Our political leaders are slowly beginning to fear that their tenure is ending in crisis. Fiat currencies are losing its values rapidly, and there is no end to destructive political interventionism in what are supposed to be free markets. Arranging a monetary reset is increasingly discussed. The preferred solution seems to be the implementation of another fiat currency – Central Bank Digital Currency (CBDC).
Let us ponder on the three functions of «money»:
Unit of account
Medium of exchange
Store of value
Fiat currencies comply with the first two requirements, but it is not evident that cash savings are a good «store of value». After all, the expansion of credit (printing money out of thin air) with negative real interest rates is destroying savers’ purchasing power. Major Western fiat currencies have lost more than 95% of their buying power since the USD was taken off the gold standard in 1971. In that respect, we can state that fiat currencies are an abysmal failure as a «store of value.»
On the other hand, gold has been a proven hedge against monetary debasement. Gold fulfills all three functions of money. Most assets are remarkably stable over time when priced in gold.
After President Nixon left the gold standard in 1971, the price of gold picked up from USD 35 to current levels ranging from 1600-2000. Gold does not return dividends, but gold’s purchasing power is relatively unchanged over time. In other words, gold is not a good investment for profit but an excellent store of value. This fact also explains why the demand for Gold increases in times of war and political instability.
Gold has protected wealth for thousands of years, but financial experts have primarily dismissed gold as «outdated» and not worth holding in your portfolios. Unsurprisingly, hoarders of gold promote gold as the only safe haven. Many of these are precious metal dealers attempting to boost sales. Still, holding some Gold as a part of your portfolio seems to be a prudent approach to protecting wealth and purchasing power.
Unfortunately, gold is not an entirely risk-free asset. If there is anything to learn from history, politicians will do anything to steal wealth from citizens to finance whatever is on their minds. They have a multitude of pernicious tools designed to aggressively raise revenue. For example inflation, taxation, tolls, duties, and outright confiscation of precious metals, with or without compensation.
Most gold owners know that Franklin D. Roosevelt in 1933 demanded private citizens turn in their physical gold for USD, which was devalued only months later. Less known is that he issued an executive order only a year later, banning private ownership of non-circulating silver coinage. After deducting a 63% fee, silver owners got paid USD 0,50 per troy ounce, which was 5 cents above the market price. Clearly, a better deal than gold owners got the prior year, but still an unjust and tyrannical act.
These are recent examples of governments criminalizing private ownership of monetary metals:
Gold stackers have well-justified worries governments will again confiscate precious metals. Most gold pundits think confiscation or nationalization is unlikely because we have left the gold standard. Nevertheless, history shows that governments are unfettered once a crisis threatens their power. Authorities make rules, change rules and enforce the rules to their liking. Ie. Constitutional rights will not protect you. We need only look to Canada to find recent political abuse of power when they seized individual bank accounts tied to lawful demonstrators. It proves that politicians are not reluctant to act unconstitutionally when it serves a political purpose.
Although there are no reliable statistics on how much gold is in private hands, only a tiny minority of households own gold. A government robbing Paul to give to Joe will always be supported by Joe. President Biden’s people have learned how to make dumbed-down citizens believe anything. Once the media has demonized gold owners as evil speculators threatening the economy, the road is paved for politicians to confiscate private gold holdings.
Undeniably, many gold owners will conceal their holdings to evade prosecution and penalties. Still, unless you have inherited gold from past generations, nothing prevents authorities from forcing gold dealers to disclose the identity of customers. Individual gold possessions will then be exposed for taxation and possibly confiscation.
Central Bank Digital Currencies vs Gold
Some of our foremost libertarians, such as renowned Mike Maloney and Jim Rickards, promote owning gold as a protection against the threats from fiat CBDCs. However, CBDCs are a threat not only to freedom but also to gold. The devil is in CBDC’s programmability. Digital currencies can be used to control and direct our spending away from any good or service our political elites do not like. Hence, CBDCs can be programmed to deny exchange to/from gold. Gold will then only be meaningful for barter and jewelry. So, governments can use CBDC to render gold almost worthless – without actually seizing the gold.
To what extent CBDC will be politically abused is unclear, but it appears naive to think that political powers will refrain from exploiting the new monetary powers to the fullest. Civil liberties will be sacrificed for more power to central planners’ quest to “save the world”.
I am not suggesting that individuals should not own gold. I still think physical or vaulted gold is a prudent hedge against currency debasement. My point is that gold may not be the safe haven we like to believe. Governments pose a severe risk to gold owners and it is imperative to be conscious of the current economic pressures that could make governments confiscate your gold. Your investment portfolio should reflect that risk.
Imagine that the first task for Joe Biden’s new 87 000 IRS is to subpoena customer records to identify gold owners and prepare for the following gold confiscation. Low probability, you may say, but no one can deny the possibility.
The full article was posted on www.franklythor.com on January 9, 2023.