Why Gold Owners Are Targets of the Government
If you own gold, you are in a war. You are under assault.
You had better figure this out early.
There is a full-scale war against you. The politicians and
central bankers who are conducting this war against you are
determined to see that you lose money on your investment.
I have written a detailed report on this: The Gold Wars."
You can download it free of charge here:
The reason why you are under assault is because you have
demonstrated by your purchase of gold or a gold-related
investment that you do not trust the monetary policies of your
nation's central bank. If you are an American, this means you do
not trust the monetary policies of the Federal Reserve System.
You have taken a step that confirms your lack of trust in the
government and its central bank. If you think the government and
the central bank will sit quietly, while millions of citizens buy
gold as a way to hedge against government and central bank
policies, you are terminally naive.
A PERPETUAL WAR
Governments and central banks for almost a century have done
whatever they could to keep citizens from using gold as a way to
hedge their economic futures against the taxation policies of the
government and the inflation policies of central banks.
The war escalated a few days after the outbreak of World War
I in August of 1914. At that time, central banks authorized
commercial banks to cease redeeming paper money for gold at a
fixed rate of exchange. For most of the world, that prohibition
extended during the war, after the war, during the Great
Depression, during World War II, up to today.
The United States government forbade American citizens from
owning gold, beginning in 1933 and extending to the end of 1974.
Today, no government is restrained by a gold standard. No
government, no central bank, and no commercial bank is required
by law to redeem paper money or bank accounts for gold at a fixed
rate of exchange.
This has freed governments and central banks from the limit
which the traditional gold standard had imposed on them. When
they inflated the currency, people who understood what was going
on would go to their local bank and exchange paper money or bank
account entries for gold or silver coins. They understood that
the increased money supply would lead to a rise in prices, and
that gold would flow out of the commercial banks and the central
bank of the nation in question. They lined up early to get their
gold, so they would not be stiffed by the commercial banking
system and the central bank, which they knew would be the case if
the central bank continued to inflate the currency.
People who own gold coins are skeptics regarding the fiscal
and monetary policies of the government. There are people who
buy gold as a temporary speculation, the same way that they would
buy copper, but I am talking about people who buy gold coins and
take delivery. These people are professional skeptics regarding
governments and central banks. They are the sworn enemies of
governments and central banks. The very fact that they would go
to a coin store and purchase bullion gold coins testifies to
their lack of trust in governments and central banks.
Politicians and central bankers regard such people as
enemies of the state. They will do whatever is possible to
impose losses on these people, so that others in the society will
not perceive that those who are skeptics about government fiscal
policies and central bank monetary policies are making money.
The worst thing that can happen from the point of view of a
government or central bank is the people who are completely
skeptical about governments and central banks should get rich as
a result of the policies of governments and central banks.
The goal of the politicians and central bankers to make
certain that the public is anesthetized regarding the disastrous
effects of severe monetary inflation on the wealth of
individuals. A rising price of gold sends a signal to those
members of society who trust the integrity and good judgment of
politicians and central bankers. The signal says: "Skeptics are
making money. You're losing money. Buy gold."
FROM JOHNSON TO OBAMA
The government of the United States has had a problem with
gold-buying skeptics ever since the Vietnam War. Late in
Johnson's administration, foreign central banks, especially the
central bank of France, began cashing in dollars and demanding
delivery of gold at $35 an ounce. This led to a gold run on the
Treasury, which was in effect a gold run on the Federal Reserve
System. This sent a signal to investors that central banks no
longer fully trusted the United States government to be able to
meet its contractual obligations to governments and foreign
Nixon closed the gold window on August 15, 1971. He broke
contract with all foreign nations and central banks. He did
exactly what the skeptics had predicted that the government would
do: refuse to deliver gold at $35 an ounce.
That sent a signal to investors that the Nixon
administration was going to require the Federal Reserve System to
inflate the currency. This is exactly what the Nixon
administration did. So did Carter's. The 1970s were the worst
period of price inflation in peacetime American history.
By the end of the decade, January 1980, gold rose for one
day above $800 an ounce. But the central bank under Paul Volcker
had reversed policy in October of 1979. The Federal Reserve
began to tighten money. This led to the collapse of gold and
silver prices in January 1980, and also to the 1980 recession.
That cost Jimmy Carter his presidency.
There is a legitimate way for central banks to fight gold
and inflict losses. The way to do this is for central banks to
stop increasing the money supply. That is a perfectly legitimate
policy. That is what the traditional gold standard required of
central banks. When central banks followed policies of monetary
inflation, and the price of gold rose as a result, the run on
gold would begin.
Paul Volcker fought gold investors from 1979 to 1982. The
Federal Reserve reduced the increase of the money supply. This
was what the traditional gold standard always did. It forced
central banks to stop inflating. If they did not stop inflating,
there would be a run on the supply of gold by a small minority of
investors. They would bring in IOUs to gold and take their gold
Central bankers do not want to fight gold investors in this
way. They want to continue to expand the money supply but not
face the consequences in the arena of public opinion. They seek
ways to force down the price of gold because the price of gold is
an indicator of central bank monetary policy. Central bankers
today have a number of anti-gold investor policies.
ANTI-GOLD INVESTOR POLICIES
The most common policy is to lease gold to a specialized
group of insiders known as bullion banks. The central banks call
this leasing, but it is operationally a form of gold sales.
The central bank leases gold at well under 1% per annum to
bullion banks. Bullion banks then sell the gold into the private
market, take the money, and invest it in government bonds or
other investments that pay far more than 1% per year.
That gold is gone. To get the gold back, the central banks
would have to demand payment in gold by the bullion banks. The
bullion banks could not repay this gold without going into the
gold market and purchasing it. This would drive up the price of
gold. It would bankrupt the bullion banks.
So, central banks do not require the bullion banks to repay
the gold which the bullion banks borrowed from the central banks.
The central banks simply roll the loans over, year after year,
and the bullion banks invest the money that they get from selling
the gold. These central bank sales are not recorded as sales by
the central banks. The public remains oblivious.
The central banks maintain the fiction that they still own
the gold. They report their holdings of gold as not having
changed. But, from an economic standpoint, the gold is gone, and
there is no possibility of central banks will ever get it back
from the bullion banks.
Another way that central banks and governments battle
investors in gold is to announce, from time to time, that the
central bank is contemplating the sale of gold. This scares some
gold investors, who sell their gold. Of course, other investors
who know the name of the game buy the gold. By threatening to
sell gold, central banks are attempting to push down the price of
The latest example of this came at the G20 meeting on April
2. An announcement was made that the International Monetary Fund
will make available special drawing rights (SDRs), which will
serve as money for central banks. To raise some of this money,
the IMF will sell some of its gold. That was the official
The IMF has been threatening to sell gold for several years.
To do this takes a majority vote of the member nations of the
IMF. It is clear that the member nations are willing to allow
the IMF to do this. Previously, this was not clear.
The figure quoted by the press regarding the amount of gold
be sold is 400 tonnes. World production of gold each year is in
the range of 2500 tonnes. It is unlikely that the IMF will sell
all of this gold at the same time. It is likely that these sales
will be stretched out over at least a two-year period. So, the
sales are likely to increase the supply of available gold by
perhaps 8% for two years. In a time when central banks are
increasing the monetary base by 100% per annum or more, this
increase in the supply of gold available for purchase is not
There is another issue to consider. It is likely that most
of this gold will be purchased by other central banks. If this
should turn out to be the case, then the actual supply of gold
coming into the public domain will not change. Nevertheless, the
announcement was made that these sales will take place. This put
downward pressure on the price of gold.
Why would a central bank or the IMF say in advance that it
planned to sell a large portion of its gold holdings? When a
large holder of commodities is going to sell the commodity into
the open market, he does not announce this in advance. His goal
is to maximize the amount of money he gains by the sale of the
asset. If he warns the world in advance how much he plans to
sell and over which time period, this will depress the price if
the sale constitutes a significant quantity. It is economically
irrational for a seller of commodity to say in advance how much
she plans to sell. I say "economically irrational" on the
assumption that the goal is to make a profit. But if the goal is
not to make a profit, but rather to inflict economic harm on
people who hold a particular commodity as an investment, the
announcement makes eminently good sense.
The fact that the IMF sale was announced by the IMF for
years preceding the G20 meeting, and the fact that it was
announced at the G20 meeting, indicate the degree of the
hostility of the IMF and the central bankers to people who invest
in gold. They were willing to take a loss in terms of the amount
of money they could have obtained for the gold by quiet,
They are willing to take this loss because they believe that
it is more important to create uncertainty in the gold market
than it is to maximize the amount of fiat money gained by the
sale of gold. So committed are these people to inflicting
financial losses on gold investors that they are willing to
suffer hundreds of millions of dollars of losses. After all,
it's not their money.
The classic example of this was Gordon Brown's decision in
the late 1990s to sell half of the gold reserves held by the Bank
of England in trust for Great Britain. In terms of today's price
of gold, his decision cost the government something in the range
of $10 billion. He drove down the price of gold to a little
under $260 an ounce in 2001. He inflicted damage on a tiny
minority of investors in gold, and he inflicted enormous damage
on economic reserves of his country. He did this as Chancellor
of the Exchequer. Today, he is the Prime Minister. He is now
pressuring the Bank of England to inflate at unprecedented rates
in order to save the banking system.
Any suggestion that Gordon Brown understands economics is
laughable. Any suggestion that Gordon Brown is envious against
investors in gold seems to be substantiated by his public career.
He is representative of virtually every national politician and
every central banker. He hates the fact that investors in gold
can drive up the price of gold, thereby embarrassing the
government and the central bank.
The rising price of gold warns the general public that the
government's tax policies and the central bank's monetary
policies cannot be trusted. Worse, a rising price of gold
transmits the availability of a profit opportunity: get rid of
fiat money and purchase gold.
Politicians and central bankers are frantic today to keep
the general public from being aware of the enormous increase this
taken place in the monetary base of every Western industrial
nation. They do not want the public to perceive that the central
banks are in panic mode because of the disaster has taken place
in commercial bank balance sheets. Large commercial banks around
the Western world are bordering on bankruptcy. Central banks and
governments are intervening frantically to keep the banks' doors
open, in order to keep the public confused about the implications
of the worldwide economic recession that has come as a result of
worldwide monetary expansion by central banks from the year 2000
PRICES CONVEY INFORMATION
Prices convey information about economic conditions. The
price of gold conveys information about the likelihood of future
price inflation. This information governments and central banks
want to distort. They do this by manipulating the price of gold
through leases that are actually sales and sales that are
announced in advance.
When an individual invests in gold, he is making a
statement. He is saying that he does not trust the powers that
be. The powers that be deeply resent this. So, an individual
who actively takes steps to increase the price of gold, which he
does by buying it, should be aware in advance that he and people
like him will be the targets of deception, envy, and ridicule.
Buying gold is not the same as buying other commodities. Other
commodities are not perceived as touchstones of central bank
monetary policy. The price of gold is, even though most of the
gold in private hands winds up as jewelry to be used in dowries
in India. Far more than central banks, Indian fathers set the
price of gold. At the margin, however, central banks do affect
the price of gold.
With the rising productivity of India, the gold market has
received a long-term increase in demand. This can be offset by
the worldwide recession, which is now in progress. When Indian
fathers decide that times are getting better, they will start
buying gold again. Today's policies of monetary expansion, which
lower real wages and therefore get people back to work, will
begin to affect the worldwide labor markets. This will increase
the demand of gold in India.
It is unlikely that a tradition governing marriage that has
prevailed for thousands of years is likely to change just because
a relatively small fraction of the Indian population has moved
into modern urban capitalism. On the contrary, there is likely
to be increased demand for gold, because fathers will be enabled
to purchase more gold for their daughters than before because
they are making more money than ever before.
This is why the attempt of governments and central banks to
lower the price of gold will backfire. Eventually, governments
will run out of gold to sell, and so will the IMF. They will run
out of gold to lease. While I do not think the politicians will
ever catch on to the fact that their nations' gold is gone,
leaving only IOUs for gold written by bullion banks that are on
the verge of bankruptcy anyway, I do think that at some point the
central banks will stop leasing gold. They will stop leasing it
because they will not have enough to lease to substantially
affect the price of gold.
I do not think the central banks will ever demand repayment
of their gold by the bullion banks. The bullion banks would
simply declare bankruptcy, and be done with it. That would
publicly expose the central bankers as economic idiots, which
happens to be the case, and the idiots don't want the bad
publicity. So, the gold is gone, and the public will not find
out that the gold is gone. The gold is nevertheless gone. Gone
in the sense of outside of control by central banks. It is
inside the dowries of women in India and a small handful of
At some point, the number of investors who figure out that
they had better buy gold is going to go from less than 1% of the
public to 5%. When that happens, the supply of gold will not
increase, and the price of gold will skyrocket. If as many as
10% of the investing public tries to put 10% of their assets in
gold, I suspect the price of gold would go to $10,000 an ounce.
The gold market is so marginal in the overall commodities market
that the attempted 10% of investors to increase their holdings of
gold to 10% of their assets would make today's holders of gold
very rich and very happy. I think at some point this is going to
happen, but I think it is going to happen in a time of price
inflation so bad that the purchasing power of the currencies will
decline so fast and so far that the fact that you can get rich in
fiat money by selling your gold will not persuade you to sell
Who is going to win the gold wars? Holders of gold. The
big winners will be Indian wives whose fathers gave them a lot of
gold as a dowry. The rest of us gold bugs will also do well.
The general public will never catch on in time, and by the time
that it occurs to even 10% or 20% of investors that they better
by gold, it will cost them so much to get into the market that
they will not make the kinds of profits that today's gold
investors are going to make.
Governments and central banks can continue to fight the gold
war by means of gold leasing, outright gold sales, and threats of
gold sales, but for as long as they inflate the money supply to
obfuscate the price of economic depression, they will be running
out of ammunition. They are in a war in which ordnance is in
fixed supply. They cannot go into the gold market and replenish
the supply of gold without driving up price of gold.
Central banks are expanding the money supply, which is
providing ammunition for those of us who want to fight the gold
war by buying more gold. In contrast, central banks are not
expanding their holdings of gold, but rather depleting them, and
so they will not be able to fight this fight indefinitely.
They may be able to fight it for as long as the threat of
recession hangs over the world economy. But when the recession
ends, or appears to end, as a result of the massive monetary
inflation and massive deficits that the governments of the world
are running, there will be a new market for gold that is
unprecedented in its intensity.
This does not mean that everybody is going to buy gold. It
probably does not mean that even 20% of investors will buy gold.
All it will take is about 10% of investors decide to put 10% of
their holdings in gold. Governments and central banks are going
to lose the war on gold because they refuse to fight gold by the
one technique that can give them victory: stop printing money.