Is the world about to witness a shocking gold revaluation?
Will There Be A Gold Revaluation?
February 10 (King World News) – James Turk: An article about gold in the Financial Times touched upon some of my current thinking, Eric. So now that the mainstream media dare consider a gold revaluation, I thought it was a good time to share my thoughts on it, but give it a spin and depth different from the FT.
The anomalies in the gold market over the past couple of months have become widely known. These include the huge spread at which futures and forward contracts are trading over spot, the huge flows of physical metal into the US, as well as the decline in the assets of GLD and some other paper-gold products.
What hasn’t been broadcast is why these anomalies are happening. And just as importantly, why now? Tariffs have been generally dismissed as the proximate cause, even before some of the tariff related tensions started to ease. But the anomalies remain.
So I’d like to speculate on one possible reason for the anomalies and one possible outcome. And I stress it is just speculation, designed simply to open one’s mind to the countless possibilities given today’s unusual circumstances.
What I’ve been pondering is whether President Trump will return the US to constitutional money, which is gold and silver. Will he revoke the Executive Orders of presidents Franklin Roosevelt and Richard Nixon that put America on an unconstitutional monetary system that has led to today’s excessive credit creation and a $36 trillion federal government debt?
Article I Section 8 gives Congress the power “To coin Money, regulate the Value thereof…” Congress doesn’t have the power to print money, and if it doesn’t have a power granted to it, obviously it can’t delegate to the Federal Reserve or anybody else a power it doesn’t have. And to regulate the value of the money it coins, Congress has the power to fix a gold/silver ratio under the Constitution’s bimetallic monetary system. The ratio must align with market rates to ensure that there is always sufficient quantities of both metals in the country for coining.
So a constitutional dollar – a C$ – is different from a Federal Reserve dollar – an F$. More to the point, a coined C$ is fundamentally different from a printed paper F$. Even further up the derivative ladder of increasing risk, a paper currency F$ is different from the intangible dollars in bank deposits that are supposed to be convertible into F$s and are only based on promises. The collapse of Silicon Valley Bank and failure of other banks show that those promises can be very thin, highlighting the risk of holding F$s.
So there two all-important questions. First, is President Trump about to revoke President Nixon’s August 15, 1971, Executive Order to “suspend temporarily” the dollar’s link to gold? Yes, that is the speculation that I have been thinking about and proposing here. It was a temporary suspension because Nixon knew a permanent suspension would quickly be deemed unconstitutional by the Supreme Court. Unfortunately, we have been suffering the consequences of F$ fiat currency ever since.
Second, would President Trump go further by revoking FDR’s Executive Orders in March and August 1933 that ended the redeemability of F$s in C$ coin? I don’t think so. There is no constitutional requirement for these two different dollars to be linked. So that would the leave in the lurch the F$ and their issuers, the Federal Reserve that prints paper currency and the banks that conjure up bookkeeping entries when they make F$ loans.
It would put these F$ issuers in a precarious position because the F$ would be competing with the C$, and fiat currency is always inferior. That’s why the framers put clear monetary provisions in the Constitution. They learned from experience with the hyperinflationary collapse of the continental in 1781, the country’s first fiat currency, and aimed to prevent its any future recurrence.
If President Trump takes this step, the F$ and the C$ would circulate simultaneously, much like bitcoin is circulating in parallel to the F$. Bitcoin has been winning the competition for holders – evidenced by its rising price over the last 15 years since its appearance. While the long-term outlook for bitcoin remains to be proven, gold has been money for 5,000 years.
Over the millennia, gold always wins compared to fiat currency, as evidenced by gold’s proven ability to preserve one’s purchasing power. For example, an ounce of gold today buys even more crude oil (i.e., energy) than it did over seven decades ago.
Banks can conjure up F$s out of thin air at will and fund government deficits when put under pressure from politicians, but banks can’t do that with bitcoin, the quantity and growth of which is controlled by math. Nor can banks conjure up physical metal, the quantity and growth of which is controlled by nature. This thinking is leading me to a probable cause of the gold inflows.
My speculation here made me recall what I’ve read about the months preceding Franklin Roosevelt’s inauguration in March 1933. Despite his pronouncements to the contrary, the insiders knew – and those on the outside with foresight guessed – that FDR was going to confiscate gold and do it before the needed dollar devaluation that would re-balance the monetary system from the credit excesses of the 1920s, which by the way, were minuscule compared to the credit excesses today.
So in 1932 and the early months of 1933, there were huge gold outflows from America to Europe and Canada. Those transfers enabled gold holders to avoid confiscation of their metal and benefit from gold’s revaluation (the dollar’s devaluation) from $20.67 to $35 per ounce, after which the gold flowed back to US vaults.
The insiders again know what’s about to happen, just like FDR’s insiders did. That explains why the gold flows are happening now. They are positioning themselves, along with others who appear to be following in the insiders’ footsteps given the frenzied rush to put one’s purchasing power into the safety of physical gold. In this scenario, gold will be revalued, but that alone doesn’t explain the huge gold flows into the US. One piece of my speculative puzzle is missing.
Only Physical Gold Will Be Revalued
Logic would suggest the gold flows into the US are telling us that only physical gold will be revalued, and you therefore need to own physical metal to benefit. It explains why the rush to physical metal is happening now, even when incurring abnormal cost, like flying gold from Asia to the US as has been reported.
My speculation here is that like FDR, President Trump is disrupting the standing order, but with a difference. The constitutional order that had prevailed for over a century began to unravel in 1913 with amendments to the Constitution and the creation of the Federal Reserve, all in the same year. FDR finalised this process of disruption to the constitutional order with the confiscation of gold and other steps that expanded the federal government beyond its design and original intent.
In contrast, President Trump is taking actions – including the Supreme Court appointments during his first term – to re-establish the constitutional order that FDR and the Progressives ended. But there is another important point.
This rush to physical metal implies that paper-gold products will have a different outcome than physical metal. My guess would be that all the paper representations of gold (ETFs, certificates, futures, etc) will be frozen before the revaluation and unravelled by settling in dollars at the frozen pre-revaluation price without any benefit to the owners of paper-gold from the revaluation. It’s not an outright confiscation like FDR did, but similar in terms of exercising federal government power. Given the magnitude of paper claims to gold relative to existent physical metal, reneging on the paper claims to gold is the only practical way to return to constitutional money without massively devaluing the dollar and causing a tidal wave of dollar inflation.
As I explained in my last KWN piece, a fair value for physical gold today based on actual metal supposedly stored in central bank vaults would be $10,900 per ounce. But given some people’s estimates that there are 100 claims of paper gold to every ounce of physical metal, it’s hard to imagine the inflationary outcome arising if holders of paper gold were to benefit to the same extent as holders of physical metal.
So my guess would be that paper gold holders won’t benefit from a gold revaluation (dollar devaluation). Even just the fear of missing out could be a factor contributing to the rush to physical metal, which in any case should not be a surprise to KWN readers. There have been many articles and interviews over the years by me and many other contributors highlighting the difference between physical metal and a paper promise to deliver metal at a future date, or how GLD is simply a tool for tracking the gold price and that its shares are not gold itself.
A New Golden Age For America
President Trump has set a new Golden Age for America as an objective. One element could be returning America to money of the Constitution. It only requires the political will to follow the supreme law of the land to which politicians are sworn to uphold. They simply need to define the genuine and real US dollar – a C$ – as a weight of gold and silver and let the C$, F$, and bitcoin compete for holders in an unfettered free market, which leaves one last point to speculate.
What would be the new gold/silver ratio? Given that each year there is about 10-times more silver by weight mined than gold, a ratio closer to 10 silver ounces to one gold ounce than its present 88-to-1 is a reasonable guess.
It seems, Eric, that President Trump is clearly focused on his legacy. He would no doubt emerge as a pre-eminent historical figure by returning America to constitutional money.
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