In this article, we will look at the history of gold futures uses across the globe and whether a much talked about revaluation event is actually possible.
For years was used by countries as money. From 1821 – 1931 when the GB pound was the world reserve currency a Gold standard was operated where GBP banknotes could be exchanged for a fixed amount of Gold. The Gold standard was an international monetary system using fixed exchange rates across borders.
Currency systems are not always perfect however and over time are susceptible to developing problems at which point governments step in to administer change.
Following WW2 and the becoming the world reserve currency, in August 1971 in a speech broadcast on live TV President Nixon temporarily removed the convertibility of US dollars to Gold, and the Bretton Woods “Gold standard” was no more. The primary reason this system ended was due to a concern about a run on the yellow metal.
The only way to stop an out of control freight train is to deliberately derail it. That is what the US government did and the fiat currency system was born.
The price of Gold has been managed by governments for years as incremental price fixes were the norm and very much required; however there was one issue – what happens when the very object used to back the currency runs out? You cannot print gold, but you can print dollars was seen as the solution.
Dating back to ancient times, gold has always been seen as the pinnacle of riches, the holy grail of wealth and the sought after prize. Gold (and Silver) coins were used as money thousands of years ago. Fast forward to the present day and nothing has changed. Back in 1971 at the time Nixon made the announcement, 1oz of Gold would cost you just over $42.
Today that price is just below $3400. An almost 8000% increase. For the astute however, this isn’t gold becoming more expensive per se, it is a catastrophic loss in purchasing power of the fiat currency that buys it.
Governments want and need inflation, they target 2% each year and fail miserably with their intentions. By printing paper currency you are creating inflation and this has gone on for the life cycle of the fiat system. Every time the bank produces a note, it is a promise to pay the bearer the sum of money printed on the very paper.
This is essentially an “I Owe You”, and since it is not backed by anything you as the unsecured depositor to the bank are relying on their ability to not mismanage your money. This led to a fractional reserve banking system where it is widely recognised banks operate on a 90% lend out ratio with only 10% equity protecting that. This is where the Basel accord banking regulations came in, and we will cover that later.
All this government demanded currency printing however creates debt, and debt until recently has been kicked down the road. This has led to phenomenal sums of money being owed by governments around the globe, and in a high interest rate environment means all roads lead to the dreaded doom loop.
What is Gold and what moves the price?
There are many common misconceptions about Gold and what it is. It has been seen as a good hedge against inflation and history has proven that. Your 1oz Gold coin is still 1oz, it just requires an awful lot more fiat currency to purchase it over time. So what moves the price up and down? Non farm payroll reports, CPI data, PPI data, GDP, both hawkish and doveish tones on monetary policy from the Fed, the debt ceiling…the list goes on.
All of the above relate to one thing and that is money. An appreciating Gold price points to a loss of faith in fiat currencies. Some label it as an insurance policy in troubling times, but that is only some of the truth. Ancient myths in folklore and stories dating back hundreds of years have led people to go in search of Gold.
The famed El Dorado, buried treasure or bank robberies to name a few. Society has ways of categorising it as a top tier item. Airlines and credit cards for example have Gold as their top level of membership. It came on the list before Frankincense and Myrrh, it is a rare Earth commodity that has always been synonymous with the elite and powerful of this world and owned by those who understand its true value as sound money and a store of wealth that stands the test of time.
In more recent times the rumours of reusing its role in history have begun to gain traction and there is a very good reason for that. For decades, debt has been rear view mirror stuff but since Covid the toxic combination of QE and high interest has led to a problem it seems there is only one way of getting out from underneath.
Is a Gold revaluation plausible?
When Nixon made the announcement, the receipts to the Gold held in the US reserves was for just over $42/oz. This has sat on the balance sheet of the US at this price since then. In a recent statement report it appeared as Item 1 under the assets column. Notably in Nixon’s speech he used the term “temporarily” suspended opening the door for a revisit at some point in the future knowing full well how structurally important Gold is to global reserves.
Since Trump became president for the second time, he has publicly stated on several occasions he wishes to audit Fort Knox. He has also released tweets on his Truth Social platform with “He who has the Gold makes the rules.” – a well known phrase in the Gold community. Scott Bessent, a world renowned Gold bug, claimed in the Oval office that the US intended to monetise the assets on the US balance sheet.
What else can that mean except revaluing Gold? He later retorted under media hype and scrutiny that this wasn’t what he meant. Even billionaire Hedge Fund CEO Ray Dalio of Bridgewater Associates has recently talked about the revaluation of Gold and proffered advice of 15% of your portfolio. A far cry from the 60/40 stocks/bonds of the last 40 year bull market that is now well and truly over. Some very big players are talking.
Central banks also have a Gold reclassification account on their balance sheets. The BIS under Basel III regulations changed Gold to a Tier 1 asset in its allocated physical form. The world is nearly there in compliance. Recently the Federal Reserve who have distanced themselves from the yellow metal for years, released a guide to revaluing Gold.
If the US were to press the button on its balance sheet at today’s price it would dispense a near $874 billion windfall from its current balance sheet price of $42.22/oz
But why stop at that? Prior to 1971 the US changed the dollar price of Gold regularly. That $874bn doesn’t touch the sides when you have a debt of over $37 Trillion that gains a million dollars every 30 seconds. The math computes to circa every $4000/oz increase in Gold pricing yielding $1 Trillion potentially wiped off the balance sheet.
So why not revalue Gold at $50,000/oz $100,000? The mechanics are very straightforward as well. The receipts for the Gold could be bought and sold between the Fed and the treasury in a basic transaction. The beauty of it all is the Gold doesn’t ever move or need to be sold. It sits on the assets side of the balance sheet as money. Exactly what it did for Romans to institutions to individuals that hold it – protecting wealth.
It all sounds too simple doesn’t it. Well it isn’t, and there are many reasons for this but we will focus on the two most salient issues.
The first is the revaluing as documented above, is not increasing the price of Gold, it is devaluing the currency. This will almost certainly lead to an enormous inflationary shock event, and the poor will feel the brunt of this more than anyone else. We live in a system where the rich get richer and the poor get poorer. For years Wall Street has gambled, and far too many times it has walked away from the table empty handed with the US government paying off the casino.
The system has always been designed to privatise gains and socialise losses and Main Street will always fall victim to this. The higher the valuation of Gold, the worse the socio demographic problem will be.
The second and by far the more worrying for the US is China. Officially they have 2,279 metric tonnes of Gold to the US’s 8,133 tonnes. Moneyweek, after a long study, reported some years ago that undocumented imports through Hong Kong, clandestine central bank buying and their own internal mining would put the figure well above 20,000 tonnes. Some economists claim this figure to be conservative.
China is very secretive when it comes to disclosing information that could affect its sovereign wealth and when they eventually do, it could be one of the worst kept secrets of all time. The last thing the US would want to do is unleash a powerplay only to be usurped by their greatest foe who saw this coming years before they did. Diplomatically it would be unfathomable.
Notwithstanding this, the balance of probability is leaning toward the considerable circumstantial evidence pointing in the direction of a revaluation event. Something as major as this wouldn’t have been dreamt up over a three day meeting in Wyoming, it would have been in plain sight for years.
It would appear some countries were astute to this, and some will be left curled up in a corner hoping to never see the outside world again. Gordon Brown springs to mind, and not just his timing, but how he sold the UK Gold which one could argue is tantamount to treasonous.
The concept of a Gold revaluation isn’t new. Many have vacillated on the subject and argued Bretton Woods created a better life for everyone than Fiat has. I myself have penned articles for several years about a revaluation, the threat from China and the minutiae around the BIS reclassifying physical Gold ownership for banks.
The picture was somewhat more bleak in comparison to today, however. Back then, the current price seemed inconceivable to some, but then so did Gold at $100 when it was $35 and so on.
Governments around the world continue to nonchalantly borrow or print money they don’t have any plan on how to pay back to reduce debt to GDP ratios which are vastly out of control. One would have to be somewhat sanguine on the concept of a Gold revaluation event that there is no other solution to this problem; however the intricacies of how the cards are turned over is likely the reason it hasn’t already been rolled out.
If/when this does happen there will be a clue. Watch for the dollar index tanking and Gold skyrocketing in price a few days before a weekend without the fundamentals. This will be ipso facto insider knowledge and the announcement can only happen when the markets are closed.
So could it happen? Yes. When? Only a few will know, and care has to be taken so the financial system doesn’t implode. There will have to be other fixes via the FX crosses of interdependent currencies. There will have to be measures in place to stop the derivatives market biting back which counts for numbers that are many multiples of the US debt.
When these conditions have been worked through one thing is absolutely certain: Gold will return to centre stage and back to what it is and always has been in its physical form: sound money and a true store of wealth.