Age of Gold Preeminence

Something as significant as the closing of the gold trading window by President Nixon in1971 may have just occurred in the realm of international finance. Keep in mind that an ounce of gold has increased over 5,700% in price since then. It is the opinion of macro analyst Luke Gromen and others that something similar has just happened. The recent sanctioning of the Central Bank of Russia may be just such an event. In a recent podcast interview with famed investor Grant Williams, Gromen lays out the case that employing this type of sanctions essentially tells the world that few assets other than physical gold held locally are safe for central bank reserves. In recent years, central banks worldwide have purchased 300% more gold than U.S. Treasury Securities for reserves. This realization speeds along a process following the Great Financial Crisis of 2008.

Essentially the United States has told the world that Dollar reserves are of little value if an American administration decides to pull the plug on access to them. Setting aside the argument about whether or not this is a politically expedient or beneficial action to take vis a vis the conflict between Russia and Ukraine, let's consider the practical implications of such a policy in light of similar responses from the European community towards Russia. To do this, we will have to take a brief walk down memory lane to set the stage for how we got to where we are today and where we are likely headed in regards to the American economy, the dollar, and gold.

The Bretton Woods financial system was in place from 1944 until the Nixon Shock of 1971. During this period, the U.S. Dollar was considered as good as gold, at a fixed exchange rate of $35/ounce of gold. As the U.S. began to operate with increasing budgetary deficits with other nations such as France, these nations began requesting gold payments for goods and services instead of dollars. The United States gold coffers of 21,000 tons were steadily whittled down to $8,000 tons when President Nixon "temporarily" closed the gold exchange window and the $35 peg to gold. 

From 1973 until 2004, the dollar price for oil was primarily kept in a trading range of $15 - $40 per barrel. The dollar went from being "as good as gold", to "as good as a barrel of oil". When the price per barrel rose too high, interest rates were raised to slow the American economy and lower the price of oil. When oil prices got too low, interest rates were lowered to speed up the American economy and raise the price of oil. Nations worldwide felt they could trust American administrations and the Federal Reserve to protect the dollar price of oil. Since nations kept most of their reserves in dollars, their ability to purchase energy was thereby protected as well. This period of stable oil prices began to wane in 2004-5, with increased oil demand from emerging economies in Asia and depleting oil fields worldwide.

Then came the Great Financial Crisis, when the Federal Reserve stopped pursuing policies that protected the dollar price of oil. Between May of 2007 and the summer of 2008, a barrel of oil increased from $65 to $140 per barrel due to lower interest rates and a new form of currency creation called "Quantitative Easing," or Q.E. Other nations began to realize the dangers of having the dollar as the reserve currency when the United States pursued predominantly loose money policies. It became a matter of national security for other nations to secure neutral assets to hold as reserves. The Governor of the Peoples Bank of China, Dr. Zhou Xiaochuan, submitted a White Paper that endorsed an alternative system that included gold and a variety of currencies. The world continues to move in that direction, with or without corresponding official policy directives.

Today it appears that the world financial order has reached a tipping point, with even the United States realizing that the petrodollar system it created nearly 50 years ago has to change. Not only for the benefit of the rest of the world but benefit the U.S. as well. The Director of National Intelligence (DNI) has been compiling a forward-looking report for the incoming American presidential administration every four years since 1997. In their report entitled "Global Trends 2030 - Alternative Worlds", published in December of 2012, they identified many of the challenges we see today in terms of energy development around the world, the possibility of a global pandemic, and the trend from a uni-polar world to a multi-polar one. While the current conflict between Russia and Ukraine was not specifically mentioned, many of the resulting challenges we see today were noted as eventual possibilities.

In a more recent report compiled in March of 2021 entitled "Global Trends 2040 - A More Contested World", even the title suggests the type of environment we are witnessing today. It also discusses the difficulties experienced by the world economies during the recent Covid-19 pandemic and how the debt levels of nations in the developed West have increased dramatically, including here in the United States. While the current conflict between Russia and Ukraine was not specifically mentioned, the likelihood for similar conflicts was more pronounced than the report issued a decade earlier. For the last several years, defense analysts have pointed out the flaws in the current system, which has the United States borrowing money and purchasing products from nations deemed to be our most significant threat. By sanctioning the Central Bank of Russia, we have taken an important step in helping focus world attention on gold instead of the dollar.

Today's economic realities focus on the issues we discussed earlier concerning international banking regulations known as Basel III. The likely positive impact on gold and silver prices. The events surrounding the latest round of sanctions have enhanced the effects of Basel III and provided further motivation for the nations of the world to look increasingly to physical gold as a reserve asset and less to the dollar. I believe that the U.S. will continue to play an essential role in the world, as will the dollar. But for the benefit of all nations, gold is playing an ever-increasing role. To benefit from the worldwide momentum propelling gold's increased role globally, all we have to do as individuals is own some gold.