By now perhaps you have seen the headline, “IMF Director Calls for A New Bretton Woods Moment”. The implications for Gold are significant. While few are familiar with the director (Kristalina Georgieva) who made the announcement, many are familiar with the IMF and the significance of Bretton Woods. Bretton Woods, you may recall, is a location in New Hampshire where a global monetary conference was held in July of 1944. The establishment of the IMF, and the creation of a new Dollar-based global financial system were major results of this conference. Even though the “greatest American battle of the war” according to Winston Churchill, had not yet been fought (Battle of the Bulge, December ‘44 - Jan ‘45), nor had the atomic bombs been dropped on Japan (August ‘45), the global financial system was in need of repair.
US Position during Bretton Woods
The United States had become the factory and farmer of choice for the allied nations, providing all manner of food items, manufactured goods, and war materials to a diverse group of friends that included the Philippines, Great Britain, China, Russia, Australia, Canada, and many others. While much goodwill was involved with the aid delivered, the United States also received a significant portion of world Gold reserves as payment. In July of 1944, the United States was holding most of the known Gold reserves of that time, and was believed to be the only nation in the financial position to support the global recovery that was desperately needed. We also had one of the few manufacturing sectors that had not been destroyed or crippled during the war.
This position of financial strength led to the acceptance of Dollars in lieu of Gold as a means of payment worldwide, and the commitment to convert Dollars into Gold at a rate of $35/ounce was established. The Dollar was presented and perceived as being as “good as Gold” to members of the international community. Until it wasn’t. In the 1950’s and 60’s, nations began turning in their Dollar reserves to the US Treasury in exchange for Gold. In 1965 President De Gaulle of France sent the French Navy to the United States, to pick up over 4,000,000 ounces of Gold to move back into French custody. As the trend picked up and continued, it eventually led to President Richard Nixon “temporarily” closing the Gold trading window in 1971. What became known as the “Nixon Shock” allowed the United States to hold onto approximately 8,100 tons of official Gold reserves, down from 25,000 tons in 1947.
Effects of the Nixon Shock
The “temporary” inability of foreign nations to demand Gold in exchange for US currency has now lasted 49 years. Imagine how long it might be if this policy was “permanent”. What impact has this temporary policy had on the value of the Dollar vs Gold in the last 49 years? As the chart below indicates, Gold has increased 4,695% vs the US Dollar, since 1971. That is, today it takes $1,925 to purchase an ounce of Gold, vs $41 in 1971. The stated goal of the “Nixon Shock” to protect the value of the Dollar, has clearly not been met. Since that fateful day in 1971, the holders of Gold have been protected, while the holders of Dollars have seen their purchasing power severely eroded. Even a rising stock market could not protect against a falling Dollar, when compared to the protection provided by Gold.
Which brings us back to the current call for a return to a “Bretton Woods moment”. As was seen in the language used during the “Nixon Shock”, rhetoric is sometimes meant to sway the opinions of the masses, more than to convey probable outcomes. The position of the United States on the world stage today is much different than it was in 1944. Rather than being the only solvent nation in a sea of insolvency, today the United States is the most indebted nation in the history of nations. Instead of being the nation with the strongest manufacturing base in the world with a huge trade surplus, today the United States operates with a huge trade deficit, purchasing many goods imported from abroad. The Dollars used to purchase these goods are no longer considered to be “good as Gold”, and many nations have reduced their US Dollar holdings in favor of Gold.
Earlier we mentioned the announcement calling for a “Bretton Woods moment” had significant ramifications for Gold. If you read or listen to the announcement, you will not find Gold mentioned in the narrative directly. I believe the impact for Gold is found in what the announcement does mention directly. The announcement calls for further currency creation and stimulus measures to be applied, and for increased loans to be supplied for various countries and sectors of the world economy. An increase in the quantity and velocity of currency creation around the world, makes an increased Gold price an almost certainty as we move forward.
The IMF vs The Federal Reserve
In the same way that actions taken by the Federal Reserve have tended to support Gold and Silver prices in the United States in 2020, the IMF can influence the value of precious metals worldwide. There is an old adage that says “If you find yourself in a hole, stop digging”. Apparently the managers of the world’s financial system do not think much of this common sense approach to finances. Perhaps at some point, it will become apparent that we cannot borrow our way out of debt. Until then, the relative value of paper currency will continue to decrease, while the value of tangible money such as Gold and Silver will continue to trend upwards.
We have already seen how currency creation in one country can influence precious metals prices upwards in that currency. But what about when the same policies are pursued on an international scale? This creates a multiplier effect that will benefit the owners of Silver and Gold in every country. There is an old saying that says, “When America sneezes, the world catches cold”. We might be witnessing the creation of a new era, that warrants a new phrase. “When the IMF creates currency, the wise turn to Gold”.