Gold buying rose spectacularly in 2018
led by the world's central banks, which increased their physical
purchases by 651.5 tonnes. That's an astonishing 74 percent over
2017. This was the most gold these banks bought in more than a half
century, since 1967. The world consumed 4,345.1 tonnes
of gold in 2018, up from 4,159.9 tonnes in 2017. Jewelry demand was
relatively unchanged at 2,200 tonnes. Retail investment in gold bars
and coins grew 4 percent to 1,090.2 tonnes, which included a sharp
222-percent rise in demand in Iran for almost 62 tonnes.
Not only have central
banks purchased more gold, but a number of new buyers have entered
the market. Poland became the first European Union country to buy
gold in the 21st
century, adding 14 tonnes in the third quarter. The Hungarian
central bank bought its first gold in 32 years, increasing its gold
holding 10-fold. India added 21.8 tonnes, its first major increase
since buying 200 tonnes off market from the International Monetary
Fund in 2009. Mongolia bought 12 tonnes. Egypt bought gold for the
first time since 1978, while India, Indonesia, Thailand and the
Philippines re-entered the market after multi-year absences. The
Russian central bank was by far the largest buyer of gold in 2018
adding an incredible 274 tonnes to its holdings. Since the beginning
of 2017, Russia ranked first in gold purchases with 383.3 tonnes,
followed by Turkey with 125.8 tonnes, and Kazakhstan ranked third
with 68.4 tonnes.
Why has there been this
large and growing interest by central banks all over the world in
buying gold? The U.S. national debt is now $22 trillion, and that
doesn't even include future obligations for Social Security, Medicare
and Medicaid. Those will never be paid as promised, because the
obligations are growing faster than government's income. Every
dollar the federal government has borrowed in the last ten years,
since 2008, has generated only 44 cents of economic output. The
U.S. gross domestic product has
increased 35% since 2008, but the national debt has increased 122%.
So much for the Keynesian idea that government spending will promote
economic growth.
As a candidate, Donald Trump promised
to erase the entire national debt “over a period of eight years.”
More recently he has shrugged off concern about the paying on the
debt because “I won't be here” to take blame when the fiscal
crisis blows up. That seems to be the attitude of a great many
politicians. The fact that the dollar has lasted as long
as it has as a fiat currency has perhaps led politicians to believe
it can continue if not indefinitely then at least for their term of
office. But a recent paper by two economic professors emeritus
(Dennis W. Jansen and Thomas R. Saving) states: “The deficit and
the cost of servicing the debt now take up more than half of all
federal income tax revenue. The days of the Treasury counting on the
Fed to help out with government finances are coming rapidly to a
close, and the full bill for our fiscal policy
choices is coming due”(italics added)—not
decades from now as many forecasts project, but far sooner.
The Fed creates money and
uses it to purchase assets, such as mortgages and government bonds.
These earn interest for the Fed. After paying its expenses, the Fed
returns the remainder to the Treasury, which has been using it to
service the federal debt. In 2006, for example, the
Fed earned interest of $36.8 billion. And after paying operating
expenses of $1.3 billion (plus the cost of rolling over a portion of
maturing debt at current, higher interest rates), it returned $29.1
billion to the Treasury.
Following the Great
Recession, the Fed greatly expanded its assets and liabilities, began
to pay interest on bank reserves, and took other steps, the net
effect of which was a large increase in Fed revenue and, therefore,
in payments to the Treasury. In 2016 Fed transfers to the Treasury
reached $100 billion and covered 48 percent of the debt servicing
cost. The Congressional Budget Office projects that Fed transfers
will cover only 11 percent of the debt servicing cost in 2019, and by
2020 the Fed will cover less than 10 percent of the debt service cost
of $485 billion!
That's $170 billion more than the $315 billion the government paid
for interest on the debt in 2018!
President Trump on several occasions
has said we need a “reset” of the dollar in the international
monetary system. No indication of what this will consist of but it
will necessarily be a devaluation of some sort for the dollar. The
last two times the dollar was “reset” were FDR's reducing the
value of the dollar to one thirty-fifth of an ounce of gold and
President Nixon's 1971 eliminating any gold value to the dollar. The
whole purpose of a “reset” is to try to avoid the consequences of
years of fiscal and monetary extravagance, but it won't work. As the
great economist Henry Hazlitt wrote many years ago: “If
a government resorts to inflation, that is, creates money in order to
cover its budget deficits or expands credit in order to stimulate
business, then no power on earth, no gimmick, device, trick or even
indexation can prevent its economic consequences." Not having learned
that lesson from the past, we shall be forced to learn it under more
painful circumstances in the future that is already at our doorstep.
There are trillions of
dollars all over the world, not just in the central banks. In my
view, the huge and growing gold purchases by the central banks result
in large measure from fears the dollar will be “reset” in a way
detrimental to the holders of dollars. So it's best to trade the
dollars for gold before that happens. And that revaluation by the central banks will be followed and
accelerated by dollar holders everywhere.
