Earlier this year we wrote that 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. 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 in 2009. Mongolia bought 12 tonnes.
Egypt bought gold for the first time since 1978, while
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.
Figures released by the
World Gold Council for the first quarter 2019 show the strong uptrend
in gold prices during 2018 has continued in 2019, and it isn't just
the central banks that are buyers. Purchases of gold-backed exchange
traded funds (ETFs) and similar products rose sharply in June by 127
tonnes as the price of gold rose to a six-year high. North American
funds had inflows of 65t, and European funds rose by 59t. In North
America, SPDR® Gold Shares (the largest gold ETF) added 51t and
experienced its largest one-day inflow of all time on June 21st while
iShares Gold Trust added 12t.
In the UK, ETFS Physical
Swiss Gold added 23t, worth nearly a billion U.S. dollars, and grew
by 115% during the month of June while iShares Physical Gold ETC
added 20t. European gold-backed ETF holdings represent the largest
percentage of gold assets in its history at 47% of total assets,
trailing North America by US $3.6 billion
Why have central banks all
over the world been buying so much gold? The U.S. national debt is
now $22 trillion, but that is only the “official” debt; it
doesn't include much larger “unofficial” expenditures. Those will
never be paid as promised, because the obligations are growing faster
than the government's income. Every dollar the federal
government has borrowed 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 that will generate tax revenue to pay its debts.
Obviously the government cannot
continue indefinitely to spend more money than it takes in. If that
trend continues, eventually the monetary system will collapse amid
high interest rates and people's distrust of the money. This is what
happened in the U.S. in 1789 when inflation was rampant and people
couldn't trust the value of the currency. Even the U.S. Congress
refused to accept its own money in payment of a debt.
What the central banks are telling us
by buying gold now is that they have less confidence in the future of
the dollar. The official $22 trillion dollar national debt does not
include future payments for social security, medicare, medicaid, and
various other payments for which the government is obligated.
Laurence Kotlikoff, an economics professor at Boston University says,
“Congress has been very careful over the years to label most of its
liabilities as 'unofficial' to keep them off the books and far into
the future.” Based on Congressional Budget Office data, Kotlikoff
estimates there is a gap of $202 trillion between the 'official' and
'unofficial' obligations of the federal government, but all must be
paid. The worldwide transfers of gold are pointing toward a day of
reckoning for the dollar. It won't happen far in the future, and it
won't be favorable for the value of the dollar.
We are headed for a catastrophe.
Thomas Jefferson was right when he wrote: “There does not exist an
engine so corruptive of the government and so demoralizing of the
nation as a public debt. It will bring us more ruin at home than all
the enemies from abroad.” If you are seriously interested in the
monetary situation, I recommend you get my book The Impending
Monetary Revolution, the Dollar and Gold. It
contains far more information than I can include in a few blog
postings.
