What Is Gold Telling Us?

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 21^st 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.