I, Franklin D. Roosevelt, President of the United States of America, do declare that said national emergency still continues to exist and pursuant to said section do hereby prohibit the hoarding gold coin, gold bullion, and gold certificates within the continental United States by individuals, partnerships, associations and corporations…
All persons are hereby required to deliver on or before May 1, 1933, to a Federal Reserve Bank or a branch or agency thereof or to any member bank of the Federal Reserve System all gold coin, gold bullion, and gold certificates now owned by them or coming into their ownership on or before April 28, 1933.
This declaration was made in Executive Order 6102 on April 5, 1933.
In it, president Franklin D. Roosevelt (FDR) made private gold ownership illegal in the United States. And he required all Americans to turn in their gold in exchange for $20.67 per ounce.
Private gold ownership remained illegal in the U.S. until 1975. Since then Americans have been free to buy and sell gold coins and bars at will.
But the U.S. government has held onto all the gold it collected from Americans back in 1933. As it stands, the United States’ total gold reserve is officially 8,133.5 metric tons. That’s worth $506.3 billion at today’s gold price.
According to official central bank records, this is the largest stockpile of gold in the world. And that raises a question – why does the U.S. still hold all this gold?
After all, gold hasn’t played any role in the global financial system since 1971. That’s the year President Nixon closed the international gold window. Doing so cut the dollar’s last link to gold.
What’s more, prominent financial officials have downplayed the purpose of gold ever since then. When asked, former Fed Chair Ben Bernanke said that gold was nothing more than tradition.
Okay… so why hold it? And why do all major central banks in the world hold gold? Many central banks have been adding to their stockpiles in recent years.
I think the answer is because they know that one day they’ll need it. They will have to reintroduce gold into the system in some capacity.
Yesterday we examined a curious interaction from the Federal Reserve’s (the Fed’s) June press conference. Fed Chair Jerome Powell decided to keep rates steady in June… but he suggested two more rate hikes are likely coming.
This prompted a financial reporter to ask a good question…
The reporter pointed out that the U.S. government was on track to run annual deficits of nearly $3 trillion in the next ten years. And if that trajectory continues, federal debt will surpass $52 trillion by 2033.
He then asked Powell directly – will the Fed lower interest rates to help the U.S. Treasury finance this debt? The implication here is that lower rates would reduce the annual interest payments the Treasury must make on the national debt.
Powell’s response was direct. No. Under no circumstances.
This should force us to stop and think.
If Congress is dead-set on blowing out the budget like this… and if the Fed isn’t willing to cut rates to help keep debt service costs manageable… well, something is going to break in a big way.
That is, unless there’s a wild card. And if we think about it – gold re-monetization could be that wild card. I’ll explain…
When interest rates were effectively at zero, the U.S. government’s debt load was manageable. That is to say, the Treasury could afford to make interest payments on the debt without blowing up the budget.
But most of the national debt will need to be rolled over in the coming years. That means the current Treasury bonds are maturing, and the Treasury will need to issue new bonds to pay off the old ones. These new bonds must be issued at today’s higher interest rates.
So the problem is – how do you service the gargantuan debt as rates rise?
Gold re-monetization is a potential solution. To understand why, we have to understand how Treasuries work.
When an entity buys a Treasury bond, they are loaning money to the U.S. government. The government pays a rate of return on the bond for its duration, then it repays the entire principal balance at maturity.
As good investors, we understand the Time Value of Money principle. A dollar today is worth more than a dollar tomorrow. Specifically because the government creates new dollars from nothing every year.
So, those entities investing in Treasuries need a strong rate of return to make it worth their while. Because they know that when they get paid back at maturity, those dollars will buy less than they would have originally.
But suppose the U.S. government agrees to settle a specific portion of Treasuries in gold. That’s gold re-monetization. When investors get paid at maturity, part of that payment comes in the form of gold.
This could lend itself to a tiered system of sorts. The Treasury could sell bonds with various degrees of gold backing at corresponding rates.
For example, a 5% gold-backed bond would carry a higher rate than a 10% gold-backed bond. But both would pay lower rates than a standard U.S. Treasury bond with no gold backing.
See how this works?
Gold re-monetization would allow the Treasury to sell bonds at a lower rate than they otherwise could. In turn, this could allow the government to manage debt service costs even as rates rise.
This would also serve to attract foreign countries and central banks to Treasury investments… which is what the Treasury needs in order to sell all the bonds it needs to sell if the Fed is no longer the buyer of last resort.
Obviously this isn’t something that would make the U.S. government’s fiscal path sustainable long-term. There’s only so much gold to go around.
That said, something like this could serve as a band-aid. It could buy the U.S. Treasury some extra time.
Of course, there are tons of wild cards and unknowns in here. We can’t be sure exactly how it would all play out.
But what we can know is this: if gold re-monetization happens, the price of gold is going much higher. Now’s probably a good time to add to our stack.
-Joe Withrow
P.S. If you’re interested in building a gold into your personal investments, our flagship Finance for Freedom program will show you how. More information right here: Finance for Freedom