The War on Gold

November 10, 1997 – On October 24th a committee of government bureaucrats from the Swiss finance ministry and the Swiss National Bank shocked the Gold market. After having reviewed for several months Swiss monetary policy as well as the legal framework by which the Swiss currency is managed, the committee announced that it was recommending that 1400 tonnes of Gold (54% of Switzerland’s 2600 tonne reserve) be dishoarded.

Gold fell $16 in response to this announcement, leaving many traders bewildered and shell-shocked. In the words of one trader quoted in The Wall Street Journal: “It’s like a war zone.”

This hapless trader probably didn’t realize the true accuracy of his statement. His description of events that fateful Friday is very apropos because governments have been at war with Gold for most of this century. That statement may sound extreme, but consider these facts.

The war on Gold began in 1914 when the redemption of paper money into specie was suspended at the outbreak of World War I. The process of separating people from real money had begun, and would continuously be reinforced thereafter by ironfisted government policy. The Gold Exchange Standard ushered in after WW I was one of the first steps in this direction.

No longer would Gold coins be allowed to circulate in commerce. Gold would only be paid out in transactions in increments of 400 ounces, the largest size Gold bar in use, thereby putting Gold far beyond the reach of most individuals.

The next shot at Gold occurred after the 1930’s credit collapse. Governments blamed Gold for the Great Depression even though knowledgeable observers at the time understood the collapse was caused by the reckless extension of credit by banks.

And to add insult to injury, the federal government in 1934 confiscated private hoards of Gold because the precious metal was considered to be ‘too valuable’ to be left in individual hands during a time of economic crisis. Decades later in his epic Monetary History of the United States, Milton Friedman correctly placed the blame for the depression where it rightly belongs, on government policy makers, and specifically the Federal Reserve. But even today few people acknowledge this monetary failure of government.

The war against Gold continued in 1944 at the Bretton Woods conference that was convened to discuss the post-war monetary order. The Dollar instead of Gold would become the currency for settling international payment and trade balances, thus further removing Gold from individual reach. The 1950’s saw the result of this policy. The so-called post-war ‘Dollar shortage’ was more than filled by the effluence from an ever overworked printing press.

Final metallic debasement of the Dollar occurred in the 1960’s when Silver was removed from coinage. The federal government likes to say that it removed the Silver, but that is just an example of their typical misstatements. In actuality, the market place removed the Silver because people recognized that the Silver in a dime or quarter was worth more than 10¢ or 25¢.

By the 1970’s, Gold had become so far removed from everyday transactions, that the language now changed as well. It was much easier for a government to fight the war on Gold by announcing that central banks would be selling Gold, instead of dishoarding it. The use of the word dishoarding emphasized that Gold was valuable. So from now on Gold would instead be sold, a supposedly mundane process – like getting rid of the family’s used car – for the now so-called ‘demonetized’ precious metal,.

In the 1980’s the war on Gold was for the first time fought a different way. Propaganda would still play a role, but most central banks actually tried to improve the value of their national currency.

For example, Paul Volcker aimed to reduce double-digit inflation and restore faith in the Dollar by gradually decreasing over several years the annual rate of growth in the quantity of Dollars in circulation (M3). And for a time, it worked. Gold was out of favor except during crises such as the Mexican debt default (1982), the Ohio & Maryland banking holiday (1985), and the Texas S&L crisis (1987). However, government policy has again changed. Since 1992, central banks everywhere have been pumping up the money supply in their respective countries, so propaganda rather than monetary prudence is again the foremost weapon in the government’s arsenal.

It used to be that money was a neutral tool that everyone would use in the free market process. No longer. Governments have usurped money. It has now become a tool of government policy. Whether for good or bad, war or peace, money has been made a force of government power. Because Gold does not respect that power, governments fear Gold. As a consequence, they have chosen to declare war on it.

This realization is easier to understand when recognizing what governments aim to accomplish. Despite their rhetoric, governments are not there to help you or me. The primary concern of any government is to remain in power, and the truthful message presented by Gold is fearful to governments because Gold limits their stranglehold on power. Governments fear Gold because they can’t control it, so their long-standing war on Gold is the result.

And what about the Swiss announcement? It’s but the latest battle in the ongoing war. Yes, despite its reputation for monetary probity, the Swiss government – just like other governments – is at war with Gold. No other logical conclusion is possible.

The committee making the announcement to recommend dishoarding Gold had been scurrying around for several months. As part of committee’s investigation process, each of the major Swiss banks had been asked to make recommendations to the committee, and while the substance of the advice differed among the banks, one common recommendation emerged – don’t make some bonehead announcement that completely demoralizes the Gold market. So what does the committee do? It makes a bonehead announcement that completely demoralizes the market. One must ask why?

Why did the government committee do exactly the opposite of what was recommended? Isn’t it a little bit suspicious that the announcement occurred just as the Hong Kong stock market was cracking, and just the day before the US stock market had its largest ever one-day fall?

It seems obvious to me that the timing of the announcement was deliberate, not coincidental. Gold is still a safe haven. If the Gold price was rising when stock markets were collapsing, a larger collapse may have occurred.

Governments understand this basic principal of Gold’s role as a market barometer measuring confidence (falling Gold price) or chaos (rising Gold price). If the Gold price were rising when world stock markets were collapsing, a red flare would show visibly for all to see.

Governments recognized that the major stock markets around the world were spinning out of control. So what did they do? They took a potshot at Gold to keep a lid on the Gold price, with the aim of forestalling the greater market panic that may have ensued if Gold were blaring a warning message.

The potshot from the Swiss government hit its mark. As the Gold trader said: It’s like a war zone out there.

The Swiss government committee came to the rescue. The Gold price fell along with the major stock markets around the world, diverting investor attention from the severity of the stock market crisis. You could almost hear the average investor thinking: Things can’t be that bad if the Gold price is falling. Maybe I better go out and buy the dip.