Western powers have debased their currencies since the inception of central banks. It started with fractional reserve banking to finance World War 1. During the thirties, government economists became predominantly Keynesians and when entering the new millennia, some even converted to Modern Monetary Theory. MMT is a radical belief that governments can print unlimited money for perpetuity, without negative consequences. On the other side of the aisle, we find very few proponents of Austrian economics, where sound money and small governments are vital ingredients. Unfortunately, our political elites embrace Keynesianism because it provides the intellectual justification for unlimited government spending. Current financial politics are based on printing money out of thin air. It is unsustainable, irresponsible, and a significant threat to future Western prosperity. The obituary of free markets is on full display, but few pay any attention to what is going on.
Our political leaders are slowly beginning to fear that their tenure is ending in crisis, although they will never admit so. Fiat currencies are losing its values rapidly, and there is no end to destructive political interventionism. What is supposed to be free markets is just an illusion. We have likely passed the point where it is too late for a return to economic sanity. Hence, a monetary reset is increasingly discussed among our elites. The preferred solution seems to be the implementation of another fiat currency – Central Bank Digital Currency (CBDC).
Let us ponder on the three functions of «money»:
Unit of account
Medium of exchange
Store of value
Fiat currencies comply with the first two requirements, but it is not evident that cash savings are a good «store of value». After all, the expansion of credit (printing money out of thin air) with negative real interest rates is destroying savers' purchasing power. Major Western fiat currencies have lost more than 95% of their buying power since the USD was taken off the gold standard in 1971. In that respect, we can state that fiat currencies are an abysmal failure as a «store of value». Unless the new CBDCs are pegged to gold or commodities with real value, digital currencies will still be "fiat", meaning backed by nothing.
On the other hand, gold has been a proven hedge against monetary debasement for thousands of years. Gold also fulfills all three functions of money. Most assets are remarkably stable over time when priced in gold.
After Nixon took us off the gold standard in 1971 the price of gold soared from USD 35 and trades today between 1600-2000. Gold does not return dividends, but gold's purchasing power is relatively unchanged over time. In other words, gold is not a good investment for profit but an excellent store of value. This fact also explains why the demand for Gold increases in times of war and political instability.
Gold has protected wealth for thousands of years, but financial experts have primarily dismissed gold as «outdated» and not worth holding in your portfolios. Unsurprisingly, hoarders of gold promote gold as the only safe haven. Many of these are precious metal dealers attempting to boost sales. Nevertheless, holding some Gold as a part of your portfolio is a prudent approach to protecting wealth and purchasing power.
Unfortunately, gold is not an entirely risk-free asset. If there is anything to learn from history, politicians will do anything to steal wealth from citizens to finance whatever is on their minds. They have a multitude of pernicious tools designed to aggressively raise fiscal revenue. For example inflation, taxation, tolls, duties, and outright confiscation of precious metals, with or without compensation.
Most gold owners know that Franklin D. Roosevelt in 1933 demanded private citizens turn in their physical gold for USD, which was devalued only months later. Less known is that he issued an executive order only a year later, banning private ownership of non-circulating silver coinage. After deducting a 63% fee, silver owners got paid USD 0,50 per troy ounce, which was 5 cents above the market price. Clearly, a better deal than gold owners got the prior year, but still an unjust and tyrannical act.
These are recent examples of governments criminalizing private ownership of monetary metals:
Do you worry about gold confiscation and runaway taxes? Yes, you should. Most gold pundits think confiscation or nationalization is unlikely because we have left the gold standard. Nevertheless, history shows that governments are unfettered once a crisis threatens their power. Authorities make rules, change rules and enforce the rules to their liking. Ie. Constitutional rights will not protect you. We need only look to Canada to find recent political abuse of power when they seized individual bank accounts tied to lawful demonstrators. It proves that politicians are not reluctant to act unconstitutionally when it serves a political purpose.
Although there are no reliable statistics on how much gold is in private hands, only a tiny minority of households own gold. President Biden's propaganda ministerium knows very well how to make dumbed-down citizens believe anything. Once the media has demonized gold owners as evil speculators threatening the economy, the road is paved for politicians to confiscate private gold holdings. A government robbing Paul to give to Joe will always be supported by Joe. There will always be a solid voter majority supporting confiscation.
Undeniably, many gold owners will conceal their holdings to evade prosecution and penalties. Still, unless you have inherited gold from past generations, nothing prevents authorities from forcing gold dealers to disclose the identity of customers. Individual gold possessions will then be exposed.
Central Bank Digital Currencies vs Gold Totalitarian governments will soon be armed with programmable Central Bank Digital Currencies (CBDC). The US has decided to test CBCD in 2023 – a clear sign that the technology is already in place. Once CBDC is implemented, paper money and coins will likely be outlawed. From there, it is a short step to negative interest rates, account freezes/seizures, and even outright confiscation for those with wrong political views. Financial privacy will vanish entirely while authorities will double down on using money to control behavior. George Orwell's dystopian nightmare of 1984 is then fully implemented.
Some of our foremost gold experts, such as the renowned Jim Rickards and Mike Maloney, promote owning gold as a protection against the threats from fiat CBDCs. However, CBDCs are also a threat to gold. The devil is in the CBDC's programmability. CBDCs can be used to control and direct our spending away from any good or service our political elites do not like. Hence, CBDCs can be programmed to deny exchange to/from gold. Another vicious alternative is an excise tax restricting gold owners to transact. The latter can be done on a whim under emergency powers. Clearly, desperate rulers can render gold almost worthless if they so wish, even without actually seizing the gold.
To what extent CBDC will be abused by governments is unclear, but it appears naive to think that political elites will refrain from exploiting the new monetary powers to the fullest. Civil liberties will be sacrificed for bigger governments - all in the perpetual quest to save the illusion of "democracy".
I am not suggesting that individuals should not own gold. I still think physical or vaulted gold is a prudent hedge against currency debasement. My point is - gold may not be the safe haven we like to believe. Governments pose a severe risk to gold owners and it is imperative to be conscious of the current economic pressures that could make governments confiscate your gold. Your investment portfolio should reflect that risk.
Imagine that the first task for Joe Biden's new 87 000 IRS agents is to subpoena customer records to identify gold owners and prepare for the following gold confiscation. Low probability, you may say, but no one can deny the possibility.