Something or Nothing?
“The road to the City of Emeralds is paved with yellow brick.” – L. Frank Baum
When President Richard Nixon removed the US from the gold standard and allowed the precious metal to trade freely, its price as measured in dollars soared. Prior to August 15, 1971, international holders of US currency could convert $35 into an ounce of physical gold, and by 1979 the price had risen 24-fold, briefly reaching the previously unthinkable level of $850 an ounce. Gold’s rise through the rages of inflation was viewed by many as tangible evidence of the imminent collapse of Western fiat currencies, threatening the underlying confidence in the system altogether. Back then, gold was more strongly associated with phrases like “real money” and “store of value” than it is in today’s popular culture, and unmoored fiat currencies were viewed with a justifiably cynical eye. The fear was that if gold continued to go parabolic, the velocity of fiat money might spike with it, creating a hyperinflationary spiral.
Depending on your school of inflation-measurement, credible arguments can be made that inflation in the US has far surpassed the appreciation of gold since the late 1970s. This is especially true if one doubts the official inflation numbers published by the US Bureau of Statistics. With the proliferation of gold futures, ETFs, and options on both, an avalanche of digital transactions sets the gold price today. The exchange of physical gold for cash merely reacts to the price on the screen, a number that many gold enthusiasts speculate is artificially suppressed. Such conspiratorial instincts are buttressed by glaring evidence from the gold desks of several big banks. To wit, this is from a Bloomberg story published in March (emphasis added throughout):
“The former head of the JPMorgan Chase & Co. precious-metals business and his top gold trader should get multiyear prison terms after they were convicted of spoofing the market for years, the US government said in a court filing.
Michael Nowak, who ran the precious-metals desk, should get five years, and Gregg Smith, the top trader, should get six years, prosecutors said Tuesday in a sentencing memo to the federal judge in Chicago who presided over their trial. The recommendation was for longer terms than traders at other banks convicted of spoofing.
The government said significant sentences are warranted because the two had spoofed for years and knew what they were doing was prohibited. At trial, prosecutors presented evidence that included detailed trading records, chat logs and testimony by former co-workers who ‘pulled back the curtain’ on how Nowak and Smith moved precious-metals prices up and down for profit from 2008 to 2016.”
If the big banks were suppressing the price of gold on behalf of the US government, it would be rather twisted for US government prosecutors to criminally charge big bank executives for following their directives, but incidents like this undoubtedly feed the price suppression narrative. To gold enthusiasts, the true price of gold will not be re-established unless and until a major global currency returns to a gold standard—complete with a seamless exchangeability protocol—allowing the physical markets to exert their dominance once again.
In the aftermath of the West’s decision to seize Russia’s foreign reserves in 2022, excitement within the gold community has grown at the prospect of just such a development. Here’s how we framed it in a recent piece titled “Gold in Handcuffs”:
“Specifically, the growing momentum to push away from the US dollar system, led most notably by Brazil, Russia, India, China, and South Africa (the so-called BRICS countries), gives hope to many that gold will play a central role in how those countries settle international trade imbalances. In that scenario, bullish investors expect gold to experience substantial appreciation against the US dollar.”
Last week, Twitter, YouTube, and other alternative news sites lit up when the Russian embassy in Kenya seemed to confirm that a currency was in the works. This new currency, backed by gold, has reportedly attracted applications from 41 other countries that desire to join the BRICS nations in their endeavor. The claims were amplified by a report in Russia Today, the full video of which can be found here.
What are we to make of these developments? How likely is a gold-backed BRICS currency, what would be the impact on the US dollar’s position as the reserve currency, and is this truly a bullish development for the dollar price of gold? To explore these important questions, we canvassed some of the smartest people we know on the subject. Let’s read what they had to say and then draw some of our own conclusions on the matter.