The New American ‘Gold Rush’

June 22, 2020 Updated: June 26, 2020

Commentary

There’s a new gold rush in America.

No, it’s not 1849 all over again, where the world flocked to America to find gold in Central California and become rich. Rather, the rich are bringing their gold into America, into the New York City area specifically, and hiding it from the rest of the world.

Why is gold suddenly rushing to America?

Wealth Flows to Safety

There are various explanations for this phenomenon. But one fundamental fact about wealth flows is that in an increasingly unstable world, it flows to relative safety. Today, even with our current disruptions, the United States is more politically and economically stable than most other nations.

But the growing demand for gold itself, rather than U.S. Treasury bonds, for example, indicates something else is going on, as well.

One simple answer is that as the fiat currencies in the world become weaker through the issuance of massive debt, the more desirable that gold becomes. That’s happening in an unprecedented way right now, with the currencies of the major nations.

The most important currency in the world, of course, is the U.S. dollar, and the U.S. government is creating them out of thin air like there’s no tomorrow. In March of this year alone, the Federal Reserve spent an additional $4 trillion to provide economic “stimulus,” while the economy remained largely non-functioning.

US Dependent Upon Monetized Debt

But even before the global economic shutdown, the U.S. government was unable to fund its operations without printing money. Indeed, the financial system was showing disturbing signs of failure in some of the federal banking sectors.

These signs were present in 2019, when the repo market wasn’t able to fund itself, as banks refused to lend to other banks overnight to fulfill certain legal financial obligations in the money market.

To keep the system working, the Federal Reserve injected hundreds of billions of dollars to support the federal banking system. And then, in March, the U.S. Treasury bond market started to fail. There weren’t enough buyers of federal debt issues, so the Fed monetized U.S. debt by buying U.S. bonds.

As a result, the Fed had to print $1.8 trillion in four weeks to keep it functioning. U.S. debt is now more than $25 trillion, adding more than $2 trillion in the past couple of months alone.

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The bottom line is that the U.S. government can no longer operate on borrowed money derived from bond sales to the rest of the world. Our central bank must print money to keep it functioning. It’s an illusion that sooner or later, must fade away.

Gold Flooding Into New York

That may be why the demand for gold is rising. Investors may already be wary of holding dollars. Unlike dollars or other fiat currencies, gold can’t be printed or electronically created.

That may also explain why the amount of gold stored in vaults in New York has more than tripled over the past three months. In fact, more than 20 million ounces arrived in New York from overseas this spring.

The chart below shows the rise of the quantity of gold stored in approved vaults within 150 miles of New York City.

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It’s for those reasons as well that gold is rushing into the United States. At some point, people will realize that the dollar-based financial system won’t be able to process all the debt that’s being added to it. There’s already too much debt and too few buyers.

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A system clogged by debt has happened. We saw this occur in 2008, and the response was to remove toxic debt from the system by having central banks in the United States, Europe, and Asia “buy” those toxic assets in order to free up capital. The Federal Reserve’s balance sheet doubled in a matter of months, and kept on growing.

That stop-gap measure worked for a few years. But the problem of debt-based economic expansion wasn’t solved, only somewhat restructured; it was a temporary fix.

Today, with so much excess money being printed by the Fed to keep the economy and the markets afloat, we may be seeing at least the beginning of the end of that solution. Eventually, something else will have to change. Keeping interest rates at zero or even negative for the foreseeable future, as so many central bankers, including Fed Chairman Jerome Powell, has promised to do, is unsustainable.

Like everything else in life, there are limits to the leveraged expansion of fiat currency-based economies. It would appear that we’re getting closer to reaching those limits.

When there’s trillions of unfunded obligations and debt behind fiat currencies, those who are aware of how the financial system works realize that those currencies are at risk of losing their perceived value.

How much more time remains before we hit another 2008-style financial crisis? It’s difficult to say, given that much of the rest of the world is worse off economically than the United States.

The key question becomes what can one rely on to hold and keep value when economic instability and currency risks are rising?

In that instance, gold, though no longer legally or officially considered money by central bankers, is actually the only money that really matters in the world. It can’t be inflated, and has an intrinsic value that tends to rise with uncertainty and as economies decline.

That’s why, at some point, most economists, but not all, will admit that currency devaluations have to occur. It may come in the form of currency wars between the United States and China, or it may be a coordinated effort, or a bit of both.

In the meantime, the money printing will continue. And so it goes.

James R. Gorrie is the author of “The China Crisis” (Wiley, 2013) and writes on his blog, TheBananaRepublican.com. He is based in Southern California.

Views expressed in this article are the opinions of the author and do not necessarily reflect the views of The Epoch Times.