In my writings and publications, I’ve done my level best to persuade my readers to protect themselves with gold. For anyone who still hasn’t done so, here I highlight a few developments that should convince you of just how urgent it is that you own gold. Why? Because gold’s role as the most important reserve asset is coming ever closer into view – a huge development that would lead to gold soaring even as chaos overtakes the financial markets.
The massive U.S. debt and the falling outlook for growth here – the Atlanta Fed recently projected a greater than 2.4% decline in GDP for the quarter – is a toxic combination that is inconsistent with the dollar maintaining its role as the world’s primary reserve currency. The only competitor to the dollar is gold, and the pieces are falling into place.
Start with a key decision made in 2021 by the Bank of International Settlements, the entity that sets the rules for central banks. BIS elevated gold to being the only official competitor to the U.S. dollar in determining a bank’s overall risk level. Specifically, it classified monetary gold as a Tier 1 asset, joining U.S. Treasury bonds as the only assets a bank could hold that were considered risk-free. All other bank assets are valued at some discount to their market value to account for their perceived risk.
Since then, central banks, which already had started to accelerate their gold purchases, have bought gold at near record levels, with gold representing a rising proportion of the reserves on their balance sheets. By my calculations, gold in terms of dollar value is approximately $3.4 trillion, roughly one-half the value of central banks’ dollar reserves of $6.8 trillion.
Moreover, these figures only include China’s stated reserves, which China lists as a bit more than 2,000 metric tons, equivalent to about $200 billion. It is an open secret, however, that China’s actual gold reserves are much larger.
How much larger? There are various estimates from various credible sources. But they all point to somewhere around 35,000 metric tons or even as high as 40,000. At today’s price, that would represent something on the order of $3.5 trillion to $4 trillion.
One of those credible sources is Nick Laird, considered the world’s leading expert on gold data. In April 2021, Reuters reported that Laird estimated that as of yearend 2020, China’s total gold holdings were a bit more than 28,000 metric tons. Early this year, Laird updated his numbers to around 35,000 metric tons. You get similar numbers from Pierre Lassonde,
the legendary co-founder of Franco-Nevada, arguably the most successful gold venture in modern history. In an April 2024 interview with Kitco, Lassonde noted that China buys about 70% of the world’s new gold production. Adding 70% of world gold production to the numbers Laird produced using a different methodology, you also come up with 35,000 metric tons.
One question is how much of China’s gold is monetary, i.e., available to back up its currency. In my calculations, I’ve lumped together China’s clearly monetary gold – the gold held by its central bank – and gold held by individual Chinese investors. That’s because, as Reuters, among many others, suggests, it’s not a significant distinction. As Reuters puts it: “It is commonly thought that should Beijing invite private holders of gold to support a major government initiative by pledging their gold as a kind of war bond then there would be a 99% pick up … The vast majority of Chinese people trust their government, especially when it comes to returning China to the top of the world.” Our figures do not, however, include gold jewelry in China, estimated to be about 2,500 metric tons.
A momentous tipping point
The bottom line is that China is in a position to add $3.3 trillion of gold to the world’s monetary reserves. That would be enough to make gold reserves surpass dollar reserves on central bank balance sheets. We think it’s a question of when, not whether, this happens. Adding a bit of icing to the cake, gold reserves held by current and prospective BRIC member countries excluding China top 4,000 metric tons.
Once China chooses to make clear the true extent of its gold reserves, vaulting global gold reserves above dollar reserves, it would be a momentous tipping point. Other central banks undoubtedly would rush to add gold to their reserves, tantamount to greater depreciation of the dollar and further cementing gold’s status as the world’s primary monetary reserve.
That would be transformational, one reason being that for the first time since the U.S. ditched the gold standard in 1971, the world’s chief monetary reserve wouldn’t face counterparty risk. That’s because gold, unlike the dollar or any other fiat currency, isn’t manmade – the expression “good as gold” isn’t just a throwaway line. By contrast, any fiat currency is only as good as its guarantor. If the U.S. government went bankrupt, the dollar would lose all value.
The rising level of central banks’ gold reserves is without question one of the great geopolitical developments of our time, and it’s happening right before our eyes. Beyond its impact on gold’s price – i.e., to push it much higher – and on geopolitical relationships, it even bears on the existential question of whether the human race can survive. That’s because, without gold at the center of the monetary system, it’s unlikely the world will be able to press ahead with essential tasks such as transitioning to sustainable energies.
There are other recent significant developments for gold that also bear on gold’s ascension in the world’s monetary system. Particularly notable are changing dynamics in the two markets that determine gold’s price: the paper market vs. the physical market. The paper
market is exemplified by the Comex, a platform for trading futures contracts on metals including gold. Until recently, it basically served as a place for speculators to make bets on gold’s price, with very little physical gold actually exchanging hands. The vast majority of contracts were either closed out or rolled over into contracts with more distant expiration dates. By contrast, in the physical market, represented primarily by the Shanghai Gold Exchange (SGE), gold contracts always have been settled with physical gold actually changing hands. The SGE has been a major reason for China being able to accumulate so much gold.
The structure of the Comex allowed for the manipulation of gold’s price, which was carried out in order to ensure the dollar maintained its central role in the monetary system. Naked shorting was used to suppress gold’s price, and if gold rose much above the price at which manipulators – mostly major banks and in particular J.P. Morgan – were short, those short positions were simply rolled over into future months. If additional shorting was necessary to keep prices from threatening the dollar, so be it.
It was Andrew Maguire, the British gold trader, who originally produced undisputed evidence of this manipulative scheme. Instead of winning plaudits for his courageous whistleblowing, he faced death threats and indeed was almost killed in suspicious traffic events. Maguire’s actions initially led to some essentially meaningless fines being imposed on J.P. Morgan. But eventually, as Western money printing intensified and balance sheets became more out of control, the need for further manipulation intensified. The manipulation became so blatant that bigger penalties were imposed and some J.P. Morgan participants even went to jail.
The rising sway of physical gold
Nonetheless, manipulation of the gold market has persisted. But that’s changing, as even the Comex has started moving towards physical gold. Recently, nearly 2,000 metric tons of gold traded on the Comex were delivered to the buyer – either an individual investor or, perhaps, the U.S. government. If a private individual, it tells you that wealthy investors have become more convinced it’s important to own physical gold. If it’s the government, it could signal that the U.S. doesn’t actually have all of the 8,000 tons of metric gold supposedly stored at Fort Knox and other vaults such as the New York Fed and was looking to bolster its holdings.
In either case, it marks the beginning of the end of the manipulation of gold via the paper futures market. This should make it clear why China, as always a master at holding its cards close to its chest and not behaving impulsively, has been biding its time in disclosing its gold holdings. China, much more than the West, recognizes the existential problems faced by the world and the urgent need for cooperation among nations. Its leaders would much rather be viewed as responding to the need for a new world monetary system than as forcing the issue at the risk of igniting explosive tensions.
If a prospective audit of U.S. vaults doesn’t turn up any malfeasance, i.e., if the U.S. does hold 8,000 metric tons of gold, it would give the U.S. a potential road to eliminating bankruptcy.
Those 8,000 tons, for various reasons, are valued at about $42 an ounce. Newly appointed Treasury Secretary Scott Bessent has noted that he likes gold and has said that gold represents his own largest holding – perhaps preparing investors to anticipate a revaluation.
Indeed, a revaluation is the only path for the U.S. to avoid bankruptcy. Increasingly, and for good reason, foreign investors are shunning our debt. In 2021, foreign investors held about 33% of U.S. government debt. By April 2024, the percentage had shrunk to about 23%. The reduction came from fierce selling of Treasury securities by friend and foe alike. In particular, the two largest sellers were China and Japan.
The U.S. faces stark choices. We can keep things going as they have been, which will mean facing near-certain de facto bankruptcy in that to stay solvent we’d have to buy our debt ourself. You wouldn’t be off base comparing our situation to that of the Weimar Republic, when the mark during 1920-23 declined by more than a trillion-fold.
The alternative – and the only way out – is to revalue gold to some much higher level. That would let us avoid the most extreme levels of hyperinflation, though we’d still be facing a lot of inflation – the consequence of our insufficiency in critical resources, which we would have to buy from others using a dollar that, priced in gold, would be sharply devalued. And it would leave the U.S. a poor second to China, whose far greater holdings of gold would be revalued along with U.S. gold. The good news is that this path would offer the U.S. a chance to start over, perhaps along a road that includes fruitful cooperation with both China and Russia. And if you think the U.S. can somehow break the bond between China and Russia, realize that that bond rests not on natural affinities but rather has everything to do with strong cooperation in technologies and complementary skill sets.
There are other implications of gold being revalued. A number of major banks may have large short positions in gold via an unfathomably complex pyramid of derivatives equal to or larger than those that led to the 2008 crash. It’s a house of cards that could come crashing down, with gold the big winner as other investments crater.
A final point: You may be wondering about the identity of a possible private buyer of the 2,000 tons of gold delivered recently on the Comex. We have a guess, one that others have also posited, that we consider very credible and that we will reveal in a subsequent blog. But even if our guess turns out to be wrong, it’s not farfetched, and that in itself speaks volumes. And for reasons I’ll explain, it also ties in with my view that there’s a strong link between gold as a reserve asset and freedom – the kind of freedom that until about half a century ago had made the U.S. the great country it used to be. It was exactly this kind of thinking that informed Thomas Jefferson when he wrote the Declaration of Independence.
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