WE HAVE GOLD BECAUSE WE CANNOT TRUST GOVERNMENTS

October 23rd 2020

Fort Knox

The United States’ presidential election will take place on Tuesday 3 November.

In 1933, Herbert Hoover – the outgoing president – famously said in his statement to President-Elect Roosevelt: “We have gold because we cannot trust governments.”

This statement led to the Emergency Banking Act, one of the most draconian events in U.S. financial history, which forced all Americans to convert their gold coins, bullion, and certificates into U.S. dollars.

While the legislation successfully stopped the outflow of gold during the Great Depression, it did not change the conviction of ‘gold bugs’, people who are forever confident in gold’s stability as a source of wealth.

“Powers come and go, monetary systems wax and wane, new sources of gold open up, but the focus on gold is a constant that links one era to the next,” writes Peter L. Bernstein in his book, The Power of Gold.

The same is true as Donald Trump bids to win a second term in the White House.

According to experts, gold’s value has again risen as uncertainty about the U.S. presidential election, coupled with bets that fresh stimulus would drive inflation, ‘offset investors’ improved appetite for riskier assets’.

Gold is recognised as a safe haven asset that is able to maintain, and increase, its value during volatile periods – and that prospect has growing allure at a time like this.

There have been few periods more volatile than the present, particularly in the U.S.

Trade wars are causing international tension, civil unrest is rife, inflation is potentially looming, the presidential election is imminent – and all of this against the backdrop of a global pandemic.

Gold has had a strong year and although going through a period of consolidation, that’s unlikely to change.

According to online retailer Kitco, analysts at Germany-based Heraeus Precious Metals said that uncertainty ahead of the election would continue to support gold prices in the near-term – and regardless of who wins, gold will continue to benefit.

In a challenging political climate both in the UK and US – and amidst extraordinary government spend on both sides of the Atlantic – there are many parallels to Bernstein’s commentary surrounding the impact of the Bretton Woods system of fixed exchange rates.

“Higher government spending tends to stimulate domestic demand, which often raises prices and sucks in imports,” he wrote.

“The more that governments tried to find wriggle room around the constraints of the Bretton Woods system, the more the public and the speculators followed Hoover’s dictum and turned to gold as the ultimate hedge against the irresponsibility of governments.”

It’s an historical reference, but it rings true.