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Why Governments Hate Gold

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Published : November 24th, 2021
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Do governments hate gold?

 The answer: Yes — Governments hate gold because they cannot print it, and it is difficult for them to control.

Because they cannot print it or easily control it, gold has little use to them during the never-ending schemes to tax and then redistribute wealth.

India is a recent example of a government trying to control gold imports through increased taxation on imports and imposing rules, such as that importers had to re-export 20% of imports as gold jewelry.

These types of rules are difficult to enforce and smuggling of gold into India skyrocketed. Once gold is in the form of jewelry or physical metals it is very difficult to tax. Below we explore some other granular points about why governments disown gold.  

Yes, some central banks do own gold …  which seems counter to our thesis but in actuality, central banks own gold for the same reasons that you and I own gold – because it is not the liability of another government.

Why Governments Hate Gold?

A) Legal tender laws mean that all taxes must be paid in fiat currency (such as the dollar in the U.S., Euros in W. Europe, …) not gold or silver (held in physical form). Nothing but sponsored fiat currencies issued by the government is acceptable to pay debts and taxes.

Why do governments pass these legal tender laws? Because in a long running series of decisions from 1921 until 1971 western governments, in response to politicians creating ever larger government spending, countries decided they prefer interference and redistribution over letting capitalism and ingenuity grow the pie for everyone (However, the pie has grown tremendously…looking at GDPs over the last 50 years).

Pursuing perfectly equal pizza slices became the ideal goal rather than a rapidly growing pizza diameter.

But you cannot control pizza slice sizes if you don’t control the pizza cutter. Since wealth is the pizza slice, and taxation is the pizza cutter, the government must ensure that only fiat money gets recognized as wealth since fiat is easier to find and tax than physical metals.

B) Heavily government-regulated industries cannot be bailed out if the currency is not fiat – and if it is tied to a gold standard or some other limiting factor.

Once we see that the government is helping to set the rules for industries, and influences industry via regulation, it becomes clear that government is then liable for when a regulated industry fails.

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During the 1930s banks, the world over failed because the government applied the wrong policy response to illiquidity problems. To be sure speculation and double counting of cheques all played a part in the 1930s banking crisis.   

But since the US government, along with many others were on a gold standard they could not print more US currency without more gold. In order to increase its gold reserves, the US government seized all gold held by citizens and banned citizens from owning gold.

The UK put into place restrictions which limited citizens to owning no more than four gold or silver coins and restricted any imports of gold for private citizens. The US government paid well below market prices for the seized gold and then raised the price to a higher official rate.

This allowed the government to then print more dollars to bail out the banks. Gold was ‘officially’ banned for individual ownership in the US until the 1970s – but the underground market prevailed and because gold is a physical asset it was easily hidden from government raids. 

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C) Gold has gained value against all currencies since governments abandoned the gold standard.

D) The existence of gold in the economy is a constant reminder of the poor quality of the government paper, and it always poses a threat to replace the paper as the country’s money.

Even with the government giving all the backing of its prestige and its legal tender laws to its fiat paper, gold coins in the hands of the public will always be a permanent reproach and menace to the government’s power over the country’s money.

E) Central Banks (e.g., the Federal Reserve) are for the most part privately held but controlled by the country’s government. A central bank derives its power to create and control fiat currency from the government.

So long as people use their money the central bank is happy. The problem becomes when people find an alternative to fiat currency. The biggest alternative is gold. That is why central banks hate gold. If people use gold instead of their fiat currency, the central bank loses power.

F) The Federal Reserve operates under a dual mandate. It must maintain price stability while also simultaneously promoting maximum employment. 

The Fed hates it when the price of gold rises because it correlates with a rising unemployment rate.

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Gold Prive VS US Labour Force Participation Rate Chart

G) The hatred of gold is nothing new. When it operated on a gold standard, the US government was limited in terms of its ability to pursue deficit spending. It could only accrue so much debt.

The gold standard forced the practice of austerity. When the government abandoned the gold standard, it gained the power to finance any national expense by simply borrowing from the Federal Reserve.

Today, no amount of gold is necessary for the Fed to purchase treasury bonds. It is blessed with the ability to expand their balance sheet with zero limitations. 

Simply put, gold limits the power and influence of central bankers. No wonder they hate it.

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24hGold - Why Governments Hate...

GOLD PRICES (USD, GBP & EUR – AM/ PM LBMA Fix)

23-11-2021 1797.30 1789.15 1344.02 1337.93 1595.82 1590.20
22-11-2021 1841.10 1816.05 1370.15 1353.68 1631.03 1613.92
19-11-2021 1861.40 1861.10 1387.30 1383.73 1647.34 1646.14
18-11-2021 1860.50 1860.30 1378.63 1381.46 1641.71 1640.78
17-11-2021 1858.45 1864.90 1383.80 1384.87 1642.68 1648.01
16-11-2021 1872.25 1859.20 1392.02 1384.73 1648.52 1638.88
15-11-2021 1863.80 1859.90 1388.72 1385.07 1627.10 1626.11
12-11-2021 1850.00 1860.55 1381.03 1387.97 1616.16 1624.82
11-11-2021 1859.25 1857.90 1387.93 1387.11 1620.89 1620.09
10-11-2021 1824.95 1859.40 1348.46 1375.21 1576.03 1608.57

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Mark O'Byrne is executive and research director of www.GoldCore.com which he founded in 2003. GoldCore have become one of the leading gold brokers in the world and have over 4,000 clients in over 40 countries and with over $200 million in assets under management and storage.We offer mass affluent, HNW, UHNW and institutional investors including family offices, gold, silver, platinum and palladium bullion in London, Zurich, Singapore, Hong Kong, Dubai and Perth.
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