Masters Series: Why Gold Is the Only Way to Stop a Global Dollar Panic
Editor's note: The actions of reckless central banks around the world could send gold prices to $10,000 an ounce.
It sounds far-fetched. But it's true.
Today's Masters Series is adapted from the April 4 Digest. In it, Porter discusses the possibility of a global "run on the banks"... and explains why the coming crisis is a matter of when, not if...
Why Gold Is the Only Way to Stop a Global Dollar Panic
"It'll be a race," he said. "Between us and China. Whoever wins will control the reserve currency of the next 50 to 100 years."
Yesterday, I wrote about a dinner meeting I recently had. One of the most powerful figures in America had invited me to dine at his table at the Metropolitan Club in New York. I've dubbed the plan he told me about – to exchange the Federal Reserve's bond holdings for gold – the "Metropolitan Plan." Assuming the exchange took place today, it would establish a new dollar/gold price of around $10,000 per ounce. Could this really happen?
I don't know, of course. But the fact that such a plan exists and is being discussed at the highest levels of America's financial circles and politics is shocking to me. Honestly, the meeting left me speechless... and shaken.
When I got back to my office, I did what I would want you to do for me if our roles were reversed... I got to work.
I sent two of my best analysts to Vancouver and set up meetings for them with our best contacts in the gold-mining industry. I got on the phone with half a dozen friends who have been in and around the gold market for 30 and 40 years. I looked up an old friend – someone I believe is the best gold-stock analyst in the world today – and offered him almost $4 million to work exclusively for us.
The point is, given all of the things I already know about the risks to our currency and the global paper-currency system, this meeting and the Metropolitan Plan were an urgent wake-up call for me.
Let's start with what I believe is the most important part of the Metropolitan Plan for you to understand. Why would the government want to tie the dollar to gold again? Wouldn't that drastically limit its power and financial flexibility?
The only reason the government would tie the dollar to gold again would be to immediately re-establish the credibility of the currency and stop a global "run on the bank."
But how could the dollar possibly fail? Our economy is immense and resilient. We control the world's most powerful military – which is distributed across more than 100 different countries. Why would anyone want to sell the dollar?
It's true that the dollar is by far the strongest of all the world's paper currencies. But this strength is also a tremendous weakness. The ubiquitous status of the dollar is a kind of Achilles heel. You see, the vast majority of U.S. dollars are held overseas.
According to the Federal Reserve, roughly half of all $100 bills are held overseas – almost $500 billion worth. Foreign demand for $100 bills since the fall of the Berlin Wall has caused production of $100 bills to soar. Far more $100 bills have been printed than any other denomination.
Of course, it isn't only cash that is being held overseas. Foreign banks hold trillions in dollar-denominated bonds. The top five foreign holders of U.S. Treasury bonds (China, Japan, Ireland, Brazil, and the combined members of the Organization of the Petroleum Exporting Countries) have $3.1 trillion in dollar-dominated bonds. And those are just the major holders. The U.S. dollar is the currency of choice for banking reserves in almost every nation in the world.
And then there are the big foreign accounts of U.S. corporations, which hold more than $2 trillion overseas. Adding up only these big numbers... you can see a huge amount of dollar currency and debt ($6 trillion-$10 trillion) is held overseas. And that's not to mention foreign-held U.S. real property, like real estate, stocks, and corporate bonds – all of which are denominated in U.S. dollars.
Unlike, say, Japan, where almost all of the currency and government debt is held locally, the U.S. dollar is the de facto global currency. In the event of a bona fide global bank run, it won't be possible for the U.S. government to simply shut down the banks and halt the panic. Almost all of the "banks" are overseas, and almost all of the currency is held overseas. That's the huge difference between today and the last time our government defaulted on its obligations (back in 1933). This is the Achilles heel of our currency that most people don't understand... and that many of our policymakers won't see coming.
In the event of a real run on paper currencies, the U.S. government won't be able to stop the panic by simply closing domestic banks and stock exchanges. It doesn't have an easy way to stop the panic because so many of the dollars are held overseas.
Meanwhile... it should be pretty obvious to any rational person that sooner or later, millions of people around the world who hold dollars are going to begin to doubt the safety of their savings. After all, when just about every major bank in the U.S. was at the point of insolvency, the Fed simply printed almost 4 trillion new dollars to bail out the system.
Wouldn't that make you wonder about the future purchasing power of those dollars? And besides, who in his right mind would own any government bonds that charged investors to own them, guaranteeing losses? Who would pay for the "right" to own a bond that pays no interest and is denominated in a currency whose value can't be controlled and isn't backed by any fungible commodity?
Someday, historians will look back on today's negative interest rates and be amazed that such conditions could have existed. This sovereign bond bubble is truly the greatest mania in the history of finance.
But we might not even need negative interest rates to spark the panic...
Just imagine what might happen if a major presidential candidate began telling global media outlets that America was heading for a massive economic crisis and that now was a terrible time to buy American companies or other U.S. assets. Imagine if this candidate began calling himself the "Lone Ranger." Imagine if he promised to eliminate all U.S. government debt, most of which is owned by foreign investors.
Actually, you don't have to imagine. That's exactly what Donald Trump recently told the Washington Post.
You can bet millions of Americans – who don't understand anything about our currency's dangerous dependence on foreign investors – will cheer these promises. But what will the world's largest banks, the biggest insurance companies, and the wealthiest families think about these promises? How will the world's black markets for drugs, guns, and money-laundering – all of which use $100 bills – react?
It's a safe bet that all of these hard-nosed foreign holders of our currency would rather own gold than a U.S. dollar that's subject to negative interest rates, new trade restrictions, capital controls... or outright repudiation from the "Lone Ranger."
Believe me... these folks won't wait for a panic to move out of the dollar. They're selling as fast as they can, which explains the huge move in gold we've seen so far this year. But this is only the beginning...
The Metropolitan Plan (swapping the Federal Reserve's paper holdings for gold) is the only way the U.S. government can stop a real, global dollar panic. It's the only way to regain the dollar's credibility with overseas creditors and dollar holders. Fortunately, the U.S. government owns the world's largest gold reserve. That's a huge weapon it can use, if necessary, to stem the panic. But you should know something... The Chinese understand this game. And nobody is buying more gold than the Chinese...
This is hard to prove, of course. The Chinese government doesn't advertise how much gold it's buying. Bloomberg estimates its holdings grew from around 1,000 tons of gold in 2010 to 3,500 tons by the end of 2015. But... it could be a lot more.
Almost all of the gold that China imports comes through Hong Kong, which reports trade data. Since 2010, almost 5,000 tons of gold has passed through Hong Kong into China. And it's against the law to export gold from China, so in addition to all of the gold it has been buying, China is also keeping all of the country's domestic production.
Given these facts, it wouldn't surprise me to learn that China already has close to as much gold as we do (a bit more than 8,000 tons). Given the size of its economy, it probably has more gold than we do on a relative basis, meaning that it would be possible for China to use gold as its currency reserve, too.
And... why would it? Again, no government would choose to limit its power or its financial flexibility by tying its currency (and its debts) to gold. But in a race to stem a global panic, in an effort to re-establish the credibility of their banking systems and currencies, governments have no great "trump card" to play.
According to my Metropolitan source, in the event of a global currency crisis, there would be a "race" between the U.S. and China to tie their currencies to gold and establish the world's most elite and stable currency. Doing so would mean controlling the world's reserve currency for the next 50 years or more.
These ideas are very important. They're important enough for me to risk the ridicule and the suspicions I was sure would erupt. Writing about gold, even in general terms, is bad enough. I don't want to spend the rest of my life arguing with conspiracy theorists about how much gold is in Fort Knox. (For the record, I don't know. My Metropolitan Plan source appeared to believe the auditors.)
I'm not advocating selling everything you own and buying gold and ammunition. I'm simply telling you that a crisis is coming. I've spoken to many of the world's foremost experts in economics and financial history. There's no question that we're approaching a major financial reckoning. Whether it's simply a serious credit-default cycle or the collapse of the global paper-money system... nobody knows. Not me. And not my source for the Metropolitan Plan.
So please... before you bash me... before you accuse me of making all of this up... or of becoming a "pawn" in some elaborate scheme to push up the price of gold... just think to yourself: Either the ideas and the proof behind them make sense or they don't.
But to answer the main question I've received about my source's motivations to tell me about this plan... I can answer that easily: I was invited to the Metropolitan Club meeting because I'm one of the most widely read authors in the world on economic issues. I've been focused on the risks to the U.S. dollar for years. In fact, here's a picture of Alan Greenspan and me having a similar debate in 2014...
"You own gold, don't you, Alan?" "Of course, I'm not stupid."
Like Greenspan, my source for the Metropolitan Plan is a well-known senior economic forecaster and leader. He feels an obligation to help warn people about the risks we face. I believe, like most people, that he's proud of his work. He thinks this plan could save our country and our currency.
Regards,
Porter Stansberry
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