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Celebrating 40 Years of Gold Freedom (After 40+ Years of Gold Prohibition)
“My fellow Americans, our long national nightmare is over.”
- President Gerald Ford, right after his swearing-in ceremony as the 38th U.S. President, August 9, 1974
On August 8, 1974, President Richard Nixon resigned office, effective the next day at noon. As soon as he was sworn in, President Ford expressed a nation’s relief, saying “Our long national nightmare is over.”
Of course, the nightmare wasn’t quite over. We were suffering from Watergate, Vietnam, oil price spikes, inflation and recession. After Nixon’s resignation, the Dow fell eight days in a row and 14 of the next 16 days, falling a total of 17.6% in just three weeks. Producer prices were rising at a 44% annual rate, due mostly to OPEC oil price increases. In response, President Ford soon launched his “Whip Inflation Now” (WIN) campaign, even though the Federal Reserve was printing money so fast that double-digit inflation continued throughout 1974 – despite a recession – creating a new term: Stagflation.
Buried in the midst of all this carnage was “Gold Freedom Day,” August 14, 1974. During President Ford’s first week in office, Congress authorized and President Ford signed into law the restoration of the right of American citizens to own gold. The bad news was that Americans had to wait another 4-1/2 months for the law authorizing private gold ownership to go into effect as of December 31, 1974.
The new gold ownership law (PL 93-373) gave President Ford the discretion of changing the date from December 31 to some earlier date. One of the law’s provisions said, “This action shall take effect either on December 31, 1974, or at any time prior to such date that the President finds and reports to Congress that international monetary reform shall have proceeded to the point where elimination of regulations on the private ownership of gold will not adversely affect the United States’ international monetary position.” In retrospect, America’s international monetary position was deteriorating, so President Ford did not accelerate the date. That resulted in a great deal of lost profits for American gold buyers. In August, 1974, gold traded at $155, but it rose rapidly to over $195 per ounce as of December 30, 1974.
American investors were forbidden to own gold during an 855% price increase from $20.67 on May 1, 1933 to $197.50 on December 30, 1974. The next day, however, the gold price began falling.
- On Monday, December 30, 1974, gold rose to a record high of $197.50 on the London morning setting, as global traders pushed the price up in advance of Americans buying gold the next day.
- On Tuesday, December 31, 1974, gold opened at $190, but it slid down to $182.50 at the close, down $15 (-7.6%) in just 36 hours, as global traders took profits at America’s expense.
- After the New Year’s break, on Thursday, January 2, 1975, gold fell another $11.50 to $175.
- On Friday, January 3, the U.S. Treasury announced that it would auction off two million ounces of gold on Monday, further depressing the price of gold to under $170 as of Tuesday, January 7.Source: “Confessions of a Gold Bug” (1990), by James U. Blanchard III, Chapter 5.
Gold did not surpass $200 for four more years, until July 1978, so Americans continued to suffer from gold prohibition until 1978, courtesy of the United States federal government in the “land of the free.”
Foreign investors were free to buy gold all the way from $35 per ounce (in 1971) to $195 in late 1974, so law-abiding Americans bought into a frothy market peak. Gold started going down in 1975 and reached a low of $103 in September 1976, so those who bought gold on its opening were temporarily under water. (Those with staying power, of course, were delighted to see gold rise to $850 per ounce in early 1980.)
An Inert Metal Was Forbidden for Americans to Own for 41+ Years
Most Americans – especially those under 50 – are probably unaware that an inert metal was forbidden for Americans to own for over 41 years. In his second full day in office, March 6, 1933, President Franklin D. Roosevelt issued Presidential Proclamation 2039, which forbid the hoarding “of gold or silver coin or bullion or currency” under penalty of $10,000 and up to 10 years imprisonment. A month later, April 6, Roosevelt signed Executive Order 6102 “forbidding the Hoarding of gold coin, gold bullion and gold certificates within the continental United States,” as of May 1, 1933. His rationale was that Americans should not be allowed to trade their paper dollars for gold at the then-fixed rate of $20.67 per ounce.
Average Americans obeyed the law and turned in their gold by May 1, 1933. (Sophisticated investors with large gold holdings were able to move their accounts overseas, typically to Switzerland.) The law exempted numismatic coins (“gold coins having recognized special value to collectors of rare and unusual coins.”) and up to $100 face value in gold coins. Soon thereafter, FDR raised the price of gold 69.3%, to $35 under the Gold Reserve Act, signed into law on January 30, 1934 – President Roosevelt’s birthday.
There were several prosecutions of recalcitrant coin dealers and investors. A San Francisco jeweler, Gus Farber, was prosecuted for selling a few (13) $20 gold coins without a license. The buyer told the Secret Service, resulting in the arrest of Farber, his father and 12 other dealers in four cities, with $24,000 in gold coins seized by the Secret Service. Several other seizures followed, but the bulk of Americans in that era believed in the wisdom of their governmental leaders, so they surrendered their gold peacefully.
Foreigners who held gold in America were also subject to this forced confiscation at $20.67 per ounce. A Swiss bank (Uebersee Finanz-Korporation) held over 60,000 ounces (worth $1,250,000) for business use in America. When their gold was confiscated, they made appeals, without luck. They got $20.67 per ounce, but when gold was revalued to $35, they lost the 69% profit available after that revaluation.
Most of America’s gold coins were soon melted down into 22-karat (917) gold and stored in Fort Knox, Kentucky. In the following 40+ years of gold prohibition, when the price was legally fixed at $35 per ounce, central banks could exchange gold at fixed exchange rates following the 1944 Bretton Woods conference. That system was shattered on August 15, 1971, when President Nixon closed the gold window. Global currencies were allowed to “float,” but Americans were still forbidden to own gold.
Central Banks Still Love Gold!
Even though gold is freely traded throughout most of the free world, central banks still “hoard” that “barbarous relic,” gold. An estimated 20% of all the gold ever mined currently rests in central banks – with the largest holdings in the euro-zone (over 10,000 tonnes) and the U.S. (over 8,000 tonnes).*
Central banks are still amassing gold. According to the latest data from the International Monetary Fund (IMF), Russia is stockpiling gold to help weather any upcoming economic sanctions due to their war with Ukraine. The Central Bank of the Russian Federation increased its gold holdings by 16.8 tonnes in June (equivalent to 540,000 Troy ounces, worth over $700 million), lifting Russia’s total gold holdings to 1,095 tonnes. This reflects a doubling of Russia’s central bank gold holdings in the last five years.
The latest IMF data also list some June gold purchases by the central banks in the same troubled region – namely, Kazakhstan, Kyrgyzstan and Tajikistan – as well as the Eastern European nations of Serbia and Greece, plus Ecuador and Mexico in the Western hemisphere. According to the IMF, global central banks held an estimated 30,500 tonnes of gold at the end of 2013, which represents over a decade’s worth of newly-mined gold and about one fifth of all the gold ever mined. For the first half of 2014, the world’s central banks added another 113 tonnes, with the biggest buyers being Russia, Iraq, and Kazakhstan.
Source: World Gold Council
* A metric ton (or tonne) is comprised of one million grams, or 1000 kilograms (about 2,205 pounds avoirdupois), or 32,150 Troy ounces. At $1300 per ounce, one metric ton of gold is worth $41.8 mi
In addition to the three biggest euro-zone countries (Germany, Italy and France), listed above, three other euro-zone nations – the Netherlands, Portugal and Spain – are also in the top 20 nations with central bank gold holdings, bringing the total euro-zone holdings to over 10,000 tonnes – more than the U.S. holds. This is significant since the weak euro has lifted the value of their euro-zone holdings faster than in the U.S. So far in 2014, gold is up 12% in euro terms vs. 9% in U.S. dollar terms. If gold trades at $1300 per ounce and the euro sinks to $1.30, then the euro price of gold will reach €1000, an important “barrier.”
The influential commodities analyst Dennis Gartman recently said that “Once €1,000 is taken out – and we think that it shall be, if not today, then next week if the geopolitical events unwind as badly as we fear they might – then there is nothing that stems the advance until €1,100.” (For comparison purposes, the peak gold price in euro terms was €1,350 in late 2012, and $1,920 in U.S. dollars in September, 2011.)
During most of 2014, gold has tended to rise when the tensions escalated in Ukraine and the Middle East. Then, gold prices tended to decline when tensions relaxed. As these wars escalate, we can expect to see both oil and gold prices rise. As Dennis Gartman says, “when war is in the air gold goes bid. What else can gold do? Capital is fleeing to the safe corners of the world, and when that happens it flees to gold.”
We don’t know when – or how far – gold will rise over the coming months, but we do know that this time of year is usually gold’s strongest season. September is historically the best-performing month for gold, and the second half of the year is usually far stronger than the first half of the year (due to gold jewelry fabrication demand) so smart investors will be well served to buy gold early in the second half of the year.
It’s too bad that Americans in mid-August 1974 didn’t have the same gold freedom that we enjoy today.