Vincent Tie

Posted by Vincent Tie on 16 Dec 2022

Gold Revaluation: Fantasy or a Likely Solution?


If you are a physical gold buyer, you would no doubt have come across discussions about how high gold prices should be revalued if gold backed the world’s money supply again.

While the term “gold revaluation” is often used for increasing the gold price, the price revaluation is really reflecting the devaluation of the currency against gold. So, for example, if an ounce of gold is $1,700 per troy ounce today and is $3,400 a year later, you need double the currency to buy the same ounce of gold.

Analysts have returned gold price estimates ranging from $10,000 to $50,000, suggesting a massive collapse of the dollar’s purchasing power. However, many doubt these price estimates, wondering how such gold price levels could disrupt the gold market and affect government debt. 

Regardless, what does history say about gold revaluation? Was it the stuff of fantasy, or was it ever seriously considered a solution to a nation's runaway global debt burden? Let’s review three instances in the past where gold revaluation happened or was considered a solution for an ailing international monetary system.

#1 - FDR Revalues Gold

The price of gold until 1934 was $20.67 per ounce, the same as it was almost 100 years earlier.

However, the 1933 financial crisis saw large physical gold outflows from the United States as investors converted dollars for gold, fearing an impending devaluation of the dollar. This led President Franklin Roosevelt to declare a national banking holiday on March 6, 1933, to stem the massive withdrawals of physical gold, effectively suspending the Gold Standard.

This gold embargo, combined with a plan to devalue the dollar, was a desperate attempt to reflate the economy from the doldrums of the Great Depression.

Roosevelt had earlier campaigned on the promise to help farmers recover from depressed commodity prices as part of a “new deal” and a way out of the Great Depression. In 1933, farmers were heavily indebted compared to their fellow Americans and were assessed to be more likely to spend any extra cash back into the economy.

Roosevelt’s dollar devaluation plan aimed to take money from those who weren’t spending it and give it to those who would.

With the Gold Standard suspended and the Thomas Amendment signed into law giving the President broad discretionary powers over monetary policy, the way was open for Roosevelt to devalue the dollar.

On January 31, 1934, one day after the Gold Reserve Act of 1934 was signed into law, Roosevelt fixed the gold at the new price of $35 per ounce, effectively devaluing the dollar by 41%. The government gained over $3 billion in paper profit as the value of the monetary gold stock increased from $4 billion to $7.4 billion.

#2 - France’s “Statesman of Finance” Proposed Gold Revaluation

Jacques Rueff isn’t a household name today but is arguably France’s most distinguished twentieth-century economist. As an economic advisor to the de Gaulle administration, he is widely credited for rescuing France from its “sick man” economy in the 1950s with his proposals to balance the country’s budget.

Having witnessed the Weimar Republic hyperinflation of the 1920s and its catastrophic consequences on society, Rueff believed that no social order could last without a strong commitment to stable money.

His distaste for deficit spending and any policy likely to let the inflation genie out of the bottle made him a critic of the 1920s Gold Exchange Standard and the post-WWII Bretton Woods System – both he saw as lacking the discipline imposed by a proper Gold Standard.

Rueff observed similarities between the alarming growth of central bank balance sheets and deficits in the late 1920s and the 1960s, which he attributed to an unchecked monetary expansion without a corresponding increase in gold reserves. He correctly predicted the failure of the Bretton Woods as early as a decade before President Nixon closed the gold window in 1971.

In Rueff’s view, the $35 per ounce gold price fixed by the United States in 1934 had become obsolete over time as inflation had doubled all prices in the United States by the 1960s. Moreover, adhering to the 1934 gold price resulted in an overvalued dollar, creating deflationary pressure on the economy since American exports become more expensive.

He believed that the United States should “resort to the only solution that is simple, practical, and well proven – increasing the price of gold.”

Despite French pressure on the United States to revalue gold, Rueff’s proposal was not adopted due to political concerns, amongst which was the worry that gold-producing countries like Russia and South Africa would gain an advantage as a result of the higher gold price.

#3 - Nobel Prize-Winning Economist Advocated for Gold Revaluation

Canadian economist Robert Mundell, a 1999 Nobel laureate in Economic Sciences and a professor of economics at Columbia University, has been a strong advocate for gold revaluation since the 1960s.

He believed that the failure of the 1920s Gold Exchange Standard and the Bretton Woods system was a result of undervaluing gold.

Mundell observed that “a concerted movement off, or onto, any metallic standard brings in its wake, respectively, inflation or deflation.”

In the 1920s, after World War I, gold prices were maintained at the pre-war level of $20.67 per troy ounce despite significant monetary inflation occurring to fund the war. Britain’s return to the Gold Standard in 1925 without a higher gold price resulted in the overvaluation of the sterling and runs on British gold.

Great Britain had to go off the Gold Standard in 1931 to stem gold outflows. This event turned an economic depression then into the Great Depression.

In his 1999 Nobel Prize Lecture, Mundell said, “Had the price of gold been raised in the late 1920s, or, alternatively, had the major central banks pursued policies of price stability instead of adhering to the Gold Standard (at $20.67 an ounce), there would have been no Great Depression, no Nazi revolution, and no World War II.”

With the creation of the Volcker Working Group in 1969 to make recommendations on U.S. international monetary policy, Mundell’s plan, which included a proposal to revalue gold, was reviewed but eventually rejected.  

Gold revaluation, a viable solution

Support to revalue gold prices higher was not limited to these examples. The revaluation of gold was always an option considered by central banks and governments as a way to address ballooning deficits and debt.

In 1962, British Prime Minister Harold MacMillan told President Kennedy that most of the world’s monetary difficulties would be solved if the U.S. doubled the price of gold to $70 a troy ounce.

The July 1971 Review of the Federal Bank of St. Louis had the following statement:

Five years ago, when dollar claims held by foreigners were perhaps no more than twice as large as the U.S. gold stock, it was possible to give serious consideration to a doubling of the dollar price of gold as a means of restoring U.S. ability to meet all dollar claims at a fixed gold price. Now that total foreign official and private liquid dollar claims are more than three times as large as our gold stock… the required threefold increase in the price of gold is beyond reasonable probability of adoption.

The U.S. national debt is now $31.3 trillion, and its monetary base is at $5.3 trillion, with no feasible solution to reduce both figures in sight. There are signs that central banks are reconsidering gold’s role in the monetary system and revaluing the gold price as a central bank solvency backstop.

Jim Rickards, author of Currency Wars, estimated that the price of gold would be at least $10,000 if the 35,000 tons of the world’s official gold backs a conservative 40% of global M1 base money supply.

The term ‘gold revaluation’ is a misnomer. In reality, it is the devaluation of currencies against gold. It is ironic that proposals to double the $35 per ounce gold price were resisted in the decades before 1971 out of fears of its economic and political consequences, but today, at $1,800, the gold price is over 51 times higher.

Those fears of yesteryears have not materialized. A bigger problem has since plagued the world since the 1971 closing of the gold window – the substantial rise in the gold price reflecting currencies’ severe loss of purchasing power.

Gold’s prominence will only rise as central banks discuss monetary system reforms. With no solution in sight to increasing global debt, monetary metals like gold and silver must play a much bigger role eventually.

Precious metals are the original money in most of humankind's history and are the ultimate safe haven assets of the world's central banks (including the Federal Reserve and European Central Banks) to restore order when the financial system or monetary union fails.

With inflation expectations rising, many world's central banks (including Russia and China) have continued to buy gold and increase their gold holdings in 2022. Investors planning to hedge against inflation should take note of central banks' considerable forays in the gold market.

It is only prudent to hold gold and silver in these times. Gold has appreciated 7.8% on average since 1970 while silver continues to be greatly undervalued versus gold.