Gold and System Collapse: Charting the Bank Run of the Mighty US Dollar / Commodities / Gold & Silver 2025

The US dollar banking system is in themidst of a bank run by the measures that I will illustrate here.

Since the 1879 gold standard wasestablished in America, the US dollar could be directly redeemed for goldwithin the banking system. This continued even after the Federal Reserve wascreated and until it was ended for citizens in 1933.

In such a system, the measure of actualgold held by the banking system ( the true monetary base) versus the goldcertificates (paper dollars but measured as the monetary base) with which goldcould be redeemed is a relevant measure of how well the banking system iscapitalised.

If the gold certificates (paper dollars)issued are way more than the actual gold (true monetary base) in the bankingsystem, then the system is under capitalised, which means the risk of defaultis increased.

In such a case, there would be a push toredeem certificates (paper dollars) for gold at the banks. Although this optionwas out for citizens after 1933, they could still redeem their goldcertificates (US dollars) for other physical assets like silver, land, oranything else. So, the option to opt out due to the currency beingdisproportionately debased was always there.

The level of gold capitalisation in the USdollar banking system, among other things, was a key reason why the US dollarbecame the world reserve currency. When the Bretton Woods agreement was made,the gold backing was 78.8% (still fairly respectable considering historicallevels prior to the 1933 executive order).

In other words, when the Bretton Woodsagreement was made, the official monetary base, or US dollars issued, was$26.927 billion (equivalent to about 769 million ounces of gold). The USmonetary gold (true monetary base) at that time was 606 million ounces of gold(valued at $21.21 billion). So, every dollar was 78.8% backed by actual goldheld by the Federal Reserve banking system.

The US was in a dominant position due to awell-capitalized banking system (relatively speaking), having the biggest goldstash, and being a key player in the war and its conclusion. This (the level ofgold capitalisation) is a part of the “DNA” of the US dollar and is evenrelevant after Nixon ended the direct convertibility to gold in 1971.

When the US dollar becomes too debased, orcannot be trusted due to war or the risk of theft (think Russia), then nationscould naturally go to an asset like gold (which they are already doing) as areserve asset instead. While the dollar still has value it can be redeemedfor gold to avoid the risk that debasement of the currency presents, whichmeans that the situation is virtually the same now as before 1971, when goldcould still be directly redeemed.

Below is a long-term chart(macrotrends.net) of gold relative to the US monetary base:

In January 1934, gold was revalued (but inreality, it was the US dollar that was devalued to adjust to the market priceof gold) from $20 to $35 per ounce. This revaluation caused the gold backing ofthe gold certificates (paper dollars but measured as the monetary base) to hitabove 98% and later even go higher.

So, when the Federal Reserve banking systemwas virtually fully capitalised (above 98%), this chart shows that gold’s pricerelative to the monetary base or paper dollars measured as the monetary basepeaked at the time.

That strong position was used to greatlyincrease credit by issuing much more paper dollars relative to  the price of gold over the next 36.583 years.In other words, it was the typical fractional reserve banking trick, where thebanker or goldsmith would issue more dollars or gold certificates than the goldon hand.

This trend of increasing the goldcertificates relative to the price of gold continued until August 1970, whenfurther increases of the gold certificates or dollars could not be made withoutcausing the gold price to go up even more than the increased dollars or goldcertificates.

In other words, the market has caught upwith the debasement, and demand for gold has increased to counter the effectsof the debasement. Soon afterwards, Nixon was forced to end the dollar’s directconvertibility since it was so significantly underfunded with gold.

Over the next nine years, the marketdevalued the US dollar until its gold backing of gold certificates (betterknown as paper dollars) again hit the 100 percent level, and even higher aroundJanuary 1980.

Again, this chart shows that when theFederal Banking System was fully capitalised (above 100%), gold’s pricerelative to the monetary base or paper dollars measured as the monetary basepeaked.
So, once the US dollar banking system wasagain fully capitalised by gold (thanks to the much higher prices), they couldgo for another round of greatly increasing credit. The interesting thing hereis the fact that they could again increase gold certificates or dollars foraround 36 years without causing the gold price to go up even more than theincreased dollars or gold certificates.

By November 2015, the market had againcaught up with the debasement, and demand for gold had increased to counter theeffects of the debasement. Since then, the gold price has moved up faster thanthe monetary base, despite all the massive stimulus amounts since (includingthose for 2020).
The critical parts of this run tophysical gold are yet to come.
Part 2 an 3 are on my premiumblog and deals with the timing of the gold/bank run and how it could relateto the run of the 1970s.
Get more of this kind of analysis at mypremium gold and silver blog or my Silver Long-term Fractal Analysis Report.

Warm regards,

Hubert

“And it shall come to pass, that whosoevershall call on the name of the Lord shall be saved”

http://hubertmoolman.wordpress.com/

You can email any comments to hubert@hgmandassociates.co.za

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