The recent fall in the price of gold has delighted a certain type of commentator. These are the people who mistake every fluctuation in the markets for a revelation about the structure of the world. If gold rises, they discover geopolitical uncertainty. If it falls, they discover renewed confidence in central banking. Every movement has an explanation that lasts until the following week, when another explanation becomes necessary. The underlying assumptions, however, never change. The existing monetary order is taken as permanent. Fiat currencies are assumed to be the natural culmination of financial history. Gold is treated as an eccentric investment whose occasional popularity reflects little more than irrational fear.

I believe the opposite. The recent correction in gold and silver will, I suspect, be remembered as one of those episodes that look obvious only in retrospect. It is not the beginning of a bear market. It is an interruption in a secular rise whose causes have become stronger than weaker. The reason has little to do with the mining industry, with jewellery demand, or even with the latest crisis in the Middle East. It lies instead in the approaching exhaustion of the monetary system created after President Nixon closed the gold window in August 1971. We have now lived for more than half a century under a regime in which every important currency derives its value from political confidence. Such systems do not last indefinitely. They never have.

Throughout most of recorded history, money was not an invention of governments but a recognition of economic reality. Gold and silver became money because they possessed qualities that no ruler had conferred on them. They were scarce, divisible, durable, portable, and universally desired. Kings placed their heads on coins, but they did not create the gold from which those coins were struck. Governments could debase the currency by mixing cheaper metals into the coinage, and they did so with monotonous regularity, but every such experiment eventually encountered the same obstacle. People ceased trusting the debased currency. Prices rose. Honest money disappeared from circulation. Political power collided with economic reality, and economic reality invariably prevailed.

The monetary revolution of the twentieth century was an attempt to escape that discipline. The Bretton Woods system retained a vestige of the old order by linking the dollar to gold, even if ordinary citizens could no longer demand redemption. When that final link was severed in 1971, governments acquired what appeared to be unlimited freedom. Money no longer represented anything beyond the promise of the state. A pound became valuable because the Bank of England declared it valuable. A dollar became valuable because the Federal Reserve and the United States Treasury insisted that it was. For several decades this seemed a remarkable triumph of enlightened economic management. Recessions became opportunities for monetary expansion. Financial crises became arguments for still greater intervention. Public borrowing expanded almost without interruption. Each apparent success encouraged the belief that governments had at last liberated themselves from the primitive constraints of honest money.

The difficulty with political miracles is that they more postpone than abolish arithmetic. Debt accumulated under a fiat system remains debt. Interest continues to compound whether the liabilities are measured in gold sovereigns or electronic bank reserves. The printing press alters the appearance of the problem, but not its substance. Governments discovered that they could finance deficits through monetary expansion. They did not discover how those deficits could ultimately be repaid.

The figures are no longer alarming. They have become politically insoluble. The United States now carries public debt approaching forty trillion dollars. Debt held by the public has already exceeded one hundred per cent of gross domestic product, a level previously reached only under the exceptional circumstances of global war. Annual deficits approach two trillion dollars and continue rising even during periods of respectable economic growth. Net interest payments are moving steadily towards one trillion dollars a year and are themselves becoming one of the largest items in the federal budget. Every increase in Treasury yields enlarges the deficit by increasing the cost of refinancing existing obligations. Debt creates interest. Interest enlarges the deficit. The larger deficit requires further borrowing. What begins as an accounting problem develops into a self-reinforcing mechanism.

Britain differs only in scale. Public sector debt now approaches three trillion pounds, equivalent to around ninety-five per cent of national income. Debt interest payments have exceeded one hundred billion pounds annually, while individual months now establish fresh records for the cost of servicing obligations accumulated over previous decades. Borrowing has repeatedly exceeded official forecasts almost before those forecasts have reached the printer. Governments continue speaking of fiscal responsibility with expressions of admirable solemnity, but the debt itself pays little attention to ministerial rhetoric. It continues growing because the political incentives all favour further expenditure while discouraging the retrenchment that might arrest its advance.

It is fashionable among conservatives to reply that governments should simply spend less. As a statement of moral preference this is correct. As a description of political reality it is close to meaningless. Modern democracies have spent two generations constructing systems of expenditure that possess constituencies far stronger than the taxpayers who finance them. Pensioners expect pensions. Public employees expect salaries. Defence establishments demand rearmament. Welfare recipients regard benefits as entitlements than discretionary transfers. Local authorities plead insolvency. Universities insist that civilisation itself depends on further subsidies. Every item of expenditure possesses organised defenders. Every proposal for retrenchment is denounced as an assault on the vulnerable. The politicians who created these obligations may occasionally promise economy, but they understand that serious reductions would probably terminate their careers.

The alternative remedy, taxation, has equally obvious limits. One hears occasional suggestions that confiscating the fortunes of the rich would restore fiscal stability. This is another comforting illusion. The combined wealth of American billionaires would finance only a fraction of one year’s federal expenditure. Britain has already taxed productive activity to the point where additional burdens increasingly encourage capital flight than higher revenue. Governments have reached the stage where they cannot plausibly tax enough, cannot borrow cheaply enough, and cannot cut enough. They therefore confront the dilemma that has confronted indebted states throughout history.

There are only three ways by which sovereign debt can finally be resolved. A government may default openly on its obligations. It may repay them honestly through prolonged fiscal discipline. Or it may reduce their real value by reducing the purchasing power of the currency in which they are denominated. The first course would detonate the banking system. The second would require sustained political courage that no contemporary government has shown the slightest inclination to display. The third, by contrast, possesses one enormous attraction. It can be disguised.

Economists now prefer the expression financial repression. The phrase is less alarming than confiscation, though it describes the same process. Governments ensure that inflation exceeds the return available on supposedly risk-free assets. Banks, pension funds and insurance companies are encouraged or quietly compelled through regulation to hold increasing quantities of government debt. Interest rates are manipulated whenever markets threaten to impose genuine discipline. Savers continue receiving nominal returns, but their purchasing power declines steadily as prices rise faster than their incomes. The debt itself remains intact in money terms while shrinking in real terms. The government avoids default. The saver pays the bill.

There is nothing novel about this arrangement. Britain employed it after the Second World War. So did the United States. High wartime debts were gradually liquidated through inflation, capital controls and artificially suppressed interest rates. No Chancellor announced that savers were being expropriated. No Finance Minister admitted that government insolvency was being disguised through monetary debasement. Yet that is what occurred. The language of modern economics has become more sophisticated, but the underlying policy has altered little.

The significance of this for precious metals scarcely requires elaboration. If governments cannot repay their debts honestly, and cannot default politically, they must reduce the value of the monetary unit itself. Gold and silver need not become intrinsically more valuable. The currencies in which they are measured become progressively less so. That is why the long-term movement in precious metals has almost nothing to do with fashion or speculation. It reflects a slow but persistent erosion in confidence that governments will preserve the purchasing power of the paper they continue issuing in ever greater quantities.

If the arithmetic points towards continued monetary debasement, the behaviour of the world’s central banks suggests that those responsible for managing the existing system have reached the same conclusion. Governments continue telling their populations that inflation is under control, and that the international monetary order rests on secure foundations. Their actions tell a different story. One should always pay greater attention to what governments do than to what they say, and nowhere is this distinction clearer than in the market for gold.

During the past four years, official purchases have averaged around one thousand tonnes annually, roughly twice the average rate of the previous decade. The buying has not been confined to the usual suspects. China continues adding to its reserves month after month. Poland has become one of the largest purchasers in Europe. Uzbekistan has accumulated steadily. Central banks across Africa and South-East Asia, whose reserves were once held in dollars and euros, have begun following the same path. The World Gold Council reports that almost ninety per cent of central banks expect official gold reserves to rise further during the coming year, while nearly half intend increasing their own holdings. The immediate monthly figures fluctuate, as one would expect, but the direction has become unmistakable. Governments that issue paper money are quietly accumulating the one form of money that no government can create.

This deserves more attention than the daily movements of futures prices. Central banks are not momentum traders. They do not purchase bullion because a moving average has crossed another moving average or because some fashionable analyst has revised his twelve-month target. They buy because gold performs a function that paper assets no longer perform with complete reliability. It cannot be frozen by a foreign government. It cannot be inflated away by another country’s central bank. It carries no counterparty risk. It does not depend on the solvency of a commercial bank or the promises of a finance ministry. It simply exists, and has existed as a monetary asset for longer than any political institution now operating.

The growing demand for gold among central banks is closely connected with another development that even the largest financial institutions now acknowledge, though generally in language calculated not to alarm their clients. J.P. Morgan recently devoted a substantial research paper to the subject of de-dollarisation. The bank was careful not to predict the collapse of the dollar, nor would one expect it to do so. It nevertheless recognised that the dollar’s share of global foreign-exchange reserves has fallen to its lowest level for two decades, that foreign ownership of United States Treasury securities has been declining for many years, and that an increasing proportion of international commodity trade is now being conducted outside the dollar system. The process is gradual than dramatic, but it is measurable, and it is occurring across several different markets simultaneously.

This distinction between sudden collapse and gradual erosion is important because popular discussion of reserve currencies tends to oscillate between complacency and hysteria. Either the dollar is said to be eternally secure, or it is supposedly weeks away from extinction. Neither proposition deserves serious consideration. Reserve currencies do not disappear in the manner of failed banks. They lose influence incrementally. A little less trade is invoiced in dollars. A few more bilateral agreements are settled in local currencies. Central banks reduce their holdings of Treasury securities while increasing their holdings of bullion. Commodity producers experiment with contracts denominated in currencies other than the dollar. None of these developments appears decisive in isolation. Collectively, they describe a world that is becoming progressively less dependent on a single monetary centre.

The sanctions imposed on Russia after 2022 accelerated this process more effectively than decades of anti-American rhetoric. Whatever one thinks of those sanctions as an instrument of foreign policy, they demonstrated beyond argument that foreign-exchange reserves held in another country’s currency are not neutral assets. They are political instruments that may be frozen whenever relations deteriorate sufficiently. A reserve asset that can be confiscated is no longer a reserve asset in the traditional sense. Gold, by contrast, remains outside this structure. It can be stored domestically. It cannot be cancelled electronically. It does not depend on access to an international payments system. States that wish to reduce their exposure to geopolitical pressure need not abandon the dollar altogether. They need only increase the proportion of their reserves held in assets beyond another government’s reach.

There is another aspect of the market that deserves notice because it has attracted little attention outside specialist circles. While speculative money has recently been leaving precious metals, other participants have been positioning themselves for large future gains. During the recent correction, substantial open interest accumulated in options on gold with strike prices of six thousand, eight thousand, fifteen thousand and even twenty thousand dollars per ounce. These positions should not be interpreted as forecasts. They are better understood as insurance policies against outcomes that, while improbable under ordinary circumstances, become conceivable once one accepts that sovereign debt crises rarely resolve themselves tidily. A fund manager who spends a few million dollars purchasing exposure to a potential revaluation of gold may lose the premium. Equally, he may earn many billions if confidence in paper currencies deteriorates sufficiently. The existence of these positions tells us less about where gold will trade next month than about how sophisticated investors now assess the distribution of long-term risks.

Silver deserves separate consideration because it differs from gold in one important respect. Gold is held principally because it has been money for thousands of years. Silver has the same monetary history, but it also possesses substantial industrial uses. Modern electronics, electrical infrastructure, solar generation and numerous advanced manufacturing processes consume silver in increasing quantities, while mine production has struggled to keep pace with demand. The result has been a structural deficit extending over several years. During ordinary economic conditions this would already be sufficient to support higher prices. When monetary demand is added to industrial demand, the possibility arises that silver may ultimately outperform gold, though almost certainly with much greater volatility. Anyone who has owned silver for long learns the same lesson. It rises faster than gold, and it falls faster than gold. It is not the investment for nervous men.

One occasionally hears the objection that if the case for precious metals is so compelling, why did they fall at all? The answer is straightforward. Markets are not philosophical debating societies. They are mechanisms through which leveraged participants buy and sell assets under changing conditions of liquidity. During periods of rising bond yields, stronger dollars or forced liquidations, gold is sold because it is liquid, not because it has ceased to be valuable. The same occurred during the financial crisis of 2008. Gold fell sharply before embarking on one of the strongest advances in its history. It happened again during the market panic of 2020. The safest assets are often sold first because they are among the few assets that can still be sold. Temporary declines therefore tell us little about long-term value.

This brings us back to the broader argument. Gold is not becoming more valuable because human beings have suddenly rediscovered an affection for shiny metal. It is becoming more valuable because the monetary units in which it is measured are losing credibility. The process is slow because confidence decays slowly. Governments continue functioning. Salaries continue being paid. Shops continue accepting paper money. Most people notice only that everything costs more than it did a few years previously. They seldom connect rising prices with expanding money supplies, just as patients suffering from chronic disease often notice individual symptoms without recognising the underlying illness.

The post-1971 monetary experiment has endured longer than many critics expected. Governments possess immense powers to postpone the consequences of bad policy. They can compel institutions to hold their debt. They can manipulate interest rates. They can redefine inflation. They can socialise private losses and monetise public obligations. They cannot, however, abolish the elementary proposition that promises eventually become less valuable when issued in unlimited quantities by debtors who lack the means or the will to honour them honestly.

That is why I remain optimistic about the long-term prospects of gold and silver despite recent weakness. I do not imagine that prices will rise continuously, or that every correction has ended. Markets are never so obliging. I do believe that the broad direction has already been determined by forces much larger than daily trading or quarterly economic statistics. Britain and America have accumulated debts that cannot realistically be repaid in sound money. Their governments cannot tolerate outright default and cannot impose the austerity that honest repayment would require. Progressive monetary debasement therefore becomes not one policy among many but the residual policy to which every other expedient ultimately leads. History suggests that whenever governments reach this point, honest money slowly resumes the position from which political convenience displaced it.

Gold will not replace the pound or the dollar tomorrow morning. Yet it is steadily recovering the function that it performed throughout most of civilisation: the universal asset against which all political currencies are ultimately measured. Those who wait until this becomes obvious to the financial press will almost certainly discover that the opportunity created by the recent correction has long since disappeared, and that yesterday’s expensive gold has become today’s cheap gold.

Naturally, none of this should be regarded as financial advice. Before doing anything so imprudent as attempting to preserve your savings against the consequences of government policy, you should first consult someone properly licensed by the government to assure you that everything is perfectly under control.