But now, 43 years later, it may be a good time to review his full statement because he went on say a bit more. Full statement, "I have directed secretary Connally to suspend temporarily the convertability of the dollar into gold or other reserves assets EXCEPT IN AMOUNTS AND CONDITIONS DETERMINED TO BE IN THE INTERESTS OF MONETARY STABILITY AND IN THE BEST INTERESTS OF THE UNITED STATES."
Under what conditions and in what amounts would the US continue to allow the conversion of dollars to gold? What interests would the US or monetary stability have with the US continuing to allow the dollars conversion to gold? Why would the president go out of his way on national television to parse his words? And yet, he did.
That second portion of the statement was not for domestic consumption. That caveat was intended for a select few nations that America required to maintain the dollars place as the global reserve.
What was the message? America would pick and choose who would be allowed the privilege of transferring dollars for gold. The likes of France would no longer be allowed to sweep up the excess dollars being pumped into the globe and pass them back to the US taking advantage of the discrepancy of the price of gold versus the real market value of gold.
Why Does This Matter???
The then-presidents statement was in response to the US gold reserves having fallen nearly 60% in less than a decade (20k+ tons down to 8,133.5 tons by 1971). The US gold standard and the Bretton Woods agreement were abandoned to save what gold the US had left.
However, Nixon nearly simultaneously arranged the petro-dollar agreement that all Saudi and, subsequently, all OPEC oil (regardless the buying nation) must be paid for in US dollars and that all importing nations would need significant reserves of US dollars to facilitate this purchasing. The US pledged military and regime support for those OPEC “allies” that honored the petro- dollar agreement. This arrangement allowed a conduit to export the massive dollar creation (US budget and trade deficits) globally without the potential hyperinflation in the US (that would typically result from diluting a currency) or the loss of the dollars purchasing power internationally.
Although doomed from the day it was agreed upon, the petro-dollar system carried on. The US did it's part providing military aid, sustaining non-democratic and often downright despotic kings and monarchs who need only accept nothing but dollars for their oil to maintain America's good graces. All but a select few OPEC members maintained the petro-dollar arrangement...however, those who suggested they were interested in payment in gold or some non-dollar arrangement found themselves on the outside looking in...and typically literally looking down the barrel of a gun. It is certainly conceivable key OPEC nations passed some portion of their dollar surplus back to the US for conversion to gold as OPEC did not significantly recycle the excess dollars into Treasury's.
And as time went on Asian tigers took advantage of cheap labor and weak currencies to run massive trade driven dollar surpluses. But two in particular, Japan and China, recycled huge trade surplus driven excess dollars into US Treasury's. From '00 til July '11, China recycled almost 50% of its excess dollars into Treasury's. China's holdings rose from $60 billion in '00 to $1,315 billion by July of '11, a 2,250% increase! From January '08 'til July '11, China purchased an astronomical $823 billion. However, since July of '11, despite running record trade surpluses, China has sold <-$91> billion in US Treasury debt.
Whatever could have drawn China to buy so many Treasury's for 3.5 years and then suddenly to stop in July '11...and reverse all engines over the next 3.5 years, selling on record dollar surpluses? My guess is that as the financial crisis set in, the US determined to run whatever deficit spending was necessary to maintain the system. And in order to maintain low rates on all that newly created debt, a very big buyer was necessary alongside the Fed. But to incent the biggest buyer...the US utilized Nixon's caveat and determined an amount and the conditions for opening a backdoor conversion of dollars into gold.
Over a 42 month period, China purchased nearly a trillion dollars in Treasury debt at ever lower yields but my best guess is their real payment wasn't paper yielding next to nothing but that they were really converting fiat into gold...but in July of 2011 when the US made clear in the debt ceiling debate that the US never intended to repay the debt or cease deficit spending...either China opted out or the US knew it was on a path to run out of gold. Either way, since July '11, interest rates around the world have collapsed on central bank demand, precious metal prices collapse on record demand, real estate and stocks soaring into record territory. The fix was in and likely involved collusion among all parties to ensure all parties got what they wanted.
The following chart represents the actual data but adds one dashed line...US theoretical gold holdings.
But that wasn't the end of the story...as now we wait to find out how much gold China has, how they plan to take advantage of all shiny stuff, and what it all means for us.