https://geopoliticaleconomy.substack.com/p/politics-price-gold-economist-michael-hudson

Why has the price of gold been increasing so fast, breaking records? Economist Michael Hudson explains the politics of the precious metal, and the dynamics of the US dollar system.
Ben Norton
Feb 14, 2025

Why has the price of gold been increasing so fast, breaking records? Economist Michael Hudson explains the politics of the precious metal, and the dynamics of the US dollar system.

Michael Hudson is interviewed by Geopolitical Economy Report editor Ben Norton.
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Transcript

(Introduction)

BEN NORTON: The price of gold has been skyrocketing. Since 2018, the price of gold has nearly tripled. This has caused a big debate around the world about why this is happening. There are, of course, several different factors.

One of them is that central banks around the world have been buying more and more gold, especially with the threat of sanctions from the United States. One-third of all countries on Earth are under US sanctions, including 60% of low-income countries.

The war in Ukraine has only accelerated this, as the US and the EU seized $300 billion and euros worth of assets held by Russia's central bank. This has scared many other countries’ central banks, which fear that they could be next to have their assets seized by the West.

Gold is being seen as an alternative to dollar- or euro-denominated assets.

But it's not just central banks. There's also a lot of private demand, especially as there was a lot of inflation coming out of the Covid pandemic.

What's interesting is that, typically, gold is seen as an inflation hedge. And when inflation increases, the price of gold tends to increase. But in the past two years, inflation has come down, yet the price of gold has continued to skyrocket.

So why is this happening?

Well, today I had the privilege of being joined by the award-winning economist Michael Hudson, and he explained why the price of gold continues to rise, and what the implications could be for the entire global economy, and the politics of gold — because, as Michael often stresses, you cannot separate economics from politics.

So here are a few highlights of Michael Hudson, and then we'll go straight to the interview.

(Highlights)

MICHAEL HUDSON: Demand for gold, as I said, has been far outstripping the supply for many, many years now. And as we're taught in Economics 101 textbooks, when demand outstrip supply, prices go up.

But that hasn't been happening with the gold price until just the last few months. And the question is, why hasn't it happened?

…

Well, the obvious answer is that the gold market isn't like regular commodity markets.

…

So the United States has sought to keep gold prices down ever since it was revalued in 1971… The aim of this was political: to keep the world viewing the US dollar, meaning essentially US Treasury securities, as the most secure form of their international reserves.

It's secure in the sense that, unlike other countries, the United States can simply print the dollars. It can't go bankrupt.

…

People like to say gold is an inflation hedge. But you could say eggs are an inflation hedge, or pork is an inflation hedge.

The point is, the real problem is the US balance of payments deficit pumping dollars into the world.

You'll pay dollars to an exporter, from China or Germany — when there was still a German industry — and they turn the dollars over to their central bank, and the central bank would then say, “What are we going to do with these dollars? If we don't send them back to the United States, our currency is going to go up against the dollar, and that is going to make our exports less competitive. So we have to keep our currency, our exchange rate, down; and we do that by buying Treasury securities”.

It has always been political. And the newspapers don't want to talk about politics, because if they talked about politics, all of a sudden people would realize the Western political and economic system cannot last in the way that it's structured now.

When you talk about politics, you realize the game is over for the West.

(Full interview)

BEN NORTON: Hi, Michael. It's always a real pleasure having you. The last time we had a discussion, we analyzed the effects of Donald Trump's tariffs, or his threat of tariffs. And you warned that it could cause a global financial crisis, as countries won't be able to get the dollars they need to pay off their dollar-denominated debt.

After we had that conversation, you raised some other points about the gold market that you wanted to talk about, and I thought there would be a great separate episode.

So why do you think we've seen this massive shift, the near tripling of the price of gold in the past seven years?

MICHAEL HUDSON: Well, we've been talking for many years now about how the international financial system works, and central bank reserves, and de-dollarization, and the split of the BRICS away from the West.

And that's what my book Super Imperialism was about, how America was driven off the gold standard because of the balance of payments drain from the Vietnam War and for world military spending, up to 1971. The entire U.S. balance of payments deficit from the Korean War in 1950, all the way through the ‘50s, the ‘60s, and into the ‘70s was military spending.

The result was that the United States had, every month, to sell the accumulation of dollars that ended up in France, Germany, and other countries. The dollars spent in Vietnam that were exchanged for local currencies ended up in French banks, because Southeast Asia was a part of the French empire; and the French banks, sent these dollars to Paris, and General [Charles] de Gaulle would then cash in the dollars [for gold] every week.

Until 1971, every printed dollar — your dollar bills in your pocket — had to be backed, by law, 25% by gold. So we were watching the American gold supply go down, down, down to the gold cover.

Every week, on Friday morning, when the Federal Reserve gold report would come out on Wall Street in the mid ‘60s, we were all saying, “When is the breaking point going to come?”

Well, it came in August 1971. At that time, the US government thought, “This is terrible. We have controlled the whole world financial system ever since World War One, by holding gold, and that was what other countries used to have their monetary reserves. We have controlled other countries ability to run budget deficits, to fund their own economy with gold; now we don't have it anymore”. And there was a lot of hand-wringing.

I wrote my book Super Imperialism, to say that this is not going to interfere with the American empire, because if countries, central banks, governments can't buy gold, they have only one big alternative at that time, and that was to buy dollars.

And how do they buy dollars? They buy US Treasury bonds, Treasury notes, short-term Treasury securities. They put their money and hold it in the form of US debt.

As they got more and more dollars, they spent more and more money buying US debt. And that became an increasing way of how the United States funded its own budget deficits.

Who bought the bonds to fund these? Increasingly, central banks. So the United States found this is what some people called the “exorbitant privilege” of the dollar.

When other countries run a balance of payments deficit, they have to devalue. The IMF comes in; they say, “Lower your wages; impose poverty to squeeze out enough money to pay the bondholders”. But the United States can keep printing the money.

So, what can other countries do? They don't have an alternative.

Well, you've seen increasing pressure to create an alternative for the last decade or so. That's what your and my discussions and your site has been about.

Other countries want to de-dollarize, and the United States fears, “What is going to be the alternative?”

Well, to some extent, we know they're buying each other's currencies. They're buying yuan, rubles; doing trade and investment in each other's currencies; to avoid having to use the dollar, and having to take the risks that Venezuela took — Iran, and Russia — of just having the dollars confiscated.

But still, there is an idea that gold is a kind of asset that the whole world has been able to agree on, along the silver, for the last 3000 years, as the monetary base.

How are you going to get countries all over the world, from North America, to Europe, to Asia, all to agree on what to hold.

Well, they're trying to come up with an agreement now, and they realize that you can't have a BRICS monetary system until you have a whole political integration of the BRICS. So that's not going to be an alternative for right now. So countries have been buying gold.

Well, the private sector is watching all of this. They're listening to your show, and what I've been writing about, and they say, “We're in a situation now, just like the world was in the late ‘60s, going into the 1970s, when finally the gold price rose beyond the ability of the United States to keep it down to $35 an ounce”. So private investors have got into the gold market.

This is what makes the gold market not simply talk about commodities, how to get rich; it talks about how the world economy is being restructured, and its monetary relations, and what the politics are.

But what I'm going to talk about today is what is happening that makes the gold market so political and so unique, that something very strange is happening there.

On Monday, February 10th, the week started with gold rising to over $2,900 an ounce. So we're on the verge of it going up to $3,000 an ounce. That's a quantum leap.

If you look at the statistics for gold mining throughout the world, the supply and demand of gold, demand has been far outstripping the supply now for 20 or 30 years.

We're seeing now an effect very much like a run on the bank. But that run on the bank has actually been occurring for a few decades.

So the question that you have to ask to begin with is, why did it take so long, until just this year, for gold to begin to go up in price, after it stagnated for a decade?

We've seen, in the last decades, the central banks have devoted a steady rise in the proportion of their reserves that they hold in gold, and proportionately less of their reserves in the form of U.S. dollars.

They're still holding more and more dollars every year, because the United States is running such a large balance of payments deficit that it's pumping dollars into the world economy.

But other countries are not just recycling these dollars. They're spending more and more of the dollars they get on gold, as a kind of safe haven for them: something that is solid.

Gold is an asset that doesn't have a debt attached to it. If you hold a gold coin, or a gold bar, that's a pure asset — no debt at all.

But if you hold a Treasury bond; that's a debt, a debt of the United States. And if it's a debt of the United States, it's like your bank deposit is a debt of the bank to you.

If the US goes under, like a bank goes under, or if it just refuses to pay, then you're out. And there's something ephemeral about all of this.

Well, if you look at the trend of gold prices, it stagnated in a very narrow range from about $1200 to $1400 an ounce for a few years, from 2015 to 2019. It was all in that range.

I spent a lot of time in Europe and Asia at that time, and all of the government officials I talked to, the financial funds, all said, “You know, we're buying more and more gold, because this system can't last, politically, the way it is”. But the price didn't go up.

Then, during the Covid years, from 2020 to early 2023, once again, there was a stagnation, a range from $1800 to $2000 an ounce. That's a pretty narrow range — you know, a low range, a little step function to a new range, and then very gradually drifting upward, but not anywhere near as fast as the actual demand for gold was.

Well, finally, in the last half-year, we've seen the gold price rise all out of range to, as I said, nearly $3,000 an ounce.

So the question is, are we in a new range for gold, or is the price going to go higher?

With so many people buying the rights to hold gold — you'll buy a gold fund, and you'll pay money into the gold fund, and that has securities in gold; or you'll buy gold and you'll store it with a bullion dealer, because you don't want to keep it at home, because it could get stolen, or who knows what will happen.

Well, where is all this gold going to come from, physically, to meet the demand?

During the last half a century, quarter century, there has been a rising private investment boom in gold, because people can look at the trend — more and more, excess demand over the supply — and they can see that this is an unstable situation.

So to understand it, you have to understand how unique the gold markets are. And I want to talk about that today, not simply as an exercise, but to show what the politics behind the gold market are, and what it means for how the world economy is being restructured.

Suddenly, gold is more than just an investment vehicle. There have always been gold bugs who don't understand, “How is it that the government can just print money? We don't understand. We're going to just try to buy gold, and there should still be the gold standard, like there was in the 19th century”. There are all these crazies on the right wing, libertarians, who don't trust government.

But now we're talking about demand not just from the crazies, but from regular funds that are looking at the trends, and they realize that there's a pile-on effect that is occurring. Everybody suddenly is moving into gold.

You'll find the advertisements all over the internet, when you watch YouTube shows, there is very often an advertisement for gold on there. And obviously, more and more people are doing it.

So the question is, is all this just a bubble, or are we moving towards a new and even higher long term plateau? Is there a change occurring in the world's financial and monetary system? Politically?

Well, I'm going to explain what is happening.

Demand for gold, as I said, has been far outstripping the supply for many, many years now. And as we're taught in Economics 101 textbooks, when demand outstrip supply, prices go up.

But that hasn't been happening with the gold price until just the last few months. And the question is, why hasn't it happened? And why have the gold prices suddenly begun to escape from their former narrow range and risen so fast, since last autumn?

Well, the obvious answer is that the gold market isn't like regular commodity markets. And even regular commodity markets don't operate in the simple way that popular media and textbooks say.

One reason for that is that, for the last century, the price of gold has been regulated by central banks, mainly by the US Treasury, ever since Franklin Roosevelt revalued gold to $35 an ounce in 1933.

That lasted until President Nixon took the US off gold in 1971. And, as a result of the war, and as I said, US officials were very frightened that the US was no longer able to control the price of gold. Hence the key to the whole world's money creation that it needs to finance how its economy operates.

The US thought, “Well, other countries are now going to take gold, and we're not going to keep up with them, and there goes our leverage for imposing power in institutions like the International Monetary Fund and the World Bank, that were all put in place 1944, 1945, at the end of World War Two”.

But that didn't happen, for the reasons that I explained in Super Imperialism, my book in 1972. There really weren't many alternatives large enough to put foreign money in.

So instead of cashing in their dollar inflows by buying gold, foreign central banks just bought Treasury securities. And as I said, that funded the rising portion of the US domestic budget deficit.

Well, the dollar glut was run up mainly, as I said, by military spending. And I worked for a year with Arthur Andersen, the accounting firm, and Chase Manhattan Bank, showing this. And I became a consultant to the US government, explaining this phenomenon, during the 1970s.

This is not something that is taught in economics courses, because it's politically sensitive, and economics tries to be “apolitical”, because if you see how political economics really is, you have a different approach to politics.

So the United States has sought to keep gold prices down ever since it was revalued in 1971. Gold prices went up pretty quickly to about $700, $800 an ounce. Then finally, by the mid 2010s, into $1200, $1400, you know, gradually going up.

The aim of this was political: to keep the world viewing the US dollar, meaning essentially US Treasury securities, as the most secure form of their international reserves.

It's secure in the sense that, unlike other countries, the United States can simply print the dollars. It can't go bankrupt, and be unable to pay the debts, because unlike other countries that have debts in a foreign currency, the US debt is in its own currency in dollars, and it can just keep printing them.

BEN NORTON: Very well said, Michael. There's so much we could respond to.

We talked about central bank demand for gold. But I think another important factor here is inflation, because traditionally gold has been seen as an inflation hedge.

When you have moments of high rates of inflation — for instance, coming out of the Covid pandemic, as the economy reopened in 2022, consumer price inflation was very high in the United States and many countries, because of the supply chain disruptions.

So as inflation increased in 2022, you could see that, in October, the gold price was around $1,600, and it increased pretty substantially to almost $2,000 in the spring of 2023.

What happened then is that, in early 2023, the inflation peaked, and the gold price went down, as inflation went down, because it’s of course seen as an inflation hedge, so it makes sense that they would tend to move together.

However, then something very strange happened. In October 2023, the gold price reached a low of around $1,850, and since then, consumer price inflation has continued to fall. But that relationship broke, and instead the gold price skyrocketed by another thousand dollars to around $2,900.

So, Michael, that relationship has now ended, it's broken. Why do you think that is?

MICHAEL HUDSON: I don't think there's a causal relationship, there at all. That's my whole point.

People like to say gold is an inflation hedge. But you could say eggs are an inflation hedge, or pork is an inflation hedge.

The point is, the real problem is the US balance of payments deficit pumping dollars into the world.

You'll pay dollars to an exporter, from China or Germany — when there was still a German industry — and they turn the dollars over to their central bank, and the central bank would then say, “What are we going to do with these dollars? If we don't send them back to the United States, our currency is going to go up against the dollar, and that is going to make our exports less competitive. So we have to keep our currency, our exchange rate, down; and we do that by buying Treasury securities”.

It has always been political. And the newspapers don't want to talk about politics, because if they talked about politics, all of a sudden people would realize the Western political and economic system cannot last in the way that it's structured now.

When you talk about politics, you realize the game is over for the West. And so of course they don't. They want to make it appear micro, “Oh, there are some people who just try to look at inflation rates”.

Some people really believe this. They believe the textbooks. They're gullible. Most investors in gold, I have to say, are gullible, but there are other people who are actually looking at reality, and they can see, this system can't last.

In the end, the people who don't trust gold are going to win.

I'll give you an example. In 1973 or ‘74, Herman Kahn and I went to the White House for a meeting with the US Treasury. And I was explaining to them how the Treasury bill standard worked.

Well, what I said was something that, certainly, they didn't want to hear. I said, “Gold is ultimately the peaceful metal, because it was the US running out of gold that threatened to stop it from spending the military costs of the war in Southeast Asia, and all over, the 800 military bases that it has over the world”.

If you have gold continue, and if Nixon did not go off gold, then America would very quickly lose all of its gold stock, as the cost of waging war against the rest of the world, of keeping its unilateral military power.

It's not power because it's a democracy; it's not power because people love it; it's because American power is the ability to hurt other countries, to bomb them, to finance regime change, and to threaten other countries. And that costs a lot of money to keep threatening.

That's part of the whole crisis that we're seeing now, and you’re all of a sudden winding down what has been, as Trump and [Elon] Musk have been saying, you're winding down what has been absorbing an enormous part of the American budget, pushing it into deficit.

And these are deficit bugs. They're not modern monetary theorists; they believe that deficit spending is bad, not that deficit spending is how the government provides money into the economy at large.

So, there's a whole conflict of monetary theory that's going on now. So you could say that this whole fight over gold and gold futures reflects the whole idea of what is going to be the basis of American military policy, and American foreign policy, and geopolitics.

Are we going to be in a constant war against the whole rest of the world? Or are we going to try to make peace with Russia, China, and Iran, and just focus against countries that we can really beat up, like Canada, England, Australia, Japan, South Korea?

BEN NORTON: Yeah, what's also ironic is that Trump talks about cutting the deficit, but he's also cutting taxes on the rich, which will likely increase the deficit, which is exactly what Ronald Reagan did.

MICHAEL HUDSON: Right! He is not quite — ha! That’s the unstated part. We all know what he wants.

BEN NORTON: Yeah, exactly. It's the same thing that Ronald Reagan did. You know, Reagan said he was going to cut government spending, but, actually, the US deficit as a percentage of GDP increased significantly under Reagan.

Ironically, it was the neoliberal Bill Clinton administration that actually reduced the deficit, and for the first time ever since, the only time ever since, the US actually had a budget surplus.

But what's interesting, Michael, is that you have been associated with Modern Monetary Theory (MMT), and you're not a gold bug.

But what you're saying here is that there is an element — you're not arguing that the dollar should go back to the gold standard. That's not what you're arguing.

You're saying that there have to be limitations to the amount of money printing, by having some kind of a link to reality [and the real economy].

MICHAEL HUDSON: Modern Monetary Theory explains how to finance the domestic budget deficit.

One thing Modern Monetary Theory theory cannot do, when you create money, is you can't create foreign currency.

[The United States] can create dollars to spend into the economy. You don't have to borrow these dollars from wealthy bondholders and investors. You can simply print the money. You don't have to levy taxes, because that's the essence of paper money.

But, when it comes to foreign spending, especially military spending, [the United States] can't print Chinese currency to finance your spending in Asia. [The United States] can't print rubles. You can't print other currencies for spending abroad.

So Modern Monetary Theory refers to a domestic economy, not to foreign money. It's a theory of domestic money.

Gold is a constraint on money creation. It all goes back to the awful, awful theories of David Ricardo, the bank lobbyist, in Britain in 1809 and 1810, when he was testifying before the Bullion Committee and saying, “We need to keep wages down. We need to keep the economy poor, so that the wealthy creditors can get enough money to control the world, and reduce everybody else to abject dependency. So we're against paper money. Paper money is inflationary. If you only use gold and silver, which the rich people have, then we can operate the whole world”.

Well, he didn't say it just in those words, as you can imagine, but his arguments were against creating paper money. This was the antithesis of Modern Monetary Theory.

Ricardo spelled out in great detail exactly what the principles of the International Monetary Fund are have been since 1944 and ‘45, that, if you don't let countries create their own paper money, and force them to have hard currency, gold, or US dollars, then they can't afford to hire more labor; they can't afford to invest. They'll be completely dependent on countries that can act as is creditors.

Again, that's what I explain in my book Super Imperialism, how this whole system came in.

I'm writing a book now — I'm on the last two chapters — on the political alliances of bankers from the Crusades up to World War One, where you have the whole attempt at hard money.

This is what caused a rupture in American politics in the 1870s, ‘80s, and early ‘90s.

BEN NORTON: Yeah, at the end of the 19th century, the famous populist US politician William Jennings Bryan said that the financial class wanted to “crucify mankind on a cross of gold”.

MICHAEL HUDSON: Remember, the creditors after the Civil War wanted to roll back prices. They said, “Well, there's been inflation during the Civil War. And that means that all of our bondholders, we don't have the same purchasing power over labor. We have to reduce labor’s wage rates and make them poorer and poor, so that we can get richer and richer, and we do this by forcing gold down. You need unemployment”.

They were, just like the Federal Reserve says, “We need unemployment, hard money, to keep wages down, so that employers can make more profits from hiring cheap labor, basically”.

This is a class war of the financial sector against the economy at large, against industry. Finance capitalism has become antithetical to industrial capitalism. That's what you and I have been talking about in these shows.

It all goes back to Ricardo saying, if you take away the government's ability to run deficits and spend money into the economy, then you'll be dependent on the rich people to supply the money.

So when President Clinton finally ran a budget surplus in 1998, what happened? That meant that the government was not spending money into the economy. People had to go to the banks and borrow, and pay interest to the banks.

That's what the financial sector wants. It wants to get interest to force the economy at large to pay interest, to get the money that it needs to conduct business, and employ labor, instead of having the government simply provide, printing the money, without interest. The inflationary effect is identical.

It's no more inflationary to print money than to borrow from a billionaire, who isn't going to spend money on buying [more] eggs, in any case, and “printing” the money that way.

So there's a whole fight over, what is the source and the use of money in an economy today?

That has been pretty much not discussed in the popular press, but that's what Modern Monetary Theory is all about. That was fought against by the financial sector that wanted to control money by the wealthy classes, by the financial sector, and by the banks, not by the government for the public interest.

The [US] government position, Democratic Party position or Republicans, is that money is to be created to make money for the wealthy financial sector, not for the economy. Ctd....