This year marks the bicentennial (2 centuries) year of Singapore’s founding. We have a lot to be grateful for. Compared to most parts of the world, this little red dot is an oasis of calm.
Today’s world is troubled. Central bankers are racing to the bottom in compressing their interest rates. Competitive devaluations are rife. The world appears to be on the brink of a currency war.
How do you protect your hard-earned savings during such an uncertain period? Fiat currencies can lose their purchasing power if eroded by (runaway) inflation. To answer this question, let us go back 60 years to see what our founding fathers did under similar circumstances.
This is a story of Singapore’s gold reserves. It is also a story of Dr Goh Keng Swee’s soul of a buccaneer.
Early 1960s
In the early 1960s, the U.S. dollar’s fixed value against gold, under the Bretton Woods system of fixed exchange rates, was deemed to be overvalued. The ballooning of domestic spending on President Lyndon Johnson’s Great Society programs, coupled with a rise in military spending in the Vietnam War, gradually worsened the overvaluation of the dollar.
Typically, the overvaluation of any currency is followed by inflation. Central banks prefer to keep inflation stable, at around a 2% per annum target. Rampant printing of money results in severe overvaluation, which leads to runaway inflation. That is terrible for the economy — just ask the Germans using the Reichsmark during World War 2, or the Zimbabweans today. They must cart wheelbarrows of money, just to exchange that for a loaf of bread.
Yet, because of its reserve currency status, America could easily print money to service their debts. They can afford inflation without having to pay for it. Printing a $100 bill is almost costless to the US government, but foreigners must give $100 of real goods to get the bill.
America had the exclusive right to print the Dollar and force it on everyone else in payment of debt. France’s President Charles De Gaulle termed it as America’s “exorbitant privilege”.
Mid to late 1960s
In February 1965, President Charles de Gaulle announced his intention to exchange its U.S. dollar reserves for gold at the official exchange rate. He sent the French Navy across the Atlantic to pick up the French reserve of gold. This was followed by several other countries.
Central banks were growing squeamish at the thought that their gold holdings might be compromised. They wanted to transfer their overseas holdings back to their own vaults.
Speculative capital flows were de-stabilising currency markets. Most ominous was the impending rupture of the US dollar-gold link, which would upend the Bretton Woods system of fixed exchange rates.
Dr Goh Keng Swee was convinced that the Bretton Woods system would fracture. He pursued a policy of diversification for the country’s reserves. Instead of holding mostly US Treasury bills, he wanted to hedge his bets in other stores of values.
To safeguard Singapore’s reserves against market turmoil, he changed our currency composition by reducing the proportion of US dollars and Sterling pounds, while increasing the Deutsche mark, Japanese yen and Swiss franc. While it’s the standard practice for any sovereign now, it was a novel and unheard-of concept back then.
Dr Goh Keng Swee wanted to procure gold for Singapore, because he knew that gold was a safe haven and was money in extremis (extreme situations). It is a highly liquid yet scarce asset. It is no one’s liability and has no counter-party risk. It’s basically insurance for fiat currencies.
Soul of a Buccaneer
Unfortunately, he was blocked by a US-led gold embargo.
Dr Goh Keng Swee identified South Africa as a potential source. Back then, Russia and South Africa were the world’s leading gold producers. He met with South Africa’s Finance Minister, Dr Nicolaas Dietrech, in Washington DC, during a World Bank meeting in 1968.
They met discreetly in a hotel room and turned the volume of the TV up so that no one can overhear them. It was a clandestine meeting. The two men agreed to send their emissaries to Zurich at a specified time to conclude the deal. Dr Goh appointed civil servant Ngiam Tiong Dow and asked veteran banker Wee Cho Yaw to accompany Ngiam.
But how will the emissaries be able to identify each other at the meeting point? Dr Dietrech took a US dollar bill and tore it in half. He gave one half to Dr Goh. The two halves fitted perfectly. That was how their emissaries would identify one another.
And that was how Singapore obtained 100 tonnes of gold at USD 40 an ounce.
1970s
The Gold Window allowed foreign countries to exchange dollars they received through international trade for gold held by the American government, at USD 32 an ounce. Gold started to pour out of the US government stockpile due to large deficits in both the federal budget and trade balance.
President Richard Nixon severed the gold link in 1971. The decision was made to prevent a run on Fort Knox, which contained only a third of the bullion required to cover the amount of dollars in foreign hands. Gold prices promptly rocketed up to USD 200 an ounce.
Today
While the US dollar remains the global reserve currency, cracks in the edifice are now apparent. How much longer will creditor countries finance the annual deficits? When the Federal Reserve’s current policy of near 0 percent interest rates ends, how much will they have to spend out of current consumption to finance nearly $22 trillion of debt?
Gold is today USD 1,400 an ounce and climbing. From his purchase price of USD 40 an ounce, to today’s market price of USD 1,400 an ounce… this is testament to Dr Goh Keng Swee’s foresight and second-level thinking. How prescient. Singapore’s official reserves of gold stand at 127.4 tonnes — a huge chunk of which was contributed by his 1968 purchase.
While we celebrate our bicentennial birthday, we should also remember the things that our founding fathers did for us. I admire his willingness to break through red tape to get things done. We owe our success today in large part to what he and his peers did for us 50 years ago.
前人种树，后人乘凉
