The What, Why, and When of a Modern Gold Standard

I hear people talking about returning to the gold standard so that money once again has real value, and so that governments are not able to manipulate the money supply as easily as they do. This sounds appealing to me. Whenever you see the price of gold going up, that generally means the value of your dollar is going down, especially as the U.S. dollar is the world's reserve currency.

Nonetheless, the proposal leaves me with unanswered questions. For example, if the world economy is growing by leaps and bounds but the stock of gold in the world remains relatively stable, how can gold supply the money required to circulate through such an economy?

A reporter from The Street asks precisely these questions (follow the link to the video) of Peter Schiff who says the coming dollar crisis will force us back onto the gold standard. Nothing else can prevent successive governments printing more and more money and moving us closer and closer to national bankruptcy. Sadly, he doesn't give me or the reporter the answers we were looking for.

This interviewer on Hard Asset Investor explains briefly how a movement to the gold standard would be catastrophically deflationary because all the gold ever mined from the earth is worth just over $4 trillion, whereas the world economy is worth about $60 trillion. (By the way, there are about $600 trillion in derivatives hanging out there. Scary thought. But one thing at a time.) But Schiff is undeterred.

Back in May, Steve Forbes told Human Events that he predicts a return to the gold standard within five years. Here is a sober account from Forbes.com of what the gold standard does and what it does not do. The same author explains the paper to gold relationship here.

The same reporter from The Street who interviewed Peter Schiff later interviewed Steve Forbes on the same subject with more satisfying answers, it seems to me.




So, it seems that a "true" gold standard is, as suspected, impossible. The amount of U.S. currency in circulation is $9 trillion. But the U.S. owns only $400 billion in gold. All the gold in the world at $1500 an ounce amounts only to $4 trillion. A "gold standard modern" would simply peg the dollar at, for example, $1500 an ounce of gold.

[W]hen the price rises above that level the Federal Reserve must raise rates and when it falls below the Fed can loosen monetary policy. Gold, in essence, would act as a check for the central bank and help regulate the U.S. dollar. "We don't need to own one ounce of gold," says Forbes in an exclusive interview with TheStreet, "you just keep it in a narrow range."

When the consequences of our debt catch up with us, and especially if there is a serious threat of the American dollar losing its global status as the reserve currency, the default currency of international transactions for things like oil, we may have no choice but to go this route.

John Nadler of Kitco.com argues that there is no path back to a gold standard. I don't know if the fact that his company sells gold has anything to do with the position he takes on the subject.

I'm learning too.

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Update:

Ralph Benko of the Lehrman Institute’s Gold Standard Now cites this post in "Memo to our Madmen in Authority. The Gold Standard is the New Monetarism, featuring the Quality, not Quantity, of Money" (Caffeinated Thoughts, July 17, 2011).

Gold, the Silent Success Story

As I write this, gold is breaking $1560 an ounce, a new record. The price rose $25 an ounce today. That is stunning. People were talking about $1500 gold by Christmas. It hit that figure before Good Friday. It is now more than half way from there to $1600 within the following week.

This should be front page news, not only because it is a rip-roaring good investment, but also because gold prices move inversely with the value of the dollar. A rapidly rising gold price means a plummeting dollar. Surely that's news.

So I wrote my column this week on gold and the U.S. economy ("Whither Gold Prices?"). Not that I am an economist or a gold market analyst, but I talk to people who understand these things, I digest the principles, add the politics, and put it all together. Badaboom, badabing...I'm a prognosticator.

When the Republicans retook the House, commissioned by the voters to reign in government spending, had Obama tacked to the center as Bill Clinton did after his 1994 midterm defeat, we would perhaps have a sign that precious metal prices were soon on their way down. But the president has signaled no such change in course. In fact, in his budget-cutting plans, he has signaled his continued determination to raise taxes on the job-producing class.


...there is every reason to believe that there is a lot of upside to precious metal prices. That’s the good news if you still want to get into the market. The bad news is unemployment, inflation, and a huge, tragic waste of human potential as we flounder in this ideological soup of Obama’s wealth redistributionist fantasy.

Track precious metal prices at www.kitco.com.

Consider the front page of today's Wall Street Journal: "Officials Unfazed by Dollar Slide."

The U.S. dollar fell Thursday to its lowest point since the summer of 2008, but officials aren't showing signs that they are alarmed by the currency's descent or acting to stem it. In recent days, the nation's top two economic policy makers—Federal Reserve Chairman Ben Bernanke and Treasury Secretary Tim Geithner—have publicly expressed their desire for a strong dollar. But there is little indication of a change in policy from either the Fed or Treasury—or in underlying economic conditions—that would alter the currency's downward course.

 This well known analyst gives advise on bubble and silver prices:

Legendary global investor and chairman of Singapore-based Rogers Holdings, Jim Rogers warned that if silver continues to go up like it has been over the past 2 or 3 weeks and reaches triple digits in 2011, he will probably start to think about selling because then 'you've got a bubble'.

Speaking to Financial Survival Radio, Rogers said: " My hope is, silver and gold and all commodities will continue to go up in an orderly way for another ten years or so, and eventually the prices will be very, very high".

"I hope something stops it going up in the foreseeable future and we have a correction," he added.
Explaining his wish, Rogers warned that "a parabolic move and all parabolic moves end badly".

"Eventually, everybody’s going to be owning gold, and then we’ll all have to sell our gold.  But that’s a long way from now, he predicted.

The legendary investor doesn't consider the recent increases in precious metals as parabolic. "If silver continues to go up like it has been over the past 2 or 3 weeks, yes, then it would get to triple digits this year.  And then we’ll have to worry.  It’s not parabolic yet".  

Here is an overview of, as the article puts it, "How gold went from $251 to $1,500."

P.S. Gold hit $1570 an ounce today. Silver still came shy of $50.