What is the best way to consider gold as a measure of relative economic power? One approach sometimes used is a measurement of the percentage of a nation’s reserves that is held in gold. The U.S. is in good shape, then, because it has 70% of its reserves in gold, whereas China has only 1% of its reserves in gold. But that, I submit, is a misleading measure.
We don’t need a foreign currency, because we print dollars. So at least as long as the dollar retains its central measuring role in international transactions it isn’t surprising the U.S. doesn’t hold in reserve a lot of euros or pounds. We hold gold and we can produce dollars at will so we don’t really need foreign currency reserves.
If you want to measure gold as a potential future backing for the economy, though, you need something more germane, and for this purpose one might consider the gold-to-GDP ratio.
The ratio for the U.S. is now approximately 3%. For China, it’s at 0.7%. But that raises the issue of whether the Chinese are lying about their reserves. And clearly they are.
- Source, James Rickards via Alpha Hunter: