Friday, May 16, 2014

The US Will Have to Go Back to a New Gold Standard

I don’t think the US wants to go to a gold standard. But if they have to do it to restore confidence then you have to ask the question, “Okay if we’re going to have a new gold standard, what’s the price?” And you’ve got to get the price right because if the price is too low, it’s extremely deflationary and you don’t want deflation. That’s what happened in the Great Depression.

So it’s a very simple math exercise. You just take the amount of money and divide by the amount of gold and that will tell you the price of gold in order to support the money supply. Now you have to make a couple of assumptions, there are a couple of inputs there. When you say money, in every gold standard there is some ratio of physical gold to paper money. Well, what’s your definition of money?

Are you using M0, M1, or M2? Those are all very different, so you have to figure that out. The second thing you have to ask yourself is how much gold backing do you want? Is it 20%, 40%, 100%? You know in the 19th century, the Bank of England ran a successful gold standard with 20% backing.

In the 20th century, the US had a successful gold standard for a while with 40% backing. The Austrian economists would say it has to be 100% because they don’t like fractional reserve banking. But whatever number you pick, you have to pick some number and stick to it.

The third thing you have to ask yourself is would this just be the United States or would it be all the major economic powers in the world? I think it has to include all the major economies and the reason is, if one country such as the United States went to a gold standard and others did not, we’d have the only currency that anybody wanted.

You wouldn’t want sterling or euros or yen or any other currency if you could get dollars backed by gold. But that would be also extremely deflationary because it would make all the other currencies worthless and everybody would want dollars and the dollar would be the only thing that people wanted.

So taking all of that into account, if you use for example, M1 which I think is a great number, and if you did say 40%, which I think is probably reasonable. And if you included China, the ECB, and the US and then did the math I described, that number today is about $9,000 an ounce.

It may have been $2,800 for the US only back in 2003, but we printed trillions of dollars since then. So the formula is the same, but the amount of paper money is much greater, therefore the implied price of gold has to be much greater. So today even if we have a reasonable gold standard that was only partly collateralized, you’re looking at $9,000 an ounce.

- Source, Jim Rickards via Sprott Money: