That was the mistake made by Churchill in 1925. The world is not going to repeat that mistake. I’m not saying that we will have a gold standard. I’m saying if you have anything like a gold standard, it will be critical to get the price right. To this regard, Paul Volcker said the same thing.
The analytical question is, you can have a gold standard if you get the price right; what is the non-deflationary price? What price would gold have to be in order to support global trade and commerce, and bank balance sheets, without reducing the money supply? The answer is, $10,000 an ounce.
The math is where I use M1, based on my judgment. You can pick another measure if you choose (there are different measures of money supply). I use 40 percent backing. A lot of people don’t agree with that. The Austrians say it’s got to be 100 percent.
Historically, it’s been as low as 20 percent, so 40 percent is my number. If you take the global M1 of the major economies, times 40 percent, and divide that by the amount of official gold in the world, the answer is approximately $10,000 an ounce.
Now, if you go to 100 percent, you’re going to get, using M1, you’re going to get $25,000 an ounce. If you use M2 at 100 percent, you’re going to get $50,000 an ounce. If you use 20 percent backing with M1, you’re going to get $5,000 an ounce. All those numbers are going to be different based on the inputs, but just to state my inputs, I’m using global major economy M1, 40 percent backing, and official gold supply of about 35,000 tons.
Change the input, you’ll change the output, but there’s no mystery. It’s not a made-up number. The math is eighth grade math, it’s not calculus.
- Source, Daily Reckoning
