US$ backed by gold again?

The value of gold is currently about $640/oz up from about $435/oz a year ago.
For gold bugs there are a couple of e-currencies that are gold based.

 

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As soon as I buy a rocketship and plant a flag on Eros you'll see a marked drop!

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I'm not sure you really got my point there. If the US switched back to the gold standard the amount of goods that you could buy with a dollar would drop considerably. U.S. dollars are currently backed by "the full faith and credit" of the United States, and currently that "faith and credit" is worth a lot more than gold. For example, one US dollar is worth about 0.8 Euros. But if you were to take all the gold that the US would be likely to reasonably be able to stockpile and divide its mass by the number of US dollars that exist, the amount of gold associated with each dollar would be worth far less than 0.8 Euros.

 

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U.S. dollars are currently backed by "the full faith and credit" of the United States, and currently that "faith and credit" is worth a lot more than gold.

I am afraid that I have no idea what this means. Are you saying that it is this promise which secures government debt more than the gold reserves that the government keeps on hand at Fort Knox? If so, then of course I must agree. But otherwise, it seems to me you are dealing with incommensurables. The full faith and credit clause is the idea behind which we get the concept of a riskless rate of return. But this takes us to other issues in finance like inflation and interest which are of no import to the more narrow discussion that I think we are talking about.

If I understand your larger point correctly, I think that where our reasoning differs is that you are assuming that the current ratio between a given currency, take the dollar say, and the price of gold will remain intact. But if you asssume that it is variable, then I think you will end where I am.

So for instance, if you were to focus on a single country -- say the US. If you were to take all of the assets in the US and then denominate them in gold-backed US dollars, then the value of gold would skyrocket to accomodate the need. (You would take some measure of the money supply - probably M1 or M2, divide that number by the amount of gold reserves the Fed has on hand, and reach a new value for the dollar to gold.) Gold would be several factors of ten more valuable than it is today. But other goods within the US need not change in value relative to each other. So for instance the ratio of widgets to 2 bedroom condo in Boca Raton could be the same. And in fact, if the ratio just right, the number of dollars for a widget or a condo in Boca Raton could remain exactly the same as before. Remember currency not stores wealth but facilitates barter, and unless there is a reason to believe that people will value one good relative to another more, then there is no reason for these ratios within an economy to change.

Expanding this to Europe, the same thing could happen there. By this I mean that the Euro value of Euro-denominated goods within Europe could remain as it stands today. But switching back to a bullionist system in this way would obviously jigger by ratio of US dollars to Euros by the amount of gold reserves of the respective central banks and correspondingly this ratio would shift by the amount of gold that these banks would have on hand at a given time. So this would obviously favor the US since the European central banks have been selling off their gold reserves faster than the US has for the past several decades. What is going to change is the value of European goods Americans, and American goods to Europeans.

This bullionist system is unworkable for a lot of reasons so this is never going to happen. One obvious problem with going back to the gold standard is that it discourages international trade and encourages protectionism, despite the fact that the Ricardo's law of comparative advantage shows that international trade works to the benefit of both nations. Other problems are in controlling the money supply to counteract the cyclical economic swings.

 

I'm a young buck, and I can't seem to understand why there has been a run up in gold prices.. Is it the uncertainty in the U.S. dollar? What triggered the up-tick in price? What can cause it to plummet?

 

When a currency isn't backed by gold or silver, that currency is much more likely to be printed frivoulously and get a nation into alot of debt, and into alot of war.

When money can be made on a printing press, it may as well be taxed directly from all those people who own that money, because of inflation. But for politicians fiat money is so addictive they can't help themselves and so they spend the money in YOUR savings account by inflating it, bringing its worth down with each and every dollar that is pumped into the system.

I would venture to say that we wouldn't be in Iraq if the Federal Reserve Bank had been abolished and reformed to a precious metal standard before the war.

 

A baseless claim.

 

The problem is that there's a lot of gold for sale on the free market outside the U.S., and the international price of gold wouldn't necessarily follow U.S. monetary policy. If you suddenly announce that each dollar is backed by X amount of gold, where X is some very tiny amount, then the dollar will suddenly have a terrible exchange rate; if you can purchase 50X amount of gold with a Euro, then it would take $50 US to equal the value of a Euro.

 

Although I don't think that it would be a good idea for the U.S. to switch back to a gold standard, if you check into the history of fiat money I think you'll find that it's almost always first initiated in a country when the government needs to pay for a expensive war.

 

I would agree with most of what you wrote. But I think that you are forgetting the actions cannot happen in isolation. I only considered them stepwise for the sake of simplifying the explanation. The effect of the US switching to a gold standard would obviously not leave the ratio of gold to euro unchanged. If the value of gold were to rise by some factor of ten in the US, you can be damn sure that the price of gold is going to skyrocket in Europe as well thus your arbitrage play wouldn't persist. The wealth of nations would again be gold-based, and the dollar might get devalued against the euro. But not as you describe.

The US no longer has the ability force its economic arrangements on the rest of the world, but it can more narrowly insist that gold be used as the currency for balances of trade. This alone would be sufficient to make the price of gold soar against all of the world's currencies.

And actually, for the record, Europe would end up worse off than the US since their central bank sold off most of their gold assets at record lows in the late 90s.

 

Sorry to resurrect a thread from a week or two ago. I foun this site through a Google search. I'm a goldbug, run a gold blog (which I won't splog here) and have run a gold standard newsletter for 6 years. I also live on a personal gold standard.

Much of what is being debated here is counter to the true value of gold -- there are many common misunderstandings about gold and how a 100% gold reserved dollar would make the US dollar incredibly powerful and desired again in the world.

The US dropped the gold standard completely in 1971, which is about the time that the value of the dollar started a big time decline. It is also about the time when the US was unable to compete on a global basis (due to a declining currency and an increasing inflation in wages). The dollar was untied from gold in 1913 by the Federal Reserve central bank, but between 1913 and 1971 it held some sort of gold partial reserve.

If the dollar was tied to gold, it would greatly reduce inflation in the U.S. Price inflation comes from one and one only place: new money being created out of thin air by the Federal Reserve. When they print new money (lately between 7 and 10% a year), it makes every other dollar in existance worth less. You have more dollars competing for the same item, so the seller raises prices to compensate.

Imagine if we only had 100 $1 bills in existance (it is closer to 11 billion). If you all of a sudden printed 10 new ones, prices would gravitate upwards by 10%.

This inflation of the dollar (in high speed since Greenspan took power of the FedRes) is what created the stock market bubbles and the new housing bubble. The boom-and-bust of bubbles is attributed to an elastic devaluing currency.

Right now the dollar is in high gear to being worthless on a global scale. On my gold blog I give links to world news sources (and world governments) that are hoping to untie the dollar from oil and many commodoties -- making it worth even less. In just 5 years the dollar has lost 40% of its value against the Euro because we printed more dollars than new euros were printed in that time. BOTH currencies fell against gold because they both are being created out of thin air.

When the dollar was "invented" it was named after "thaler" which was a standard for gold money. The dollar WAS gold. $1 was actually a bank IOU for 1/20th of an ounce of gold. Gold wasn't priced at $20 per ounce, it was actually the dollar that was worth 1/20 ounce of gold in a bank vault.

From 1750 to 1913 when the dollar was 100% tied to gold, it was a stable currency -- prices didn't go up or down. Gold has been a fairly stable currency for almost 8000 years -- it was the first metal discovered by man and has been used as money for all 8000 years. Since 1913, the dollar has lost 95% of its value.

Inflation by the Federal Reserve is a way to transfer wealth from the middle class to the elite -- it is a silent tax. Rather than taxing us more, they print more money, making our dollars worth less. Even the stock market hasn't returned very good gains in 40 years because much of the stock market growth has been to compensate for a declining dollar value. Stock market charts go up just as much because the dollar is just worth less -- and more readily available.

 

The problem, though, is that the current U.S. money supply is worth far more than the total gold in U.S. reserves. If you divided the amount of U.S. dollars by the mass of gold in U.S. reserves and say "We have X dollars and Y mass of gold, so each dollar is now worth X/Y gold," the value of the dollar would go down.

 

Yes it is in any case - Dollar is like a plane over the ocean, beyond the point of no return, and low on gas. - It is going down.

 

Perhaps this is the reason why the gold standard was dropped - so the government could create money without raising taxes.
Something similiar happened in the late Roman empire when the currency was increasingly devalued by debasing with less valuable metals.

Or, maybe it was dropped because their wasn't enough gold in the US to back all the real wealth that was being created???

Excellent post btw Dada...how do you live on a "personal gold standard"?

 

If the dollar ever dropped so low that it wouldn't take a hit in value if it were backed by gold, perhaps there wouldn't be a reason not to switch to a gold standard. As it stands, there would be a sudden and massive drop in the dollar.

 

This is absolutely why the dollar was taken off a 100% reserve standard -- government power. The first person who wanted to have a government controlled "fiat" money was Henry Clay -- a Whig. He mentored Alexander Hamilton, another Whig, who wanted government money so that he could inflate it to give money to friends for corporate welfare. He was shut down. Hamilton mentored Abe Lincoln, who actually created federal money without gold (which devalued nearly instantly). Lincoln actually fought the "Civil" war not for slavery but for the power to tax people to pay off his friends to build useless things.

Wealth is never truly created in a gold standard -- it is actually shared. If you have a fixed base of money, you can be proud that your income dropping doesn't mean you're getting poorer, it actually means that the economy is experiencing positive deflation -- more people are chasing the same amount of money, so prices become more efficient to attract the money. Slow deflation is a huge benefit to society as it causes people to save and invest rather than just spend stupidly (consumerism through debt).

Basically I earn in gold and silver (about 40% of my work) directly. What I don't get paid in gold and silver I get paid still in fiat US dollars, which I convert to gold or silver right away. I have no banks, no credit cards and no loans -- I own my home, my vehicles and my junk.

The benefit of saving in gold/silver is not if it goes up or down in price (I believe that when gold goes up, it isn't worth any more because consumer goods go up equally). The benefit is that I have "cash" now that I can sell anywhere in the world at any time, and I don't have to worry about government inflation destroying my savings. I believe (and have proven in my newsletters) that most people LOSE money on stock markets over their lives because the dollar is worthless by the time they retire. So what if charts go up if the value of the dollar goes down? In the entire 100 year history of the stock market, taking into account the fall of the dollar over that time, you'd only make 500% on your money. Ridiculous.

After I've hit a good amount of posts here I'll post the link to my main site so interested parties can take a gander. I hate when people spam my forums so I don't do it elsewhere

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I agree that the civil war was not fought to free the slaves - that was just the best "window dressing" cause available for making ignorant farm boys willing to die for the north's factory owners to become richer. Now days "free the slaves" is not available so "make world safe for Democracy" is the best available slogan to make ignorate city boys, usually poor black ones, willing to die for the oil owners to get richer.

But, that is all old. To come to the reason I am posting: What are you making reference to with: "useless things"?

If refering to the canal systems that were built, I would argue that they did give the rail roads a real "run for the money" for a few years. - Sort of like the beta tape recording system did recently until it was abandoned for the VCR system. Just because something in the long run lose 100% of the market, does not mean it was "useless" - Sometimes tha only way to determine what is best is to let them fight it out in the market.

 

Billy:

I agree that something useless today might have been useless yesterday, but there is no reason for government to be the ones to tax everyone to pay for something that might or might not have a positive gain for everyone. The great thing about the market is the supply and demand are always met at the best rate possible for both sides. Why build canals if the cost of the canals outweighs the benefits -- as is often the case in any government bureaucracy.

I can understand the debate point that highways, canals and telephone systems might not be built because acquiring the property would be expensive and difficult, but I also believe that if government didn't create these mechanisms we might have seen different ones from the market. Why do we use roads and not personal aircraft? Why did we use telephone wires for so long when wireless technology was available (but not cost effective because of reduced demand).

I'm no fan of any big government, but I do see the inefficiencies that always come from government-sponsorship and regulations of markets.

For me, gold is the ultimate answer to restricting government to their basic power: preventing others from trampling on our private property rights. Everything within the Constitution is based on the right to private property and how it is used (including your body).

 

My point was that the market will not always put the "up front" money into all projects that may turn out to economically very useful, or may turn out to be a total waste. To mention just two currrent examples: Fusion research or anti-viral drugs for the possibility that the "bird flu" will jump the species barrier and kill millions of people. In both these case private fund are being invested, but not at the rate I think worth while. To take two historical examples: Alaska was purchased from the Russian and called "Fulton's Folly" for much longer than any private firm commits funds. It has had a fantastic ROI for the public good. Closer to the lower 48 and more recently, Bolder Dam (also called Hover Dam) has been a economic success that private funds would not touch.

Despite this, I too am a supporter for limited government and have little faith in its decisions, but sometimes it is necessary for more than you listed.

I do not hold any gold stocks or gold, although years ago I did own some stock in Giant Yellow Knife (I doubt it still exists, at least under that name.) - My timing was not good and I lost a little money on it, especially if one considers the lower purchasing power of the lesser number of dollars I recieved when I sold. (Sold it as I "needed" an offsetting tax loss.) I mention this to point out that the ratio of dollars to oz of gold is not a monotonicly increasing function.

For me, gold and to some extent, silver, are "dead assets" perhaps less likely to appreaciate that rare coins or fine paintings* - all have most of their value based on the "greater fool theory" instead of practical utility. I prefer "productive assets" like land (but that has the disadvantage that you can not move it if the local government taxes it at too high a rate) or industries (stocks).

The Indian and Brazilian ADRs I invested in several years ago, well before I began to post here views that you also have of the dollar's collapse, have done much better than gold. For example, I bought ADRs of the local Sao Paulo water company (ticker symbol SBS) at under 5 and and it is now trading in the 20 to 25 range and still pays several percent dividends.

The more the dollar falls, the more the price rises (in dollars) to buy a share in a foreign company. Gold may be $650 an oz now, but that price may come down as well as go up. Of more concern to me is fact that either you must pay to have gold held securely* for you or expose your self to risk of being killed for it. (My faith in the governments ability to protect you from that risk is not very high, even that is their sole function according to you.)

It might be both informative for you and your web site readers to compare the "Betas" of gold and ADRs vs. the dollar and see which is really the better protection against inflation.
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*There is no possibility that more of these will be produced, but as gold is a dense metal, probably more abundant in the Earth's and other planet's cores, it is possible that a lava, with 5% gold content, may come pouring out of some volcano or some fantastic "dike" or meteorite of it may be discovered. (Neither very likely I admit, but possible.) Even the old dream of the alchemists may become economical. - It is certainly possible to transmut another element into gold with today's technology, just not economical to do so, yet.

I still do not like collectables, even the ones with limited supply, as they can be stolen and provide no dividends, etc. I strongly suspect that, just as banks need not keep 100% of the deposits in the bank, so too the firms that hold gold for you would be unable to give it all back to the depositors if all asked for it back at the same time.

 

Ah, I see. If inflation is reversed enough, I suppose we would again be able to buy something with a penny - as was the case a hundred years ago.