Tuesday, September 4, 2012

This Is What Going To The Gold Standard Looks Like

Interesting video from Bloomberg below discussing what going to a gold standard would look like in America in order to back the currency in circulation. We know today that most cash is not held as physical paper cash and coins (the $2.3 trillion discussed in the video), but in savings accounts and time deposits at the bank (the Fed's measurement of M2 which is now over $10 trillion). In order to back current M2 levels, which are rising by the day, the federal government would have to purchase every available above ounce of gold in the world.

What Bloomberg does not discuss and what is the most logical way to go back on a gold standard since it is impossible for the United States to own every ounce of gold in the world, is to revalue the paper price of gold. Estimates range around $9,000 an ounce of gold to back just the M2 money supply. In order to back M3, the total money supply, it would take over five times that price of gold.

This will occur in one of two ways over the next few years:

1. The orderly way where politicians get in front of the problem and put together a plan to revalue gold upward quickly and organized as they did during the great depression. In the early 1930's they revalued gold upward by 70% over a weekend (in turn devaluing the value of the dollar by 70%).

2. The chaotic way where the market will determine the free market price of gold on its own. When a tiny percentage of the paper instruments around the world begin to move toward precious metals (currently less than 1% of all investments around the world  are held in gold related assets) then it will trigger a revaluation many thousands of dollar higher. At that point there will be no stopping how high the paper price of gold moves during the mania.

This topic was discussed in great detail in Jim Rickard's book Currency Wars, a must read for anyone trying to understand the future of the global economy.


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