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| Photo from Bank of England |
Gold is a subject that strikes me as something confusing. I get it was a valuable medium of exchange in days of yore, but I am unable to understand the fascination that certain "gold bugs" currently have with the precious metal. Again, I am not an expert on much of anything.
I wonder about some of the claims about a so-called gold standard, such as...
A gold standard controls inflation. It does not. Like anything else, if the gold supply increases, the likelihood of price increases occurs. When it decreases, it reverses that process. One should look no further than two periods in global history.
When the Spaniards found large amount of gold in the new world, the supply of gold became such that prices increased. When those prices increased to the point of outstripping the cost of mining gold, the supply dwindled, and the prices began to fall. From the early 1700s to early 1800s, the average inflation was thought to be around 1%. That sounds really good and a great argument for a gold standard, but the various decades of that period show large bouts of inflation, followed by large bouts of deflation.
We can even look at our nation's history (U.S.) and see a similar pattern when discussing some type of precious metal standard. There were also serious bouts of inflation/deflation. Demand of goods seems to be the main determinant of the price, not some fixation on gold/silver.
When we talk about the importance of a "gold" standard, what are we advocating. We were on the "gold" standard when the Great Depression hit and previous recessions/depressions.
Are we talking about having each dollar of currency, 100% backed by gold? We have about $1.7T in currency and coin in circulation, so that 261,498,926.241 troy ounces of gold held by the U.S. government, indicates the gold should be about $6,500, compared to the current price of $1,287.30 per troy ounce.
Clearly, we would need to remove about $1.37T currency and coin from the system. Of course, we live in a fractional reserve system, as nearly every other country on earth, so the M1, which is the most liquid form of assets would also need to be reduced by $2.9T and the M2 by about $11.6 trillion. We are talking MASSIVE DEFLATION throughout the economy.
As for the days of the gold standard, such as the period leading up to the great depression, the gold standard required that 60% of the money supply be backed by gold. Not sure if that was M1 or M2 or even currency and coins. In any case, it would create a real problem if depositors ran to the bank with coins and currency... demanding gold and/or silver in exchange. Oh wait... it did.
One area where the gold standard could be considered beneficial, would be in foreign trade. If we had transferred gold to balance our trade deficits, the resultant inflation, would have rebalanced the trade. Of course, we would be paying a lot more for things made in the USA, instead of saving money by buying foreign products.
It is a fun exercise to talk about a gold standard but be very wary of such a thing happening. It may not be quite the pie in the sky, that is being promoted by those "gold bugs".
Of course, if I had a lot of gold and wanted to make a profit by selling... I might attempt to use any manner of tactics to inflate that price. Eventually, one of those tactics might work.
P.S. The U.S. does have a gold standard, and it is something around $42 1/3. Don't try to use that number to avoid the taxman. It's been tried and failed. Of course, you could convert those ounces of gold to that dollar figure, but it is not a very wise investment, imo.
