'Gold as Money' Means a Potentially Massive Rise in Valuation

by: Alex Stanczyk June 05, 2008 | about stocks: DGL / GLD / IAU    

Alex Stanczyk

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One thing that the world has forgotten for the most part, is that gold is money. It has been parroted around for three generations as a commodity only, with little industrial use or demand, and no value as a currency.

Humans have this interesting tendency to forget history, even though through all of time it consistently repeats itself.

The cycle I am speaking of is the one where societies and economies cycle back and forth between paper fiat money backed by nothing but a governments promise that it has value, and currency that is backed by gold and silver.

This is not new, and in my opinion will happen again, as it always has, for thousands of years.

For a while now I have been going on about how the Chinese, OPEC, and other nations that have trillions of USD in their reserves are not going to simply sit on it and watch it devalue by 16%-20% a year because of a rampant monetary inflation policy of the Federal Reserve.

 

Dollar crisis looms, says Nobel laureate Mundell
Reuters June 3, 2008 at 8:36 AM EDT

VALENCIA, Spain — A major dollar crisis could come within five years and China is discussing reforms to the global monetary system to protect its $1.6-trillion (U.S.) reserves pile, says Nobel Prize-winning economist Robert Mundell.

Mr. Mundell, who has regular contacts with Beijing officials, said they are considering proposing ways to fix major currencies including the dollar and the euro, in a system similar to the one which operated under the Bretton Woods agreement from the end of World War Two until the 1970s.

If you were China and seeing this happen to your National Treasury, would you sit there and do nothing or look for a solution?

The answer is obvious.

China is worried about its pile of about $1.6-trillion in foreign reserves, built up during years of U.S. trade deficits, which loses value as the greenback depreciates.

The excerpts from the above Reuters article shows that China seems to be interested in a gold backed system. If this were to occur, we need to take a serious look at what it means for the price and demand of gold.

I will give you one simple equation, which you can then apply to any nation, or the economy at large. If the USA were to go to a gold backed standard, that means each dollar in circulation would then have to be redeemable in gold. The current measure of USD in circulation based on private firm analysis is above $14 Trillion USD. The US Treasury claims it has 261,498,899.316 ounces of gold according to its website. If we were to divide the number of USD in circulation by the amount of gold claimed to be on hand in the US Treasury, it would make the price of gold $53,537.00 per ounce.

You can perform this calculation on any nations currency, if you know the amount of currency in circulation and the country’s claimed national reserves in gold.

The bottom line is, if the world heads to any form of gold backed currency system, or any world government chooses to make its own currency backed in gold, then two things would happen:

  1. That country will be the best runner up for the next world reserve currency
  2.  The valuation on gold will skyrocket beyond the angels

"Without reform, the global monetary system is headed for a dollar crisis within years, Mr. Mundell believes." I sure hope you own some gold before that happens.

Disclosure: I own CDE, SLW, HL, AUY, SVM.TO

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This article has 25 comments:

  •  
    Jun 05 05:43 AM
    This is last years news. Dollar going up and gold going down now. Please keep up to date. Interest rates (what determines dollars value) are going up.

    Gold had an 8 year run. Where were you? Eight year old news is useless.
    Reply | Link to Comment
  •  
    Jun 05 07:49 AM
    TERRIFIC article! To CLH: Did you read this piece or confuse it with Ben Bernake ramblings....
    Reply | Link to Comment
  •  
    Jun 05 08:37 AM
    CLH, worries behind us, dollar the envy of the planet, buy financials? Maybe we are confusing terms, as in short term vs long term. Nothing in the trend has changed, no fundamentals for the USD have changed for the positive. The debt still is there, house prices still crashing, ABX indices still at historic lows and falling, stimulus absorbed by fuel costs (read: stimulus checks go overseas), the Fed still has loaned out more than half of its US government securities and is setting up to loan out more, just to keep the banks afloat.

    Tell me I'm wrong, and why. Tell me what I missed.
    Reply | Link to Comment
  •  
    Jun 05 08:39 AM
    Excellent article! Insight that is very up to date with the realities we face today.
    Reply | Link to Comment
  •  
    Jun 05 08:58 AM
    I sold my gold to buy gas for my car ~:-(
    Reply | Link to Comment
  •  
    Jun 05 09:01 AM
    Yes the fundamentals agree with this article. The only thing that frustrates me is that this article mentions five years out. Other analysts give a similar viewpoint but different timeframes. And so on and so on. Not knowing the timing makes it very difficult to profit even if you know that something is definitely going up!
    Reply | Link to Comment
  •  
    Jun 05 09:22 AM
    CLH, think before you post. Or don't post.
    Reply | Link to Comment
  •  
    Jun 05 09:38 AM
    All are great comments!
    My simple logic.
    Buy Gold: Take delivery of Gold: Hold Gold
    Reply | Link to Comment
  •  
    Jun 05 09:42 AM
    Time table is posted at jsmineset.com, He even tells why, but how much Gold is held in reserves has not been vetted, GATA.org has requested a inventory,but was denied by the Gov!! Fort Knox may have Gold,then it may not,after all the Gold lease that the bullion banks has been doing to surpress Gold Prices for years!
    Reply | Link to Comment
  •  
    Jun 05 10:19 AM
    Gold is not money, no matter how often you touts claim it is. It is not a medium of exchange in any developed nation in the world. You cannot spend it at any store in your town. It is merely an overpriced speculative commodity. There is no possibility whatsoever that developed nations will return to a gold standard. $53,000 an ounce? Are you stupid enough to believe any of this or are you just duping the unsophisticated?
    Reply | Link to Comment
  •  
    Jun 05 10:33 AM
    CLH, your views are like a terminally ill cancer patient (economy) who has just been given a large dose of heroin (cash infusions, tax rebate checks, etc.) Gee, I feel great now, so I must be cured!

    The panic and fear that will prompt nations and individuals to return to gold as money has barely started. Smart investors have been buying gold for 8 years, the sheeple will follow once it becomes obvious that all attempts by the Fed to "fix" this mess will ultimately fail and make things worse in the long run.
    Reply | Link to Comment
  •  
    Jun 05 10:35 AM
    I agree in principle with this article but I don't think an "orderly/organize... return to the gold standard is possible. The world's fiat currencies have gone to far over the cliff to turn back now. The country or organization that implements a gold standard now will bring about unbelievable pain to the USD and other currencies and crush the global economy. Just imagine the chaos that would insue if every country's money supply growth appeared in their exchange rates with a Gold back currency.

    Ultimately the world will return to a gold standard, but not until the "Hell or High Water" efforts to suppress the Gold have failed.
    Those that have foreseen the death of the USD have been wrong before and they will be wrong again. Never underestimate the resilience of the powers that be to bail out a sinking ship. After all, they have 6.7Billion captives at their command to do the bailing.

    But no matter how much bailing they do, one day, Hell or High Water will come. Just not today ;)
    Reply | Link to Comment
  •  
    Jun 05 10:38 AM
    A government's adherence to a gold standard does not require that it hold enough gold to redeem all outstanding paper money. The purpose of a gold standard is a signaling mechanism: there are too many dollars (gold price goes up) or there are too few dollars (gold price goes down). A government can do what it wishes with that signal. If the government mops up or provides fresh paper money in accordance with that signal, very little gold needs to be held in the vaoults. Gold is a unit of account not a medium of exchange.
    Reply | Link to Comment
  •  
    Jun 05 11:05 AM
    China is buying dollars to keep its own currency low. Do you really think it's going to stop soon?

    To User 205735: Unless govt money is backed up by gold (i.e. exchanged to gold on demand), you don't have gold standard. Which means that if you have it, you have to hold big gold reserves. When most countries jumped on gold standard in the end of 19th century, price of gold relative to silver jumped several times.
    Reply | Link to Comment
  •  
    Jun 05 12:17 PM
    The US bought gold hand over fist in the 1930's after FDR nearly doubled the price. This gold pile became the bedrock of the universal acceptability of the dollar. If the govt got religion and acknowledged that the reported 271 million ounces of gold in our reserves did not exist what would that do to the value of the dollar?

    China is not stupid. They will accumulate gold, as will Russia, from domestic mines if not at the London fixing. When China can announce that they own 271 Million ounces of gold the yuan/rembini will become the reserve currency of the world. The standard of living in the US will go down the crapper.
    Reply | Link to Comment
  •  
    Jun 05 12:33 PM
    The same treasury website where you quote the amount of gold held states the currency in circulation is $1,028,731,853,530.

    This is a far cry from the $14 trillion quoted by your un-named private firm.

    fms.treas.gov/bulletin...

    Sorry, I couldn't find an html link.



    Nevertheless, this does equate to $3934 per ounce.

    Reply | Link to Comment
  •  
    Jun 05 01:19 PM
    Your link refers to MZM (money at zero maturity) which refers to actual cash. Mr. Stanczyk is referring to M3 which is now hidden from the public but was last officially at $10T
    en.wikipedia.org/wiki/...

    That was in 2005, and has since been growing at an average of 12%
    www.shadowstats.com/al...
    That would would put it at $14T today.

    Sorry I can't provide an official link because there is no official publication of the once incredibly useful M3 report. I loved watching those anonymous "Caribbean banking centers" suck up all the cash that the OPEC countries where dumping. Sure would be nice to seen the M3 make-up today.

    Got wheelbarrow?
    Reply | Link to Comment
  •  
    Jun 05 01:54 PM
    The problem with discussing the gold standard, is that almost nobody remembers how it works anymore. A fractional gold standard like Bretton Woods fixes the value of a currency, say the dollar, to a specified amount of gold. Since gold is scarce, heavy, and earns no interest, most people want to hold notes or paper investments which represent a specific value and will do so as long as they know they can exchange it any time. This results in most currency circulating as paper. This is similar to fractional reserve banking where deposited money is available on demand as long as most people don't demand it simultaneously. This allows currency in circulation to far outnumber gold in reserve. A Bretton Woods like standard is about fixing the VALUE of money to gold, not the 100% backing discussed in the article above.
    Reply | Link to Comment
  •  
    Jun 05 06:02 PM
    I know very little of these matters, but if the price of gold skyrockets, will not the gov't take it away from holders, as has happened before? Someone please tell me.
    Reply | Link to Comment
  •  
    Jun 07 02:57 AM
    so few people own gold in th US now coupled with the fact that the Fed can print $ without gold means that when the price of gold explodes it will automatically shut out the vast majority from owning it,,,then there will be the few who own it and the rest suffering!
    Reply | Link to Comment
  •  
    Jun 07 03:21 AM
    If push came to shove, why couldn't America's President pull a modern version of the FDR trick? ie., declare a "recall" all US citizens' gold and the gold from our ETF's, give us some arbitrary (low) amount of freshly printed paper dollars for it, then make it illegal to own/hold gold thereafter. After Fort Knox is replenished, the President can then officially devalue the currency to the point where an American gold standard might hold up going forward, debasing the paper dollars the government just gave us for our gold.
    Reply | Link to Comment
  •  
    Jun 07 02:38 PM
    ASAP:

    Actually, the expatriation of wealth would need to be outlawed before such a measure could be enacted, so gold bugs would have warning.

    If that ever happened, the biggest holders of small-denomination gold in North America would be Canadian border guards, as a flood of gold owners bribed their way out of a third world dictatorship to an obvious first waystation in their search of a new place to live, work, and invest their wealth.
    Reply | Link to Comment
  •  
    Jun 07 03:08 PM
    Gold is used in electronics. It is found in computers, satellites, etc. I expect that the government might someday declare gold to have "stategic importance," so that the confiscation of gold will have a patriotic overtone, one that will be hard to resist. If you don't turn in your gold, you will be the enemy.

    In this case, one would be hard pressed to find someone to trade with.
    Reply | Link to Comment
  •  
    Jun 07 03:51 PM
    CLH: sell me all your 'barbarous relic', dude. I'm an ignorant yutz who doesn't know better. I'll give you crisp paper pieces with ink, backed by the full faith and yaddah yaddah of the US government, such a deal!
    Reply | Link to Comment
  •  
    Jun 12 06:07 PM
    Destination $3000 Gold.
    Iran will help us get there. :)
    Reply | Link to Comment
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