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SOVEREIGN MAN

Easier said than done

Gold Standard

August 24, 2012
Spoleto, Italy

If you haven’t heard yet, the committee which is drafting the platform for next week’s US Republican National Convention has announced that they are including a proposal to return to the gold standard. Big news.

Ironic… given that it was a Republican president (Richard Nixon) who abolished the gold standard in the 1970s. Regardless, it’s nice to see the issue thrust into the spotlight. But does it stand a chance of actually becoming a reality?

Let’s look at some numbers.

Remember, a gold standard is a monetary system in which individual currency units are fixed to an amount of gold held by the government; under a gold standard, the paper money supply cannot be expanded without also increasing the amount of gold on hand.

With a full gold standard, 100% of the money supply is backed by gold. In practice, a smaller amount of gold may be fixed to back the money supply.

According to the World Gold Council, all the gold that has ever been mined in the world is now valued at roughly $10 trillion. This is essentially the same number as the current M2 money supply in the United States.

In other words, to fully back its existing money supply, the US government would have to control every ounce of gold that has ever been mined in the history of the world.

At present, the market value of the federal government’s gold holdings only amounts to about $250 billion. Now, I’m making a big assumption that Uncle Sam is accurately reporting his gold holdings. But we shouldn’t worry much about this, US gold holdings are going to be audited soon. By the Treasury Department. How impartial.

Anyhow, this $250 billion worth of gold bullion constitutes a mere 2.5% of US money supply. So advocating a return to the gold standard is much easier said than done.

Even under a flimsy, partial gold standard, the amount of gold backing the currency would certainly need to be north of 2.5%. Even if just 10%, this would suggest either:

(a) money supply would contract by 75%, spurring massive deflation [unlikely]

(b) the gold price increases to $5,000 [more palatable]

Clearly one of the key risks in this scenario is that the US government would need to acquire as much gold as they can get their hands on, likely through Roosewellian-style gold confiscation.

Let’s be honest, though. This talk of a return to the gold standard is probably just a pipe dream. The numbers don’t make sense. Besides, why would any politician want to be constrained from conjuring money out of thin air?

But just in case the idea gains momentum, it may be worth a speculation.

One could, for example, buy some options on long-dated futures; the call option to buy gold at $2,350 in December 2017 costs around $225 right now (times 100 ounces). Assuming that silver also rockets in price, one could pay ~$2 (times 5,000 ounces) for an option to buy silver in December 2016 with a strike price of $80.

If a return to the gold standard drives precious metals prices through the roof over the next five years, those options could be worth 20x what you pay today. If it ends up being nothing, your exposure is limited.

Naturally, there are a number of risks associated with making such speculations in public markets… not the least of which is the counterparty risk associated with the exchange itself.

I’ve long written that public markets are completely broken. Exchanges are just government lap dogs who make a sport of supporting fraud and fleecing the little guy.

If you have the means, you can reduce this risk by investing through foreign exchanges. Hong Kong’s exchange currently has a cash-settled gold futures contract (100 troy ounces of 995 gold priced in USD) and will eventually introduce options. Other global exchanges (Shanghai, Singapore, etc.) also transact gold futures.

Of course, nothing beats owning physical metal, preferably stored overseas. If Roosewellian-style gold confiscation becomes reality once again, the safest place for your gold is going to be a snug safety deposit box in a place like Hong Kong or Singapore.

Our goal is simple: To help you achieve personal liberty and financial prosperity no matter what happens.

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About the author: Simon Black is an international investor, entrepreneur, permanent traveler, free man, and founder of Sovereign Man. His free daily e-letter and crash course is about using the experiences from his life and travels to help you achieve more freedom.

Comments on this entry are closed.

  • danterola

    Simon, why is this not a feasible solution? It seems to me that the value assessed to gold that the US government already holds could be adjusted to meet their needs without confiscation. If they make money out of thin air, why not make up a value based on what they currently hold in the treasury out of thin air as well? Is is because the global market sets the price on gold? If the gold standard won’t work, and fiat money is a joke, what would be the ideal scenario in your opinon? I’m no economist, so forgive me if I am missing something.

    • Johann

      I’m cynical. While I think it’s good to see a discussion about a return to the gold standard as part of the Political landscape, I can’t help but be suspicious about the motives of the people behind it. Pardon my cynicism, but Roosevelt’s legislation to abolish private gold holdings is still on the books, is this a trojan horse of sorts, and an excuse for Washington to get their mitts on people’s gold holdings, on the basis of it being needed to back the currency. The price of gold as it is, and the amount of gold on the planet, simply isn’t enough to back the currency. Short of either massively cutting govt spending, and no Govt will do that, or repricing Gold higher to say, $10,000 an ounce……..I can’t see how it will work based on the amount of money sloshing around

      • http://www.facebook.com/sauvagecheri Peter Jouchmans

        The price of gold as it is, and the amount of gold on the planet, simply isn’t enough to back the currency. Short of either massively cutting govt spending, and no Govt will do that, or repricing Gold higher to say, $10,000 an ounce……..I can’t see how it will work based on the amount of money sloshing around
        That’s why it is a good idea to own gold,and not to keep it in the US ,just in case it does go to 10 000 an ounce ,which is a possibility ,the problem will be in surviving during the ” Turmoils”,make no mistake,we have been sold by our own government ,and they have already picked the best assets ,leaving us with liabilities to pay .
        Watch what happens after the elections ,its all set ,once one of those monkeys gets elected ,they’ll pull the rug from under us just like last time 2008 the ones in the know do not care for the rest of us they have taken care of their own butts already

      • CC


        The price of gold as it is, and the amount of gold on the planet, simply isn’t enough to back the currency…or repricing Gold higher to say, $10,000 an ounce……..I can’t see how it will work based on the amount of money sloshing around”

        But isn’t that how you’d do it? Reprice gold or, more precisely, reprice the dollar in terms of gold. So if the US government holds about 261M ounces of gold to its name, and is responsible for about $26T is US$, then the price of gold in terms of dollars is around $100K per ounce. Right?

        Granted this lays bare the true value of the dollar and how much is has been devalued and the general insolvency of the US government. But it appears to be the truth. Is that what we’re all afraid to hear?

  • CC

    It seems you’re thinking about this the wrong way. You ought be talking in terms of the current value of the amount of gold in terms of US$, but rather the conversion rate of the amount (number of ounces) of gold against the number of US$. This would require a re-valuing of gold (per ounce in US$) at a very different level.

    In other words, to return to a 100% gold standard for the US$, wouldn’t you simply divide the total number of dollars by the number of ounces of gold the US government owns?

  • Paul

    Gold AND silver AND platinum standard? etc.

  • thomas

    assume they’re lying about the amount of globe….also, you can back currencies with a host of precious metals and diamonds…..they can probably manufacture gold at this point but are keeping that under wraps….you also need to focus on the ‘big picture’ which is the on-going Earth changes….and not just here……here’s your reality check:

    3 part investigative report…..NASA photos

    http://www.enterprisemission.com/_articles/05-14-2004_Interplanetary_Part_1/Interplanetary_1.htm

  • CC

    As couple of posters have already pointed out the dollar could be re-backed by a cocktail of precious metals. It could also be backed by other physical assets. Land comes to mind. For example the US federal government directly owns around 650M acres of land.

    In the end it about the US dollar being anchored in something other than paper and ink and the alleged promise to re-pay.

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