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SOVEREIGN MAN

Are there any currencies backed by gold?

March 28, 2012
Santiago, Chile

Dumbfounded.

That’s the only way to describe the reaction that future historians will have when they look back and study the utter perversion that is our global financial system.

We live in a time when a tiny handful of people have their fingers on a button that can conjure trillions of dollars, euro, yen, and renminbi out of thin air. In the United States, it comes down to one man. Just one.

With a single decision, he controls the lever that dominates the entire economy. When you control the money, you control everything– financial markets, consumer prices, risk perceptions, investment habits, savings rates, hiring decisions, pay raises, sovereign debt, housing starts, etc.  One man.

This irrational, arrogant system presupposes by design that a central banker is smarter than everyone else; that markets are incapable of determining appropriate risk and value; that he is more effective at allocating our time, capital, and labor than we are.

Future historians will probably also be dumbfounded when they see how long people allowed worthless, unbacked fiat paper to pass as money.  It’s extraordinary that most people today happily accept a digital abstraction of paper currency controlled by a single individual as ‘valuable’.

It was more than 5,000 years ago that primitive commodity money was used in Mesopotamia, and it’s been over 3,000 years since metal coins began circulating.  For more than 99.2% of human civilization, money actually meant something… right up until 1971 when Richard Nixon ended any remaining link between the dollar and gold.

Ever since, the US government has refused to acknowledge precious metals as money… yet if the Treasury’s financial statements are to be believed, Uncle Sam is still holding  261,498,900 troy ounces of gold. Let’s dismiss the tungsten possibilities for now and presume that it’s real gold. At today’s prices, the value would be about $437 billion.

Meanwhile, M2 money supply at last count was about $9.8 trillion as of March 12, 2012. This means that roughly 4.46% of US dollars in circulation are ‘backed’ by gold, the rest backed by false promises and goodwill.

In the UK, the government’s Exchange Equalisation Account shows 9,971,000 troy ounces of gold on the books. At today’s market value (1,054 British pounds) and the Bank of England’s most recent statement on reserve balances and notes (259.5 billion pounds), Britain’s gold supply constitutes roughly 4.05% of pounds in circulation.

Simply put, the price of gold would have to rise 20-25 times in order for the US and British governments’ gold assets to match the supply of money in circulation.

In fairness, very few countries hold meaningful gold positions when compared to their money supplies. Even Singapore, generally regarded as having one of the healthiest balance sheets on the planet, holds a mere 2% of its money supply in gold.

(Singapore does, however, consistently run budget surpluses and control two sovereign wealth funds which manage the equivalent of 130% of GDP…)

Lebanon is an exception. According to Banque du Liban statistics, the value of Lebanon’s gold holdings is equivalent to nearly 50% of the country’s money supply. To boot, Lebanese banks tend to have very high liquidity ratios and are willing to open accounts for most nationalities.

The problem with Lebanon is that the country is deep in debt– well over 100% of GDP.

With an additional $30 billion in foreign reserves on the books (i.e. other people’s paper), though, Lebanon does have the capacity to pay off over half of its debt. And there are a number of state-owned companies that could be privatized to generate even more revenue.

Given the how sophisticated government corruption is in Lebanon, though, such solutions may never come to pass. Go figure… the one place on earth where the currency is actually backed by something becomes the next shoe to drop.

Fortunately there is another place worth considering. For now, gold only comprises about 5% of Mongolia’s $4 billion money supply. Not much. But the important thing to pay attention to is the trend.

A few months ago, the government of Mongolia nearly doubled its gold holdings to 3.5 tons. This is a huge move.

Given the massive resources in the country (coal, copper, gold, oil, uranium, etc.), Mongolia is set to become one the world’s richest countries. And I think we can expect them to continue trading out paper reserves for the gold that’s already under their soil.

It’s possible that, if the trend holds, Mongolia’s gold holdings will back 10% to 25% of the tugrik money supply in just a few years’ time. Over the same period, gold holdings in the US, UK, and Europe will probably decline to less than 2% of their perpetually inflating money supplies.

Moreover, bank accounts denominated in the Mongolian currency (tugrik) yield an impressive 13% to 15% for savers.  As far as paper goes, this one actually may be worth betting on.

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.

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Comments on this entry are closed.

  • John Lloyd

    Simon, is that the real yield taking inflation into account? Because I know inflation is very high in Mongolia, north of 10%. Lastly, I have concerns about the enormous amount of government spending in Mongolia. According to one article I read, government spending accounts for 44% of GDP and is expected to grow. 

  • Kolyan Mambozo

    Simon,
    a little correction here.
    “money actually meant something… right up until 1971 when Richard Nixon ended any remaining link between the dollar and gold.”
    I’d recommend to check once again history of the Bank of England: “…In 1694, the syndicate was given a charter to create the new “Bank of England”.  The original charter lasted until 1705.  They started by issuing the huge sum of £1.2 million in Bank of England Notes, with only a fraction of it (precisely £760,000, 63%) backed up by real gold, the rest created out of thin air – fake certificates for gold that was not in the Banks reserves.  The first run of central banking did not last long.  After less than two years, there were £765,000 worth of outstanding notes, backed up by only £36,000 in gold.  A loss of confidence in the bank notes had led to a run on the Bank, as people demanded redemption in gold (“specie payments”).  Unable to redeem all the notes, the new Bank was bankrupt already.”
    http://www.truthandliberty.com/Econ_6_1_Bank_of_Eng.html

    So, the idea of “fractional banking reserve” is much older.  And try to digg who were those “bankers” who approached the Royalty.

  • Anon

    all money whether paper or metal or anything else you want to subscribe a value too is an illusion.

  • Ibrahim Dalis

    I am stunned to realize that acquiescing to use paper currency issued by central banks is worse than knowingly receiving a stolen property and using it as a barter commodity thereafter in the usual course of trading. Some may argue that although he worked hard to earn that money, the money must be real and honest. Although the premise of the argument is true, the conclusion is false and embarrassing. For the money issuer (creator), it is unjust enrichment he is not entitled to; for the user of that money who worked hard to earn it like you and me, it is the worst criminal rip-off one could think of which we self inflict. No one would argue that receiving a stolen property and using it as an ordinance in subsequent trade transactions is a serious crime punishable by law, so how come the banks who create money out of thin air not backed by anything, not even good will could get away with such a massive theft? This is only the first stage of the theft scheme when you know that the issuer of that money is a private party, not even your government that could rightfully claim the privilege of creating money. So such private party is allowed to lend that worthless money to your government as a loan with interest attached. Quite shocking! To secure the loan, the private party often buys government bonds which is nothing short of a promise to pay at an auctioned wholesale bargain price! That is another layer of rip-off on top of the first one inflicted on every taxpayer as bonds are worthless without taxes collected. The third stage of the theft scheme is allowing your precious possessions like gold and real estate to depreciate when the baseless paper money in circulation can be used to purchase or appraise your real and valuable possessions. In the ideal scenario, all currency in circulation should exactly equal the amount of gold and other precious and valuable possessions of the nation. When the volume of currency starts to exceed the value of gold and all other valuable possessions, then inflation is the inevitable. However, that does not mean an automatic inflation adjustment to the assets we have as one might wishfully believe. For instance, if the national gold reserve is worth only 500 billion dollars, and the volume of M2 currency is 10 trillion dollars, the market gold price should be about 20 times more than it is currently set at. But that is not the case and it never happens, so the gold owner is ripped off when the market price is kept at its depreciated value as if the M2 currency were only 500 billion dollars in value. To make thinks even worse, the fourth stage of theft comes in the form of the fractional reserve practice which allows the very ones who started the scheme to lend out money that does not even exist at a money volume that is at minimum 10 times more than the actual circulated currency in reality. Last but not least, the usury system which is dealt by almost every business entity in the nation is used as a vehicle to transform wealth from the hard workers to the ponzi schemers of money creation. Now you wonder how all wealthy nations like the US, Canada, and Europe are sinking in debt although they have the biggest circulated money volume (cash and credit) in the world. We no longer have a real and honest economy where goods and services are exchange and earned consistently. The ones who have nothing but the power to create the money end up laundering their worthless and fraud money with our real and honest hard work and valuable possessions. They give us their worthless money which could collapse any time and take away our hard work and valuable possessions. Still wonder how could all our national gold reserve or most of it end up inside the vaults of central banks? Exactly through this complex and secret system of money fraud and ponzi scheme. So when we continue out of desperation to honor this fraudulent monetary system, we are morally in no better position than that who knowingly receives a stolen property yet ignores it source and continues to use it as a trade ordinance. Truth really hurts, doesn’t it?

  • Ibrahim Dalis

    One more note about the money fraud scheme. The bailouts. So one may ask: if the banks could create money, why need bailouts by taxpayers? Well, although most major private banks channel into and closely affiliated with central banks, they may be seen as representatives of their own and hence fall into the ordinary investor’s category (the taxpayer.) To cover up the money creation fraud, it is in the interest of all banks, central or non-central to make it appear that they are in need of bailouts when trouble hits as if they had no other way such as instant money creation power to remedy the trouble! Furthermore, when the non-central banks go to the people for bailouts, they push the citizens deeper into debt which they could further use to profit from by way of interest collection on the debt. If that were not the case, then why banks like Bank of America do not go to central banks for bailouts instead of using taxpayers’ money in times of trouble? Law and policy remain at the disposal of banks through the crook politicians who give such predatory institutions access to public money both for additional exploitation and continued cover-up of the money fraud scheme.

  • Bob K

    You’re holding up Lebanon and Mongolia as the poster boys for world economies? You’ve firm grip on paranoia, ya nutcase.

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