Very Interesting Gold Standard Analysis

[fi50@fi2023]

I am reading a book by James Rickards, "The Death of Money:  The Coming Collapse of the International Monetary System".  In his book, Rickards presents an interesting analysis of how we are still on the gold standard in an indirect way.  It's a fascinating way to look at the relationship between fiat currency (a promissory note of sorts) and Gold (the collateral for the promissory note).  Rickards states as follows:

"All gold standards involve a relationship between physical gold and paper representations of gold, whether these representations are called notes, shares, or receipts.  Once this relationship is accepted, one is quickly back to the world of contract. 

On this view, gold is the collateral or bond posted to ensure satisfactory performance of the money contract.  If the state prints too much money, the citizen is then free to declare the money contract in default and redeem her paper money for gold at the market exchange rate.  In effect, the citizen takes her collateral.

Gold advocates suggest that the exchange rate between paper money and gold should be fixed and maintained.  There is merit to this idea, but a fixed exchange rate is not essential to gold's role in a contract money system.  It is necessary only that the citizen be free to buy or sell gold at any time.  Any citizen can go on a personal gold standard by buying gold with paper dollars, while anyone who does not buy gold is expressing comfort with the paper-money contract for the time being.

The money price of gold is therefore a measure of contractual performance by the Fed and Treasury.  If performance is satisfactory, gold's price should be stable, as citizens rest easy with the paper-money deal.  If performance is poor, the gold price will spike, as citizens terminate the money-debt contract and claim their collateral through gold purchases on the open market.  Like any debtor, the Fed prefers that the citizen-creditors be unaware of their right to claim collateral.  The Fed is betting the citizens will not claim the gold collateral en masse.  This bet depends on a high degree of complacency among citizens about the nature of the money contract, the nature of gold, and their right to take collateral for nonperformance.

This is one reason the Fed and fiat money economists use phrases like "barbarous relic" and "tradition" to describe gold and insist that gold has no role in a modern monetary system.  The Fed's view is absurd, akin to saying land and buildings have no role in a mortgage.  Money is a paper debt with gold as its collateral.  The collateral can be claimed by the straightforward purchase of gold."

Very interesting analysis IMO.

[Libertarian666]

No one can claim their collateral under the current irredeemable paper standard, as there is no collateral posted.

So this is a more complicated but not more informative way of saying "When people are unhappy with paper money, they can buy gold."

[BearBones]

The money price of gold is therefore a measure of contractual performance by the Fed and Treasury.  If performance is satisfactory, gold's price should be stable, as citizens rest easy with the paper-money deal.  If performance is poor, the gold price will spike, as citizens terminate the money-debt contract and claim their collateral through gold purchases on the open market.  Like any debtor, the Fed prefers that the citizen-creditors be unaware of their right to claim collateral.  The Fed is betting the citizens will not claim the gold collateral en masse.  This bet depends on a high degree of complacency among citizens about the nature of the money contract, the nature of gold, and their right to take collateral for nonperformance.

No different than any other tangible asset of value, really. Could as easily redeem for land. Or widgets. Just that gold has high value/mass and is, therefore, portable. And has the longest historical association with currency. Therefore it has the highest correlation with distrust in the worlds reserve currency or currencies.

[goodasgold]

No different than any other tangible asset of value, really. Could as easily redeem for land. Or widgets.

But land and other widgets, such as pork bellies, are not as compact, durable, transportable or as liquid as gold. As proof of this, FDR did not confiscate land or pork bellies, only gold.

I just wish there was an easier way to store gold abroad. The U.S. government, in a pinch, could pressure foreign gold ETFs to hand over American citizen-owned accounts. The Perth Mint seems to be the best alternative for foreign storage, but it requires large minimum deposits and expensive fees for storage, deposits and redemptions.

[dualstow]

No big deal, but that quote above is from Bear Bones, not Fi50.

[Libertarian666]

No different than any other tangible asset of value, really. Could as easily redeem for land. Or widgets.

But land and other widgets, such as pork bellies, are not as compact, durable, transportable or as liquid as gold. As proof of this, FDR did not confiscate land or pork bellies, only gold.

I just wish there was an easier way to store gold abroad. The U.S. government, in a pinch, could pressure foreign gold ETFs to hand over American citizen-owned accounts. The Perth Mint seems to be the best alternative for foreign storage, but it requires large minimum deposits and expensive fees for storage, deposits and redemptions.

How high are the storage fees?

[fi50@fi2023]

I believe the anti-gold sentiment is intentional and calculated in order to maintain faith in fiat currency.  Due to reckless monetary policy since the 1970s, gold is substantially more valuable than its spot price.  How valuable?  If we returned to the gold standard, gold would need to be priced at approximately $18,000.00 per ounce.  Even if the G20 decided to use a 50% gold standard (which is supported by history), gold would have a price of $9000.00.  While we moan on this discussion board about depressed gold prices, central banks around the world are loading up on the "worthless metal" while trying to keep the citizens believing that gold is worthless junk.  The lower the gold price, the more confidence in the massive monopoly money being printed around the world.

[goodasgold]

How high are the storage fees?

The Perth Mint has several programs for storing gold:

https://www.perthmint.com/storage

[MachineGhost]

Very interesting analysis IMO.

Yes it's very interesting what "sound finance" adherents of the "gold bug doom porner" persuasion like Rickards do to twist themselves into a Rubesque pretzel all to justify their anchored belief that gold is still money.  Some people just don't let reality slap them on the face.

[MachineGhost]

I believe the anti-gold sentiment is intentional and calculated in order to maintain faith in fiat currency.  Due to reckless monetary policy since the 1970s, gold is substantially more valuable than its spot price.  How valuable?  If we returned to the gold standard, gold would need to be priced at approximately $18,000.00 per ounce.  Even if the G20 decided to use a 50% gold standard (which is supported by history), gold would have a price of $9000.00.  While we moan on this discussion board about depressed gold prices, central banks around the world are loading up on the "worthless metal" while trying to keep the citizens believing that gold is worthless junk.  The lower the gold price, the more confidence in the massive monopoly money being printed around the world.

Thats assuming accumulated debt is valued at new money gold pegged prices which never happens under new monetary systems (except braindead abortions like the EU), so no the gold wouldn't be worth that much.  But then again, neither would the previous currency.  Remember, gold has no intrinsic value...  its priced merely relative to the value of a currency benchmark.  It is the latter that is actually changing in value.

The peak cyclical target for gold is USD$5000.  So there isn't that much upside relatively speaking.  Be smart and juice the move all you can.