All that Glitters

I am not a gold bug. Sure gold has its uses but its just not to my taste. I don’t own any jewelry, I don’t collect coins, and my fillings don’t glitter. Today there are two issues: should I buy gold and should the US go on the gold standard? Should you buy gold? I don’t really care but I won’t. Gold has now ventured into the greater fool territory as in “I know the price is high but there is a greater fool than me out there who will pay more.” If that were not the case then no one would buy it – the old buy high sell low axiom. Sure gold was a good buy when it was $350 an ounce but at $1,832? Not a chance. Throughout my lifetime gold has proven to be a lousy investment. Its natural price seems to be below $400 an ounce so a buy and hold strategy is a losing one. People do not buy gold as an investment, rather they buy it as a hedge against inflation. Thus, knowing when to sell to that greater fool is as important as knowing when to buy. The key is to not be that greater fool. Personally I would rather buy a real asset as an inflation hedge. But do what you think is best but know that you cannot find any evidence that a buy and hold gold strategy is a good one.

Well what about a return to the gold standard? Those who advocate this argue that a gold standard would stop the government from controlling the money supply. All governments it is argued are tempted to inflate the money supply and cause inflation, devaluing the currency. If money creation were tied to gold, the argument goes, then there would be no inflation. Such an argument is naïve at best. Governments under the gold standard have always found ways to create more money. The easiest way is simply to change the value of the currency in terms of gold. Instead of a $1,000 an ounce make it $2,000 an ounce. Voila! The money supply is doubled! Governments have also debased the currency by adding lead to the coin or by decreasing the purity of gold coin. Where there is a will there is a way.

What is more curious is that most of the gold standard advocates profess to favor free markets – that is markets free from government interference. How they can reconcile a gold standard with that philosophy is beyond me. The government would have to artificially set a price for gold and then manipulate prices to maintain that standard. This is the antithesis of the free market. First, what should the price be? What about the market price? Well the market price is the price today. If we set it at that price, then what happens when the market price changes? Do we increase the money supply when the price of gold rises and then decrease it when the price of gold falls? What about economic growth? Historically the US economy grows at about 2 percent real GDP per annum. If the money supply grows at that rate then we have economic growth without inflation. The question is what is the growth rate in gold? It is around 50 million ounces per year. If the gold supply increases faster then we have inflation. If it increases slower then we have deflation. Do you really want economic growth dependent upon how much gold is dug out of the ground or that flows into the US Treasury? I don’t. Next consider that we set the price at around today’s price ($1,842 an ounce). The last time I looked, the US held a little more than 8,900 tonnes of gold (a tonne is 2,204 pounds). If my math is correct, then that would leave the US a money supply of $650 billion. Well currently M2 is $14 billion. US GDP is $20 trillion. This means that velocity is around 1.42. So under the gold standard with a money supply of $400 billion and velocity of 1.5, we would have to shrink GDP by around to around $650 billion. Say what? Moreover, there are around 140,000 tonnes of gold out there which means that US reserves are around 6 percent of the total. If you look at the amount of US debt held around the world, the top fifteen countries hold more of our debt than what would be the US money supply under the gold standard. Any of these countries and many others could show up and say “exchange your debt for your gold” any essentially plunge the US economy into depression. Then there is the famous Gresham’s law – bad money drives out the good”. Historically this is one of the biggest problems of the gold standard in that gold has a price as a commodity which is determined by the market and a price as money which is determined by the government. The two are only equal by happenstance. If gold is worth more as a commodity it flows out of circulation and the economy slows down and deflates. If it is worth more as money, then gold flows into circulation and causes inflation. Lastly, one of the largest private owners of gold lies with the enemy of the right – George Soros who could manipulate the US supply. Do we really want to turn over the fate of the US economy to George Soros. Hum. Maybe he is secretly financing those pushing for a gold standard.

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