Smashing Three Pig-Stupid Gold Standard Myths

[Publisher’s note: As our mailing blitz of Jim Rickards’ New Case for Gold draws to an end (nab yourself a copy while you still can), our accounts department are assessing the damage. It is costing us $6.72 to produce, and another $10.91 to ship each Special Edition.

But it’s worth it.

If you believe, even just a tiny bit, that gold will have a role to play in the next financial meltdown, this book should be your Bible.

Below we republish a blistering essay from Jim where he explains why that is…]

Smashing Three Gold Standard Myths

Recent history has been a long and volatile ride for gold investors.

Starting from a low of about $250 per ounce in mid-1999, gold staged a spectacular rally of over 600%, to about $1,900 per ounce, by August 2011. Unfortunately, that rally looked increasingly unstable toward the end.

Gold was about $1,400 per ounce as late as January 2011. Almost $500 per ounce of the overall rally occurred in just the last seven months before the peak. That kind of hyperbolic growth is almost always unsustainable.

Sure enough, gold fell sharply from that peak to below $100 per ounce by July 2015. It still shows a gain of about 350% over 15 years. But gold’s lost nearly 40% over the past four years. Those who invested during the 2011 rally are underwater, and many have given up on gold in disgust. For long-time observers of gold markets, sentiment has been the worst they’ve ever seen.

Yet it’s in times of extreme bearish sentiment that outstanding investments can be found — if you know how and where to look. There’s already been a change in the winds for gold so far this year.

Today, I show you three main arguments mainstream economists make against gold…and why they’re dead wrong.

I want to refute some of the more common arguments against gold. Mainstream economists make them all the time.

Because I write about gold and talk about it in TV interviews, I’m constantly hearing

these anti-gold arguments. The time has come to shoot them down once and for all.

What are some of the main arguments against gold? The first one you may have heard many times. ‘Experts’ say there’s not enough gold to support a global financial system. Gold can’t support all the world’s paper money, its assets and liabilities, its expanded balance sheets of all the banks and the financial institutions in the world.

They say there’s not enough gold to support that money supply; that the money supply is too large. That argument is complete nonsense. It’s true that there’s a limited quantity of gold. But, more importantly, there’s always enough gold to support the financial system. But it’s also important to set its price correctly.

It is true that, at today’s price of about $1,250 an ounce, if you had to scale down the money supply to equal the physical gold times 1,250, that would be a great reduction of the money supply. That would indeed lead to deflation. But to avoid that, all we have to do is increase the gold price. In other words, take the amount of existing gold, place it at, say, $10,000 dollars an ounce, and there’s plenty of gold to support the money supply.

In other words, a certain amount of gold can always support any amount of money supply if its price is set properly. There can be a debate about the proper gold price, but there’s no real debate that we have enough gold to support the monetary system.

Someone who says there’s not enough gold hasn’t thought about the problem because there’s always enough gold. You just need to get the price right. I’ve done that calculation and it’s fairly simple. It’s not complicated mathematics.

Just take the amount of money supply in the world, the amount of physical gold in the world, divide one by the other, and there’s the gold price.

You do have to make some assumptions, however. For example, do you want the money supply backed 100% by gold, or is 40% sufficient? Or maybe 20%? Those are legitimate policy issues that can be debated. I’ve done the calculations for all of them.

I assumed 40% gold backing. Some economists say it should be higher, but I think 40% is reasonable.

That number is $10,000 an ounce. In other words, the amount of money supplied, given the amount of gold if you value the gold at 10,000 dollars an ounce, is enough to back up 40% of the money supply. That is a substantial gold backing.

To go from today’s price of about $1,250 to $10,000 would be a 700% devaluation of the dollar. I’ll admit that sounds extreme.

More likely, the Fed could conduct an 80% devaluation to start, announcing that gold will be $5,000 per ounce. Then, it could do a second devaluation from $5,000 to $10,000 per ounce.

But if you want to back up 100% of the money supply, that number is $50,000 an ounce. I’m not predicting $50,000 gold. But I am forecasting $10,000 gold, a significant increase from where we are today. But again, it’s important to realise that there’s always enough gold to meet the needs of the financial system. You just need to get the price right.

Regardless, my research has led me to one conclusion — the coming financial crisis will lead to the collapse of the international monetary system. When I say that, I specifically mean a collapse in confidence in paper currencies around the world. It’s not just the death of the dollar…or the demise of the euro…it’s a collapse in confidence of all paper currencies.

In that case, central banks around the world could turn to gold to restore confidence in the international monetary system. No central banker would ever willingly choose to go back on a gold standard.

But in a scenario where there’s a total loss in confidence, they’ll likely have to go back to a gold standard.

The second argument raised against gold is that it cannot support the growth of world trade and commerce because it doesn’t grow fast enough. The world’s mining output is about 1.6% of total gold stocks. World growth is roughly 3–4% a year. It varies, but let’s assume 3-4%.

Critics say if world growth is about 3–4% a year and gold is only growing at 1.6%, gold is not growing fast enough to support world trade. A gold standard, therefore, gives the system a deflationary bias. But that’s nonsense, because mining output has nothing to do with the ability of central banks to expand the gold supply.

The reason is that official gold — the gold owned by central banks and finance ministries — is about 35,000 tons. Total gold, including privately held gold, is about 180,000 tons. That’s 145,000 tons of private gold outside the official gold supply.

If any central bank wants to expand the money supply, all it has to do is print money and buy some of the private gold. Central banks are not constrained by mining output. They don’t have to wait for the miners to dig up gold if they want to expand the money supply. They simply have to buy some private gold through dealers in the marketplace.

To argue that gold supplies don’t grow enough to support trade is an argument that sounds true on a superficial level. But when you analyse it further, you realise that’s nonsense.

That’s because the gold supply added by mining is irrelevant, since central banks can just buy private gold.

The third argument you hear is that gold has no yield. It’s true, but gold isn’t supposed to have a yield. Gold is money. I was on Fox Business with Maria Bartiromo recently. We had a discussion in the live interview when the issue came up. I said, ‘Maria, pull out a dollar bill, hold it up in front of you and look at it. Does it have a yield? No, of course it has no yield, money has no yield.

If you want yield, you have to take risk. You can put your money in the bank and get a little bit of yield — maybe half a percent. Probably not even that. But it’s not money anymore. When you put it in the bank, it’s not money. It’s a bank deposit. That’s an unsecured liability in an occasionally insolvent commercial bank.

You can also buy stocks, bonds, real estate, and many other things with your money. But when you do, it’s not money anymore. It’s some other asset, and they involve varying degrees of risk. The point simply is that if you want yield, you have to take risk. Physical gold doesn’t offer an official yield, but it doesn’t carry risk. It’s simply a way of preserving wealth.

I believe the primary way every investor should play the rise in gold is to own the physical metal directly. In fact, I always say that at least 10% of your investment portfolio should be devoted to physical gold — bars, coins and the like.

But given the current market conditions, I also believe that right now is the perfect time to profit from gold in other ways as gold moves towards the $10,000 level. I’m confident that those who understand the forces propelling gold’s big move stand to make fortunes.

It may go to $2,000…$5,000…then $10,000. But $10,000 per ounce is where things are going to have to end up, because nothing else will solve the world’s problems.

This is the backdrop that sets the gold market up for a bull market like we’ve never seen.

And it’ll create an especially attractive opportunity for alert investors.


Jim Rickards,
Author, The New Case for Gold


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James G Rickards is an American lawyer, economist, and investment banker with 35 years of experience working in capital markets on Wall Street. He is the author of The New York Times bestsellers Currency Wars and The Death of Money. Jim also serves as Chief Economist for West Shore Group.

We have printed, and are shipping, just 7,000 Special Australian Edition copies of his latest book, The New Case for Gold. (All you need is a valid Australian mailing address.) Don’t miss out. To reserve your copy, click here.

James G. Rickards is the editor of Strategic Intelligence, the newest newsletter from Fat Tail Investment Research. He is an American lawyer, economist, and investment banker with 35 years of experience working in capital markets on Wall Street. He is the author of The New York Times bestsellers Currency Wars and The Death of Money. Jim also serves as Chief Economist for West Shore Group.

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