Going Back to a Gold Standard?

Three reasons you need your own private Gold Standard, rather than waiting on
"sound money" from government... SO DID GOLD's first foray over $1,400 mean
we're going back to a Gold Standard ? asks Adrian Ash at BullionVault . Nope.
Not in the West, nor anytime soon anywhere, and for three simple reasons. First,
Gold Prices aren't high enough. Second, modern governments don't hold enough of
the stuff – not for their tastes, at least. And third, the pace of physical
monetization, out of jewelry and mined ore into coin and large-bar form, just
isn't great enough. Yet. Gold Pricing & Value Backing the world's broad-money
supply with gold – even at the 40% cover-ratio set by the United States in the
interwar years – would require a price nearer to $4000 per ounce than $1400.
That's with all the gold ever mined in history locked inside central-bank
vaults, by the way. Full cover for a reserves-backed "bullion standard" would
need prices above $10,000 per ounce. Nor against financial assets is gold priced
highly enough to warrant becoming the world's sole monetary arbiter. Now valued
at $7.6 trillion, the near-170,000 tonnes of gold ever mined in history is worth
only 3.9% of total investable wealth . That figure compares with well over 20%
before 1930 – a valuation which at current mining-production rates (and with
constant asset prices) would require a gold price of $6650 per ounce by 2015, or
$6230 by 2020 on BullionVault 's maths. So, although recovering from what was, a
decade ago, the weakest role it ever played in the world's financial system,
gold remains dwarfed by other, more widely-held and heavily-weighted assets –
most obviously the US Dollar and Treasury bonds. Official-Sector Gold Holdings
As a proportion of the above-ground total (a cube now measuring some 20.65
meters along each edge), world governments haven't held this little gold since
1911. Yes, that period marked high tide for the classical gold-coin standard.
But with the ebb came the Federal Reserve, the welfare state, and
"mixed-economy" planning – historical facts which have scarcely retreated,
even as the nationalized gold stocks they first confiscated fell back.
Demolishing these pillars of "soft money" in the next five or 10 years, let
alone unwinding the centralized urge to control price-levels, GDP growth and the
free transfer of capital, looks less likely than even another quadrupling of
gold prices. Nor do the largest gold holders – those states nearest to a
practical level of cover – show any enthusiasm for mobilizing their gold
hoards as part, never mind the base of their monetary systems. The No.1 official
holder, the United States, last flirted with talk of a return to gold in the
early '80s. But back then, gold's private-investment weighting was six times
greater than today, and double-digit interest rates gave cash savers positive
real returns on their money (post-inflation) for the first time in a decade.
Such a "hard money" backdrop remains a long way off today, despite the fact that
the US could actually back its currency in circulation with a 40% cover-ratio at
current prices ($1390 per ounce, in fact). Money is much more than just notes
and coins today, of course, and to cover M2 – meaning primarily household cash
savings, held on deposit and in money-market accounts – the Treasury's 8,133
tonnes of gold would need to be valued almost 10 times higher per ounce
($13,230). Absent that kind of price, and given the deflation-fearing consensus
amongst central bankers and the academics they listen to, it ain't going to
happen. We need devalued currency, not sound money, believe the people who could
decide such a change. Physical Monetization of Gold This dim outlook for a
dictated return to some level of "Gold Standard" in the rich West, however,
won't prevent private savers, nor emerging-economy states, from continuing to
build their own gold reserves. Demand for "monetary" gold (i.e. coin and bar)
worldwide is now running at twice the pace of five years ago, eating perhaps 49%
of 2010's total global-market supplies in the form of low-margin units for
trading and storage, rather than as jewelry, bonding wire, dental fillings, or
flakes floating in schnapps. But is that pace enough? A little under a century
ago, Joseph Kitchen (he of the wonderfully-named ' Kitchen Cycle ' in commodity
prices) studied bullion flows and found that – in a world where gold had been
money, formally, for over 200 years – monetization of newly-mined gold was
running well above 45%. Jewelry recycling no doubt topped that level, while
existing monetary units surely retained their form. Furthermore, at present, a
little over a third of the world's above-ground gold is currently held in coins
or bars (as measured by best estimates for investment plus central-bank stocks).
But even at current rates of investment fabrication, it would take 15 years to
raise that physically monetized level to 44%, the average proportion held by
central banks between 1945 and 1971, the first (if not last) period when
interventionist, welfare states in the West yoked their money supplies to gold.
So must gold play no role in money? Indexing a notional, government-only Bancor
currency or Special Drawing Right against a basket of, say, Dollars, Euros, Yuan
and gold might seem wise, but it appeals to the same thinking which gave us the
United States' exorbitant privilege of Dollar issuance, plus that explosion of
state intervention in all economic activity which we're still very much living
with today. Whereas, in time, the sheer weight of privately-held gold reserves
may in fact tip us back towards the origins of the classical Gold Standard.
Because that historical "accident" (as gold-market historian Timothy Green calls
it in his Ages of Gold ) developed out of freely-decided convention – not
central-bank diktat or academic theorists sitting in Princeton , Berkeley or on
Southwark Bridge – with private actors trading goods and settling debts with
transfers of bullion. Even in 1900, private holdings of Gold Coins still
exceeded central-bank hoards worldwide, only losing ground as Europe's second
thirty-year war drew near and nation states began hoarding for war, vaulting for
victory. It wasn't until Great Britain re-introduced gold convertibility in 1925
that the Bank of England issued paper notes to represent its gold holdings –
rather than enabling free circulation of metal in coin – thereby shifting the
world from a gold-coin to a bullion standard. So never say never. Because the
largest hoarders of gold by far today are the newly-enriched consumers of
emerging Asia's two largest economies. India's world-beating appetite is
beginning to devour low-margin investment coins and bars once more (some 30% of
the subcontinent's gold purchases, according to Sunil Kashyap at Scotia
Mocatta). Chinese households have bought more gold in the last two-and-half
years than the People's Bank holds in total – and here too, cost-efficient
coins and bars are gaining fast on non-investment forms. Actively encouraged by
Beijing , China's rapid private accumulation of both gold and silver should
remind economic historians that only structurally sound, growing economies have
ever employed precious metals successfully as their monetary standard. We'll
have to wait and see whether China quite fits that bill. But gold has never been
a panacea for weak, over-indebted states, as the disaster of Britain's return to
gold in 1925 proved. Put another way... "Our gold standard is not the cause but
the consequence of our commercial prosperity..." as prime minister Benjamin
Disraeli noted in a speech to Glasgow industrialists fifty years earlier. Still,
Western investors fearing what Asia's rise could do to their own standard of
living might also consider getting the jump on China's rapid accumulation of
privately-held gold. For as long as gold is used to store value, rather than
directly for buying and selling, then seeking out the most efficient, most
secure route to owning it, and converting your gold into widely-accepted
currency as you need, looks the next best thing to enjoying gold-backed currency
– your own private Gold Standard in a world of central bankers hell-bent on
devaluing your savings. Get started now, with this free gram of physical Gold
Bullion at the award-winning, mining-industry backed world No.1, BullionVault
...