We’re not going back to a gold standard – anywhere – any time soon! Here are three simple reasons why not.
This article is an edited ([ ]) and revised (…) version of the original written by Adrian Ash to ensure a faster & easier read.
1. Gold Pricing & Value Insufficient
Gold prices [just] aren’t high enough. 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 gold price near… $4,000 per ounce – and that’s with all the gold ever mined in history locked inside central-bank vaults, by the way. Full cover for a reserves-backed gold standard would need prices above $10,000 per ounce.
[In addition,] gold is not priced highly enough against financial assets 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% pre-1930 – a valuation which at current mining-production rates (and with constant asset prices) would require a gold price of… $6,230 per ounce by 2020 [based on] BullionVault‘s math so, although recovering from what was, a decade ago, the weakest role gold ever played in the world’s financial system, it remains dwarfed by other, more widely-held and heavily-weighted assets – most obviously the US Dollar and Treasury bonds.
2. Official-Sector Holdings of Gold Insufficient
Modern governments don’t hold enough gold – not for their tastes, at least. [After all,] as a proportion of the above-ground total world governments haven’t held this little gold since 1911… [which] marked [the] high tide for the classical gold-coin standard…[In addition,] the largest gold holders do not 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 U.S. could actually back its currency in circulation with a 40% cover-ratio at current prices ($1,390 per ounce, in fact). To cover M2, however – 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 (i.e. $13,230 per ounce). 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. The people who could decide such a change believe we need devalued currency, not sound money.
3. Physical Monetization of Gold is Insufficient
The pace of physical monetization of gold – out of jewelry and mined ore into coin and large-bar form – just isn’t great enough – yet. This dim outlook for a dictated return to some level of a gold standard in the rich West, however, won’t prevent private savers, nor emerging-economy states, from continuing to build their own gold reserves…
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. [As such,] even at current rates of investment fabrication, it would take 15 years to raise the physically monetized level of gold to the average proportion held by central banks between 1945 and 1971 ( i.e. 44%) [which was] the first, if not last, period when interventionist, welfare states in the West yoked their money supplies to gold.
The Role of Gold
…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”… developed out of freely-decided convention – not central-bank diktat or academic theorists – with private actors trading goods and settling debts with transfers of gold bullion.
Even in 1900, private holdings of gold coin still exceeded central-bank hoards worldwide, only losing ground as Europe’s second thirty-year war drew near and nation states began hoarding gold 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 gold in coin – thereby shifting the world from a gold-coin to a gold 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 for gold is beginning to devour low-margin investment gold coins and gold 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 gold coins and gold 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. “Our gold standard is not the cause but the consequence of our commercial prosperity,” noted prime minister Benjamin Disraeli in a speech to Glasgow industrialists fifty years earlier.
Seeking out the most efficient and most secure route to owning gold, and converting it into widely-accepted currency, is the next best thing to enjoying gold-backed currency. In a world of central bankers hell-bent on devaluing your savings you need your own private gold standard. [Got gold?]
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