A central bank’s worst nightmare is when they want inflation and can’t get it. The Fed’s tricks have all failed. Is there another rabbit in the hat? Actually, there is. The Fed could announce that effective immediately the price of gold was $5,000 per troy ounce which would cause massive inflation within 15 minutes.
This article is an edited ([ ]) and revised (…) version of the original (written by Jim Rickards) to ensure a faster & easier read. It may be re-posted as long as it includes a hyperlink back to this revised version to avoid copyright infringement.
They could call a board meeting, vote on a new policy, walk outside and announce to the world that effective immediately, the price of gold was $5,000 per troy ounce.
The Fed could make that new price stick by using the Treasury’s gold in Fort Knox and the major U.S. bank gold dealers to conduct “open market operations” in gold. They would be a buyer if the price hit $4,950 per troy ounce or less and a seller if the price hit $5,050 per troy ounce or higher.
They would print money when they buy and reduce the money supply when they sell via the banks. This is exactly what the Fed does today in the bond market when they pursue QE. The Fed would simply substitute gold for bonds in their dealings. The Fed would target the gold price rather than interest rates.
Of course, the point of $5,000 gold is not to reward gold investors. The point is to cause a generalized increase in the price level. A rise in the price of gold from $1,000 per troy ounce to $5,000 per troy ounce is really an 80% devaluation of the dollar when measured in the quantity of gold that one dollar can buy.
This 80% devaluation of the dollar against gold would cause all other dollar prices to rise also. Oil would be $400 per barrel, gas would be $10.00 per gallon at the pump and so on. There it is — massive inflation in 15 minutes: the time it takes to vote on the new policy.
Don’t think this is possible? It has happened in the U.S. twice in the past 80 years. You may even know some people who lived through both episodes.
- The first time was in 1933 when President Franklin Roosevelt ordered an increase in the gold price from $20.67 per troy ounce to $35.00 per troy ounce, nearly a 75% rise in the dollar price of gold. He did this to break the deflation of the Great Depression, and it worked. The economy grew strongly from 1934-36.
- The second time was in the 1970s when President Richard Nixon ended the conversion of dollars into gold by U.S. trading partners. Nixon did not want inflation, but he got it. Gold went from $35 per troy ounce to $800 per troy ounce in less than nine years, a 2,200% increase. U.S. dollar inflation was over 50% from 1977-1981. The value of the dollar was cut in half in those five years.
History shows that raising the dollar price of gold is the quickest way to cause general inflation. If the markets don’t do it, the government can. It works every time…
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Governments will need and want and will engineer higher gold prices because it is their primary method of dealing with otherwise unserviceable debt. Higher gold prices will have the effect of debasing/devaluing their respective currencies which is the result they’re looking for. Dramatically cheaper currencies mean that the debt can be serviced much more readily.
You are going to see the price of gold go up… a lot and it may go up a lot in a very short period of time. It’s not going to go up 10% per year for seven years and the price doubles. It’s going to chug along sideways, maybe in an upward trend, with a lot of volatility. It will have a kind of a slow grind upward… and then a spike… and then another spike… and then a super-spike. The whole thing could happen in a matter of 90 days — six months at the most.
You can have multiple paths, and timing has to be watched, but the $10,000 number for gold is very well grounded analytically.
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