If All the Gold's In Private Hands, Is a Gold-Backed Currency Possible? (June 6, 2007)
Readers know from previously posted charts that gold has been a better investment than the stock market for the past seven years. Here is the "new record high" S&P 500 priced in gold, courtesy of frequent contributor U. Doran.
Not so high as the mainstream and financial media makes out, eh?
Here is the issue in a nutshell. Forgive my brevity and all the complexity I have left out in trying to compress a deep and critical issue into a few lines.
Money supply (money created by "fiat" i.e. by government debt or printing presses) is exploding at 15%+ around the globe even as global growth is 4%. Massive expansion of money supply leads to inflation, which has been officially under-reported for years, though we intuitively know it is rising (and the bond market confirms this intuition). As a result, the cash in our wallets loses value every year.
In times of rapid growth of money supply, hard assets such as real estate and commodities skyrocket--exactly what we've witnessed over the past seven years.
Another result has been the declining value of the dollar in relation to other currencies--mostly the Euro, which is the only major currency which trades in a free market, i.e. "floats." (The yen is manipulated into a narrow trading range, and the yuan is pegged to the dollar.) If the dollar falls below the "line in the sand" of 80 on the Dollar Index, it could trigger a major decline of 30%-50%. Many observers consider this inevitable.
As the dollar weakens, investors and traders start backing away from their reliance on the dollar as a placeholder of value and as a currency used for trading. For instance, Kuwait split raises questions over longevity of the dollar (link courtesy of U. Doran).
Net result: owners of dollars (i.e. Americans) find their purchasing power reduced/devastated. Many observers believe a pan-Asian currency will arise to replace the dollar: China, Japan, Korea on single currency unit. Many believe that any such currency will have to be backed by gold to have any "staying power."
For background on the issue of gold-backed currency, here are three links provided by U. Doran. I especially recommend the first one:
The Once and Future Money
The End Of National Currency
Gold and Economic Freedom (by Dr. Alan Greenspan, 1966)
So far so good. But as astute reader Don E. explains, there's a fly in the ointment for any gold-backed currency: most of the world's gold is in private hands:
This idea presented itself as a problem last week when I read Anatal Feketeís commentary on the preponderance of gold having moved from the hands of governments, central banks, to private holders. Gold Vanishing into Private Hoards.Governments can of course confiscate all privately held gold, as the U.S. government did in the 1930s. Yes, it was a crime to own coined gold or bullion in the U.S.A. It doesn't take much imagination to speculate that a nation, or perhaps many nations, could decide to create a gold-backed currency by confiscating their citizens' gold and paying them in paper for the privilege of giving their gold to the State.
Not a reassuring thought, to be sure.
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