No central bank in the world wants to go back to a gold standard. But that’s not the point. The point is whether they will have to.
I’ve spoken with several US Federal Reserve Bank presidents. When you ask them point-blank, ‘Is there a theoretical limit to the Fed’s balance sheet?’, they say no. They say there are policy reasons to make it higher or lower, but that there’s no limit to the amount of money you can print.
That is completely wrong. That’s what they say; that’s how they think; and that’s how they act. But in their heart of hearts, some people at the Fed know it’s wrong. Luckily, people can vote with their feet…
I always tell people who say we’re not on the gold standard that, in a way, we are. You can put yourself on a personal gold standard just by buying gold. In other words, if you think that the value of paper money will be in some jeopardy, or confidence in paper money may be lost, one way to protect yourself is by buying gold, and there’s nothing stopping you.
The typical rejoinder is, ‘What’s the point of owning gold? They’re just going to confiscate it, like Roosevelt did in 1933.’ I find that extremely unlikely.
In 1933, we had just come through four years of the Great Depression, and Roosevelt was new in the White House. He closed the banks right after he was sworn in. And he confiscated gold only a few weeks later.
And it wasn’t as if Elliot Ness was going door to door, breaking into your house and taking gold. They wanted to get a small number of people who had 400-ounce bars in bank vaults. And they got those people because they were able to close the banks and use them as intermediaries to confiscate that gold. But now, gold is far more dispersed, and there’s far less trust in government.
If the US government tried to confiscate gold today, there would be various forms of resistance. The government knows this. So they wouldn’t issue that order, because they know they couldn’t enforce it, and it might cause civil disobedience or pushback.
As long as you can own gold, you can put yourself on your own gold standard by converting paper money to gold. I recommend you do that to some extent. Not all in, but I recommend having 10% of your investable assets in gold for the conservative investor, and maybe 20% for the aggressive investor — no more than that.
Those are pretty high allocations relative to what many people have. Most people own no gold, and all the institutions combined have an allocation to gold of about 1.5%. So even if you take the low end of this range, you’re still nowhere near 10%.
In fact, institutions could not double their gold allocation even to 3%. There’s not enough gold in the world — at current prices — to satisfy that demand. So there is huge upside associated with gold.
Still, central banks don’t want to go to a gold standard. But if gold is a barbarous relic, if gold has no role in the monetary system, if gold is a ‘stupid’ investment, then why do the Chinese have 5,000 tonnes? Are they stupid?
Don’t blame the thermometer
If some scenarios play out, 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.
You’re not going to see the gold price go up 10% per year for seven years and doubling that way. 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.
When that happens, you want to be prepared. It will wipe out paper savings. It will devalue superannuation. It will devalue pensions, insurance and annuities through inflation…because remember, it’s not just the price of gold going up.
It’s like putting a thermometer in a patient, reading a 40-degree fever and blaming the thermometer. The thermometer’s not to blame; it’s just telling you what’s going on.
Likewise, the price of gold is not an economic object or aim in itself. It’s just a price signal. It tells you what’s going on in the economy.
And gold at the levels I’m talking about would mean that you’ve now verged into hyperinflation, or something close to it, because nothing happens in isolation.
Now you’ve crossed the threshold. The minute you think of gold and paper money side by side, or having some relationship, you get to these price levels of US$7,000–8,000 an ounce.
I haven’t made those numbers up. They’re not there to be provocative. It’s simple maths.
Just divide the US money supply by the amount of gold in the market…
People will pay attention to that. And either the Chinese are dopes — which they’re not — or people will start to buy gold, which they will.
But if there’s a run on paper currencies (which is entirely possible) and there’s borderline hyperinflation (which is entirely possible), major economies may have to go to a gold standard…not because they want to, but because they find it necessary to calm the markets.
By the way — you can’t just write a game plan today and follow it step by step. That’s nonsense.
You have to be nimble; you have to be following developments; and you have to be prepared to change your mind based on new news.
for The Daily Reckoning
James G. Rickards is the editor of Strategic Intelligence, the newest newsletter from Agora Financial. 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.