Investing in precious metals 101

Question on a gold standard fallacy!

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  • Thu, Sep 24, 2009 - 08:21pm

    #1

    Kurosawa

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    Question on a gold standard fallacy!

I think it’s safe to assume that most on the board are advocates of the gold standard or money being backed by some sort of commodity in reserves. 

I’m having trouble arguing against the fallacy that suggests that there isn’t enough gold to support an economy, in other words the arguement that suggests that with a commodity backed economy there are only limited transactions and stifles expansion.

I’m looking for an easy to understand explanation….

If there is limited gold in supply would prices just rise? and vice versa?

Look foward to you explanations.

  • Thu, Sep 24, 2009 - 11:06pm

    #2
    Peak Prosperity Admin

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    Re: Question on a gold standard fallacy!

Good question Kurosawa; and it’s one that I’ve asked myself.

[quote=Kurosawa]

I’m having trouble arguing against the fallacy that suggests that there isn’t enough gold to support an economy, in other words the arguement that suggests that with a commodity backed economy there are only limited transactions and stifles expansion.

[/quote]

You just have to think of purchasing power and not quantity. If we wanted to back the dollar by gold again it would simply be a matter of determing the proper ratio of gold to dollars. All arguments of gold market manipulation aside, the market has done this for us. We can see that an ounce of gold is now worth approximately $1,000. So the dollar would be worth 1/1000th of an ounce of gold.

The idea that gold would “limit transactions and thus stiffle the economy” . . .

Keep in mind that a gold backed currency supply can be expanded or contracted in the following ways:

1. Raising or lowering the official price of gold. For example – If the government decided to raise the price of gold from $1,000/oz. to $1,100/oz. then the money supply would be increased by $100 per ounce of gold.

2. Raise or lower the reserve ratio at banks.

3. Dig more gold out of the ground.

4. Put more gold into the ground. (ie. someone takes some gold out of circulation and buries it). 

As you can see a lack of money would not be a problem.

History

The dollar was backed by gold until 1971. 1800 to 1950 were the golden years of the Republic (pun not intended). In the words of Marc Faber, those years were an “economic miracle.” Just take a look at what happened to the dollar after 1971.

So that’s my layman’s understanding of a gold backed currency. I’m sure others on the forum will have better answers than me and I hope they will share their knowledge.

Your question has raised several new questions in my mind about a gold backed currency. Time to do some research!

Orion

  • Thu, Sep 24, 2009 - 11:27pm

    #3
    Peak Prosperity Admin

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    Re: Question on a gold standard fallacy!

OK, fair warning this is going to be a dumb question.

Regarding gold, and the physical stockpile that the US has in reserves for example in Ft. Knox, how much is this? I suppose it is some kind of secret, but there has to be some kind of analysts’ understanding of how much this is? An approximation?

So, in the calculations of US debt, in the materials on the Crash Course, is this counted as an asset? Maybe I missed it, but I don’t recall it showing up on the asset side of the ledger. Perhaps it is such a small magnitude that it does not matter in the grand scheme of things.

I mean an obvious if not sophomoric observation is that if gold rises to some stratospheric valuation, could this not equalize the debt in dollars if the US has sizable holdings? I wonder the magnitude of the US holdings in the context of this.

  • Fri, Sep 25, 2009 - 12:24am

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    Re: Question on a gold standard fallacy!

Kurosawa wrote:

I’m having trouble arguing against the fallacy that suggests that there isn’t enough gold to support an economy, in other words the arguement that suggests that with a commodity backed economy there are only limited transactions and stifles expansion.

The “gold standard” was the original fractional lending scheme.  Goldsmiths would lend out 10 times as many “gold reciepts” as they had gold.  This was the precursor of fractional lending and the basis for modern banking ratio of reserves. 

According to Byron Dale, Modern Money Secrets, there was never enough gold to back up the dollar, even in 1900 when the U.S. adopted the “gold standard.”  This would only matter if enough people would actually start to request their gold.  Unfortunately, that’s exactly what happened in 1933 and the U.S. had to stop all domestic gold redemption.  Abruptly, the dollar was devalued by around 40% and the government began confiscating the people’s gold (mostly was quickly sold at a heavy profit as gold almost doubled in value).

If the U.S. had enough gold, there would be no need to stop the redemption policy.  And, after the policy was changed, there really was no need to confiscate the peoples gold since the dollar was no longer redeemable…but that’s another part of the scam.  Shortly after the confiscation, the U.S. went bankrupt, the gold standard had failed again.  I say again because a few years earlier the gold standard failed in Great Britain and other places where it had been adopted in Europe.

We don’t have near enough gold

The big problem is that the United States holds very little gold – most of the worlds gold is elsewhere. The US may have as much as 3,100 metric tonnes of gold.  At $1,000/troy oz, that works out to be around $99.65 billion.

 According to Shadow Government Statistics, M3 is currently at around $15 trillion (the non-Federal reserve bank stopped publishing M3 in 2006).

With only $99.65 billion of gold, we would back up the $15 trillion M3 dollars with less than a penny’s worth of gold,  99.5% of every dollar would be fiat by definition.

And, it gets worse.  How would we pay the interest on our national debt ?  The interest on our national debt this year is projected to be around $600 billion dollars.  And our trade imbalance (money leaving the country) in 2008 was around $816 billion.  So far, during 2009, the imbalance is $417 billion.

According to the World Gold Council, the average annual “new” gold supply is around 4,000 tonnes globally.  This includes mined, scrapped and sales from central banks.  At $1,000/troy oz, that works out to be around $128.6 billion assuming that the U.S. buys 100% of the annual gold supply.  Even if we had enough gold to start the system, it could not be sustained. 

Fractionally backed dollars to compliment fractional lending?  At best, the U.S. could only back up a small part of each dollar.  If you want to “store” your wealth in gold or other commodities, you are free to do so now.  You can buy and hold the PMs of your choice and not rely on the banking system.

Hope this is helpful…

Larry

  • Fri, Sep 25, 2009 - 12:26am

    #5
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    Re: Question on a gold standard fallacy!

darbikrash wrote:

OK, fair warning this is going to be a dumb question.

Regarding gold, and the physical stockpile that the US has in reserves for example in Ft. Knox, how much is this? I suppose it is some kind of secret, but there has to be some kind of analysts’ understanding of how much this is? An approximation?

I think your question is a good one – let me try to answer it.  Many have suggested that Fort Knox is empty, but since it hasn’t been audited for over 50 years, no one can say for sure.  However, in early 2007 the U.S. reported that 8,100 metric tonnes of gold. 

The United States Geological Survey [USGS] publishes monthly Mineral Industry Surveys designed to provide a macro-import/export-overview of the U.S. precious metals [gold] industry. The data in these surveys is supplied to the USGS principally by industry trade groups such as the World Gold Council as well as official sources like the U.S. Census Bureau. 

During 2007, over 2,000 tonnes were “exported” and in 2008, almost 3,000 tonnes were exported – (see full report here).  So, in 2 years, roughly 5,000 tonnes were exported representing more than 62% of reported sovereign U.S. gold reserves.  At best we seem to have around 3,100 tonnes of gold remaining.

Larry

  • Fri, Sep 25, 2009 - 01:12am

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    Re: Question on a gold standard fallacy!

Kurosawa,

This topic has been discussed several times on this site, but unfortunately I do not have a ready-list of all the threads.

Essentially, any amount of gold or any other commodity will work.  The common argument that “there isn’t enough” is equivalent to saying there aren’t enough inches to measure a football field.  Like any other monetary unit, gold is just a unit of measure, except it’s also one that’s highly portable, durable, and cannot be counterfeited.

The key to any hard-money system is the asset behind it.  In order to increase the supply of the asset, the asset itself has to be spent into the economy.  If we enter into a deflationary environment the cost of mining the asset falls below the value of what is mined, so more of the asset will be produced until the cost of mining it reaches the value produced.  It is really difficult to imagine any run away deflationary or inflationary scenarios with a true hard-money currency, which by definition would not be debt-based.

Gold critics will point to past experiences with coin-clipping and fractional reserves as if these had anything to do with gold and nothing to do with human fraud.  If you do not have honest men, or if honest men will not stand up for accountability, no system will ever work.

  • Fri, Sep 25, 2009 - 05:11am

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    Re: Question on a gold standard fallacy!

Farmer Brown wrote:

Essentially, any amount of gold or any other commodity will work.  The common argument that “there isn’t enough” is equivalent to saying there aren’t enough inches to measure a football field.  Like any other monetary unit, gold is just a unit of measure, except it’s also one that’s highly portable, durable, and cannot be counterfeited.

Patrick, your calculator may need recharged – the amount of gold does matter.  Gold is measured in value every day, today it was around $1,000/Oz.  If the U.S. Treasury really has 3,100 tonnes of gold, it would be worth around $99 billion.  The numbers and value are finite and easy to measure, the problem is the measurement comes up short – by over 99%.

How can $99 billion dollars worth of gold back up a $15 trillion M3?

Larry 

  • Fri, Sep 25, 2009 - 06:43am

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    Re: Question on a gold standard fallacy!

Flip your perceptions….

In 1900, one ounce of gold could buy $20 US

Today it can buy $1000 US

Any reason it cannot buy $10,000 in the future ??

The reason it could only buy $20 back then and $1000 now could be viewed as a simple supply and demand issue.

Massive supply causes a fall in price…….

 

You say “The numbers and value are finite and easy to measure, the problem is the measurement comes up short – by over 99%”

But numbers are also infinitely divisible.

Imagine a currency called  grams.

Your  balance on your credit card might read 120 g one day.

You can then you buy a cup of coffee for .086 g

Then you could go to the bank and demand a 100g bar of gold, leaving 19.914g in your account.

 

Cheers Hamish

  • Fri, Sep 25, 2009 - 07:26am

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    Re: Question on a gold standard fallacy!

gyrogearloose wrote:

In 1900, one ounce of gold could buy $20 US…Today it can buy $1000 US…Any reason it cannot buy $10,000 in the future ??

Hello Hamish, yes I agree, the price of gold may well be $10,000/Oz. in the future.  But if we switched to a gold standard today, with 3,100 tonnes of gold, we would have some $99 billion worth of gold (market price $1,000/Oz.).  I think we can agree that the M3 (amount of money) is around $15 trillion (see my post #3).  If this is so,  then by pegging the dollar to the market price of gold, we would essentially be devaluing the dollar by 99%.

During great depression (1930’s) the dollar was instantly devalued by around 40% because we didn’t have enough gold.  And, in comparison, we have even less gold to money, as a ratio, than ever before.  

Isn’t this a mathematical issue rather than one of theory?

Larry

  • Fri, Sep 25, 2009 - 09:21am

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    Re: Question on a gold standard fallacy!

[quote=DrKrbyLuv]

During great depression (1930’s) the dollar was instantly devalued by around 40% because we didn’t have enough gold. 

[/quote]

Again, flip you perception.

It used to be that for every $20 note there was 1 oz of gold.  After all the $20 note was nothing more than a recept for the deposit of 1 oz of gold in a bank, and had written on it  “may be exchanged for one ounce of gold”

But in 1933 there was a run on gold ( first in Britian, and when they “closed the gold window” it moved to the USA ), because the equivalent of CM followers worked out that the government had committed a MASSIVE fraud and there were many more $20 notes than there was gold, quite simply because they had printed them and used them without taking an oz of gold in exchange. These CM type people wanted to get as much gold at the old value before the govt did the inevitable.

So yes, the dollar was “instantly devalued by 40% “, but what was it devalued in relation to ? a meal? a car ? a gallon of gas??

No, gold.

Why?  Because there was a massive oversuply of FRN’s

 

Think of today, people are concerned that the fed is printing FRN’s, so what do they do?

Buy commodities with the ones they have before the flood of FRN’s  renders them worth less or worthless…….

So it was not that they did not have enough FRN’s, it was because they had TOO MANY FRN’s in relation to gold.

And today we have many more times that already to high a number of FRN’s

 

As a child I could buy an ice block for 5 cents, and individual sweets were priced at a number of sweets per 1c.

Today  1, 2 and 5 cent pieces are no longer in circulation because they are worth so little. ( and ice blocks cost $1.50 )

These days we have more than 20 times the amount of money, but we certainaly are not 20 times richer.

 

Cheers Hamish

 

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