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GOLD STANDARD: Could Bringing Back the Gold Standard Make America Great Again?

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“We have gold because we cannot trust governments,” President Herbert Hoover famously stated in 1933 to Franklin D. Roosevelt.  (CBC News)Anchor[1] Anyone who seriously claims to trust the government is either a fool carrying an empty bag or a politician.

This was the same year that Roosevelt enacted the Emergency Banking Act followed one month later by the Executive Order 6102. Suddenly everyone who had been buying up gold in a bid for some sort of financial security, in the midst of terrible economic conditions, literally had it wrested from their hands.  You can imagine at that point, the rapid spiralling downward fall, like Alice in Wonderland tumbling down the rabbit hole, of trust in the government.  There would have been some angry rabbits out there at having to hand in their carats.

More recently, seemingly gold-loving President Trump has thrown around the idea.  In a 2015 interview with GQ, he stated: “Bringing back the gold standard would be very hard to do, but boy would it be wonderful. We’d have a standard on which to base our money.” (Forbes 2017)Anchor[2]  Sure. That’s a great if you have your own private gold stock, which apparently he does, not to mention his glittering gold-plated fixtures.  So how much of that statement could be a self-motivated rubbing-hands-together sort of thing as he could possibly anticipate a rise in net worth? 

But hold on a minute.  One of the issues with having gold backed currency is the simplest of all principles.  It’s like the six-year old who goes to the store to buy candy but doesn’t have enough money to get what he wants.  His plan fails.  And next time, he will understand the simple concept that without enough money to back up your idea, it just won’t work.  Even he will get that.  

So what if there isn’t enough gold to set up a proper gold standard? What if it is just a useless trip to the store or just a misguided fairy tale of an idea?

In the Goose That Laid the Golden Egg, a poor cottager and his wife were delighted when they found that their goose daily laid a golden egg.  Eventually, greed took over and it wasn’t enough for them. They slaughtered the innocent goose in a bid to extract as much gold as possible and as quickly as possible.  Alas, when they sliced open the poor bird, rubbing their hands in glee at the thought of their marvelous gold-filled world, they were crushed to discover that inside it was just a normal goose.  There were no large stores of gold hiding in its’ belly.  The goose had been giving them everything it could.  The cottager and his wife found themselves without gold and thrown back into financial difficulties.   As they discovered too late the gold reserves they thought they could count on were just an illusion.  They had brought on their own ruin by their abject mishandling of the situation.

So the question is:  is there enough gold in the world to adequately present the idea of gold-backed currency and avert negative consequences?

According to the World Gold Council, at the end of 2017, total estimated amount of gold in the world was 190,040 tonnes above ground and 54,000 tons below ground.Anchor[3]    The total dollar value of mined gold is roughly US $7.5 trillion.Anchor[4] (Wikipedia 2018)

The CIA World Factbook states that there is US $80+ trillion in broad money worldwide.  Given that the collective value of gold in the world is less than 10% of that, the math doesn’t add up to allow for a viable gold standard.

In the US, the approximate dollar value of gold that the country reportedly holds is $310.5 billion (United States Bullion Depository).  It doesn’t even come close to $21+ trillion in debt.

And that is not even taking into account whether or not the US really does have the amount of gold they say they do.  For more on that click on this link:  http://juniorgoldreport.com/hiding-the-elephant-fort-knoxs-vanishing-act/

Given the discrepancy between the purported amount of gold the US holds and their very real astronomical debt, what could they do?  How could they back their currency with gold when they don’t have enough collateral to balance it out?  No bank would lend a wanna-be homeowner with a $50,000 salary and a demand for a $10 million mortgage with no down-payment, even a penny.  That would just be inviting disaster.  More likely, they would receive nothing more than a bright red “NO” stamp on their application. 

Keeping in mind the likely inability of the US to absorb a full gold standard, would a partial return to the gold standard work – one that puts certain controls or limits in place?  Clearly, you would want to avoid the gold standard fiasco of the 1930’s.

The US public is no doubt fed up with the ballooning federal deficit levels and colossal national debt that just seems to keep on going and going, like the Energizer bunny.  Unfortunately, you can’t just take out the batteries to make the deficit stop.  And it’s not likely that the politicians are going to stop their wanton spending.  Power corrupts and corruption costs and so on and so on.  The wheel continues spinning madly unable to stop.

And here’s one thing that would have the Feds shouting objections. With a gold standard, their ability to print money would be restricted.  They’re not going to like being told what they can and can’t do.  There goes that power thing again. 

On the other hand, a gold standard would make it necessary to have gold in store to exchange for fiat money on an as required basis. In turn, the Feds could have no choice but to limit the amount of debt the government takes on, hopefully forcing it to concentrate on existing debt rather than irresponsibly taking on more. 

And maybe, just maybe, it would bring in some much-needed financial discipline and in turn that $21+ trillion could be chipped away at, although realistically that mammoth of a debt is not going to become extinct any time soon.

However, even being able to pay a miniscule amount down combined with fiscal restraint could create a bit more economic confidence in the US.  That, in turn, could generate future economic possibilities as other countries look with a kinder eye to cooperative efforts vs the China/Russia plan going on now with these two huge powers seemingly determined to dethrone the mighty USD as the leading global currency.  They have been collectively hoarding gold amassing huge stores.  In March 2018, China launched their gold-backed petroyuan with astounding success the first day of trading with a value of USD 4 billion transactions occurring. (RT 2018)Anchor[5]  We just need to sit back with a giant bowl of buttered popcorn as we wait for their next moves.

President Trump must be getting a little antsy with all this going on.  He recently announced his nomination of Former Republican Presidential campaigner and pizza magnate Herman Cain for a seat on the Federal Reserve Board.Anchor[6]  Of course, everything that Trump does would seem to be carefully calculated to lend primarily support to himself and his ideas, and the nomination of Cain fits into this theory nicely.  Cain is a known supporter of the idea of bringing back the gold standard. 

That part of the general population who are in favor of the gold standard may be happily singing along to The Rolling Stones’ hit “Everything is Turning to Gold”

Don’t care if your love grows cold
Found love in someone else’s home
Don’t like standin’ in the snow
Everything is turning to gold

However, as it seems to be Trump’s fashion, Cain may not particularly care what the general masses think and be willing to find it ‘in someone else’s home’ to achieve a desired goal.

For those who do want to see a return to the gold standard, they can take cheer in this recent announcement.  Cain firmly believes that the US should never have gotten off the gold standard as by doing so it enabled Congress to inflate currency whenever it overspent creating the current mess.Anchor[7]  Point well taken.

With some sort of a gold standard in place, it could safeguard against the same sort of tactics controlling inflation and keeping the economy in check.

During a financial crisis, fiat money can seem to lose all appearances of relating to anything concrete.  It may seem to make more sense to use it for kindling for the value it may give you and during tough economic times, people want something that gives the appearance of solidity as they desperately seek some form of stability to see them through the wild economic roller coaster ride.

Within the gold market, we could see a rebound and return to the bulls as favor in the commodity increases and people may look to purchase gold in any form as they rush to what they see as solidity rather than placing their trust in other market industries.  Gold has and possibly always will be the stable go-to as countries seek economic balance while wresting with controlling their debts and further spending.

There are, of course, ways a gold standard could handcuff the Fed’s big-spending money printers.

The Feds may not be able to raise or cut interest rates based on the country’s needs.  Control over the US economy would, at least in part, be handed over to other countries whose vested interest might not be in the best interest of the US.  And again, can you see the Feds sitting around their sumptuous board room table nodding in agreement to that? 

Cain acknowledges the likely resistance in his statement, “I realise the Washington establishment goes ballistic at this suggestion. Gold is kryptonite to big-spending politicians. It is to the moochers and looters in government what sunlight and garlic are to vampires.”(as per Footnote 7) 

Given that he and Trump are likely on the same wavelength, pushing the idea through could really cause a wrath of fire and we don’t actually want a Third World War.  Imagine President Trump, who has already stirred up such inane controversy about building a wall, which would not likely do anything except cost the country billions, being told by some other country leader that the US must do as they ask or face the consequences. 

With the US being as volatile as they are and ready to jump in whenever guns and soldiers are needed whether or not the US is actually involved in the issue at hand, who is going to be the first to push the super destructo button when their own honor is at stake?  Not a pretty picture.

Needless to say, the gold standard could come with certain hazards.  While that may not happen, you can never say never, especially where power and control of money are concerned. 

And of course, unless huge stores of unmined gold are discovered and brought up in all their dust and glory, to supplement what is already mined, the current supply would have to be sufficient to support an increasing volume of transactions.  Otherwise, this could run into a whole host of other problems including inflation, rising interest rates and potentially employment rate insecurity.

And what is there really is a discrepancy between what the US says they have in gold reserves vs what actually is.  What if a cover-up was discovered?  That could have all the makings of a “GoldenGate”, with all the scandal and fluff attempts to divert attention from how things actually are and how they got there.  Not something that any government needs.

In the long run, a better solution might be to impose some form of caps on spending related to gold reserves – a modified gold standard.  This at least, should allow the Feds to maintain control over the US economy without having to be at the discretion of other countries.   It should also provide a reined-in spending platform, whereby the government might just consider fixing the current economic situation, rather than fervently creating new debt expecting that future generations will be able to cope with having their life-blood drained from them thanks to foolish politicians making foolish decisions.

In any event, it is not likely that the US will return to a gold standard.  Despite the greater stability that gold can provide over fiat money, it is probable that the Feds could direct the focus on the negative aspects of the gold standard in protest at having their hands tied, regardless of what might be better for the country.  They also probably aren’t going to let their money supply or interest levels be determined by the world gold market.

This is a great example of the philosophy Power is King, with a complete disregard of what might be best for the rest of the population.

Happy Investing!

Dr. Kal Kotecha


Anchor[1] CBC News :  The gold standard: revisited  https://www.cbc.ca/news/business/the-gold-standard-revisited-1.1069604

Anchor[2] Forbes (2017)  President Trump: Replace The Dollar With Gold As The Global Currency To Make America Great Again

https://www.forbes.com/sites/ralphbenko/2017/02/25/president-trump-replace-the-dollar-with-gold-as-the-global-currency-to-make-america-great-again/#55da3ba34d54

Anchor[3] World Gold Council (2019) : How Much Gold Has Been Mined   https://www.gold.org/about-gold/gold-supply/gold-mining/how-much-gold

Anchor[4] Wikipedia (2018) : Gold Reserve  https://en.wikipedia.org/wiki/Gold_reserve

Anchor[5] RT (2018) : Petro-yuan helps China & Russia dump US dollar in oil trade  https://www.rt.com/business/422472-russia-china-petro-yuan/

Anchor[6] Anna Golubova (April 2019) :  Trump Picks Gold Standard Advocate Herman Cain for Federal Reserve Board   https://www.kitco.com/news/2019-04-04/Trump-Picks-Gold-Standard-Advocate-Herman-Cain-For-Federal-Reserve-Board.html

Anchor[7] Christian Shepherd (April 2019)   Donald Trump’s Fed Pick Herman Cain in his Own Words  https://www.ft.com/content/2a42b4ec-5778-11e9-91f9-b6515a54c5b1

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