Gold bugs around the world are discussing the rumors that the Republican party in the US will make a return to the gold standard a part of its platform. Whether or not this is a good thing, though, depends on the details: if it is not properly implemented, it could make things worse. Personally, I'm deeply skeptical any of this will come true, but I think the matter is worth exploring for those interested in the gold market.
First is the question of price: if the US dollar returns to the gold standard, at what price? The good news for those who hold gold and perhaps gold stocks is that the price would be astronomically high. Jim Sinclair's blog on "The Mathematics of Gold" is highly instructive here; the price needs to be a function of US international debt, and the gold the US has will need to go to international debt holders. Sinclair calculates a price of $12,500, although I think that is even too low. If we take the M2 money supply -- over $10 trillion -- and divide it by the number of ounces the US Treasury claims to have -- 261,499,000 -- we get an amount over $38,241. I think being over this amount would prove to be necessary for a gold standard to really be implemented.
Before any of my fellow gold bugs begin jumping up and down at the thought, let's consider a few things:
- A return to a classical gold standard means an end to the welfare/warfare state -- both sides of it -- and a balanced budget. Can this really happen when the Republican party continues to support the "war on terror" and does not have a plan that balances the budget?
- Suppose the rosy scenario outlined above actually does come true. What's that mean for those already in the US in debt with no gold? Their situation has become more difficult: their debt still exists, but the return to a gold standard ensures a period of deflation as malinvestments are squeezed out of the system and government stimulus is no long possible. Is this advantageous for maintaining social order and creating a bright future? Will those in debt be able to get out?
- Suppose the US returns to a gold standard at even higher price -- let's say $50,000/ounce. But suppose China and other debt holders feel shortchanged by this, as it means they will get only a little bit of gold (the higher the gold price goes, the less gold they will get for redeeming their dollar reserves and US treasury bonds). Suppose they demand something else in return, like control of US government property, loss of US sovereignty and a greater role for the UN, or something along those lines. Is that good?
My final take: gold has a role in solving this debt crisis. And, perhaps a gold standard of some kind is the answer. I remain skeptical, though, that it will emerge out of the popular parties in the US, and I don't think a gold standard alone is the answer; rather some type of debt cancellation is needed to. Ultimately, the devil is in the details.
Whether a gold standard comes or not, I believe we are about to enter prime time for gold. The merits of gold are becoming more widely understood, it has sold off greatly since its September 2011 highs, and the underlying fundamentals are only getting stronger; the US continues to run budget deficits, as does most of the rest of the world, so the need for sound money is only getting stronger. Physical gold is a must, and (NYSEARCA:GLD) remains a useful tool for those who wish to incorporate trading or diversify beyond physical gold in one's possession and vault storage.
Disclosure: I own gold coins, bullion, and gold stored in vaults. I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.