Rhunzzz

Own Gold? Time to Fold

I would buy gold, but it would not account for more than 10% of my portfolio holdings. Does that make me a goldbug?

Thanks for daring to sound a contrary opinion against the goldbug mafia of SA. It's astounding really, I keep seeing at least 3-6 articles on a daily basis regarding GLD, almost all of them relentlessly bullish. One might almost think the goldbugs were trying to convince others to buy from them.

Gold: Not Just for Gold Bugs Anymore

Dear Sir,

I am reading the article you linked. I have some points to raise.

1. The article states that the Fed's balance sheet liabilities would have to be backed by its current gold reserves. In other words, not every single dollar would need to be backed by gold. So why would this be any different from a fractional reserve system? It would just be a fractional gold reserve system - only partially backed by something of value (debt in the current system, gold in this putative system).

2. Current spot price of gold is $743.35 per troy ounce, last I checked. For the dollar to be pegged at the reserve price $7,000 per oz. would mean a 950% devaluation of the dollar in gold terms. This would appear to me to have catastrophic inflationary and redistributive effects upon the economy. All of a sudden those who had accumulated gold would suddenly see a sharp increase in their purchasing power, relative to everyone else. I don't see how this could be good for the US economy.

I don't see anywhere in the article suggesting how to deal with such a huge drop in the purchasing power of the dollar in gold terms. If I have missed it, please point it out.

Gold: Not Just for Gold Bugs Anymore

Dear Sir,

The point is not what Wall Street cares about. We all know they will aim to maximize profit, that is the whole point of the market system, after all.

The point is that to return to a "total" gold standard, where every single dollar in circulation is backed by physical gold, would result in a huge distortion of the market. You think the ethanol subsidies diverting food production into biofuels was bad? If the Fed were to seriously set about drastically increasing its gold reserves to back up the dollar, even at the current spot price, the resultant distortion of the market would greatly dwarf this!

Think about it, current global gold reserves are only 29,822.6 tonnes. To back up every dollar at current spot price would require 753,161.49 tonnes!

Am I totally wrong in this? If so, please enlighten me. How else would the US return to a gold standard without either driving up the price of gold so high that it would greatly distort the market, or causing deflation so severe that we would be reverting to barter trade?

A fractional gold-reserve monetary system perhaps? If so, then I don't see how it would be much of an improvement over the current system.

Gold: Not Just for Gold Bugs Anymore

Dear Sir,

I have often wondered exactly how a country could actually go back on to the gold standard. Because it seems more like a very theoretical solution that would have horrific consequences if actually tried.

The current spot price of gold is $743.35 per troy ounce.
1 metric ton is 32150.746 troy oz.
Therefore, currently, 1 metric ton of gold is worth $23,899,257.04.
At last count, the US economy is approximately $18 trillion. Hence, for every dollar to be backed by gold would require... 753,161.49 metric tonnes of gold.

For reference, the entire world's gold reserves are reported at 29,822.6 tonnes. In 2001, it was estimated that all the gold ever mined totaled 145,000 tonnes. (Figures from the World Gold Council).

So perhaps we should reset the theoretical reserve price of gold to be lower? Let's take the last reserve price backed by the US Fed in 1971, which was $35. For the present size of the US economy, backing a reserve price of $35 per troy ounce would require 15,996,074.07 tonnes of gold.

So clearly, to go back to the gold standard would require one, or some combination of the following:

1. The US buys up a lot of gold in order to back up its targeted reserve price, in fact much more than the current global reserves, and much more than all the gold ever mined as of 2001, therefore driving up the spot price of gold in the process, diverting a lot of investment into gold-mining and gold processing rather than other activities like, oh, agriculture or technology.

2. The US economy shrinks to a fraction of its size.

So it does look like going back to the gold standard MIGHT be quite a horrific idea actually. Of course, this is just simple arithmetic.