Posts Tagged ‘gold standard’
New Gold-Backed Currency Could be in Use Next Month
It looks as though a northern state in Malaysia called Kelantan will be using a new gold-backed currency as early as mid-August. They won’t be the first state/country to be using a gold-backed currency; Indonesia has already minted a minimal number of pieces (25,000) to be used in Australia, Malaysia, and Singapore.
According to the Guardian, the states Islamist government is kick starting the currency by paying its government employees 25% of their paychecks with the gold dinar and silver dirham. To further strengthen the cause all state companies will be accepting the currency and over 600 businesses will be doing the same.
Gold-backed currencies are touted as the only way to thwart the central bankers around the world, stop inflation and stabilize the world’s economies. Many well respected financial analysts here in the US are calling for a gold backed dollar in order to do just that. A gold-backed US dollar could work if gold bullion was confiscated and the price was again locked in at a much higher price to be equal with the money supply. Some experts say that price would be anywhere between $3,000 and $11,000 per ounce, though I have heard some pretty extreme predictions as high as $47,000 per ounce.
The US was on the gold standard for many years until the Federal Reserve was allowed into our system in 1913. They have systematically eroded the purchasing power of the dollar through a series of events. First they removed us from the gold standard domestically in 1933 by confiscating all gold bullion and making it illegal to own gold. Then under President Nixon they removed us from the gold standard internationally in 1971 by closing the gold window, making it impossible for foreign countries to convert their excess US dollars to gold.
A new gold standard in the US would thwart the ability of the government to print money at will, thus impeding inflation and the erosion of private wealth. Inflation is merely a tax. The more something costs you the less money you have to spend on other things. Inflation shifts wealth from your pocket to the government’s pocket. Physical gold and silver bullion have proven to keep up with inflation over the years. Therefore everyone should have some in their portfolio.
Interview with Jim Rickards on ITM Trading Website
In this 11 minute interview with Jim Rickards, Senior Managing Director for Market Intelligence at Omnis, Inc. and President of ITM Trading Inc a precious metals dealer in Arizona, Mr. Rickards reveals how he comes up with his prediction of gold pricing reaching as high $11,000 per ounce.
Mr. Rickards answers the first question by saying that he prefers a strong dollar with gold backing but to him it is clear that the government is going in the opposite direction by cheapening the value of the dollar through money printing. Therefore it makes sense to look for alternatives to the dollar, but when you begin to look around for an alternative nothing looks good except for gold. Would you want Euros or other fiat currencies? With everything that is going on in the world economic picture I think not.
When you look at supply and demand fundamentals on gold and then look at gold from the perspective of macroeconomic view, gold becomes the only real option, thus Mr. Rickards believes at one point gold will become the only acceptable form of money.
When people say to Mr. Rickards that there isn’t enough gold in US to back the dollar, he simply states that it is not a function of supply, but at what price. If gold was set at $1,200 per ounce that would create deflation, so you have to come up with a price that creates balance.
Mr. Rickards says that he believes gold will go to $3,000 to $7,000 per ounce using his calculations. He says “it is a simple 8th grade math equation” using the amount of gold in the US hoard and the amount of money in the system and you can come up with the price. He did note that the current range represents today’s money supply, further stimulus (money printing) will increase the gold price range. The reason for the range is this: it depends on which money supply figure that you use (M0, M1, M3). Mr. Rickards says that if you include the global gold and money supplies that the figure can get as high as $11,000 per ounce.
Jim Rickards is a very well respected economist/analyst who appears on CNBC on a regular basis. I highly recommend that you watch this interview at www.itmtrading.com, you will find it in the right-hand navigation panel.
Gold and the US Dollar
Gold and the U.S. Dollar were pegged for much of our history as a country. We started minting gold coins as currency in 1795, which were interchangeable into paper dollars. We stopped using gold coins as currency in 1933 when president Franklin Delano Roosevelt called in all gold bullion in order to revitalize the economy during the great depression. At the time of the confiscation gold was pegged to the dollar at $20 per ounce. After the confiscation was completed the government revalued gold at $35 per ounce, thus robbing the wealth of all paper dollar holders by 42%.
Gold remained pegged to the dollar at $35 per ounce until 1971 when Nixon closed the gold window and removed us from the gold standard all together. It should be noted that from 1933 to 1974 it was illegal to own gold bullion, but one could own numismatic gold as it was excluded from confiscation.
The dollar and gold were then allowed to free float as it does today. Some of the gains and losses in gold on a day-to-day basis can be attributed to the U.S. dollar but some of it comes from predominant buying and selling.
Gold and the dollar fluctuated in step with each other until June of 2005. Prior to this date if the dollar was down gold was up and vice versa. In June of 2005 gold and the U.S. dollar decoupled from each other, and since then gold and the dollar have risen and fallen together and sometimes moved in opposite directions. They are not directly tied to one another. However, if the dollar decreases in value, the gold price in terms of dollars will rise. For example, gold today is up $18.60 as of this writing, and the dollar is down .15 to 77.48. Out of the $18.60 increase, $2.10 is due to a declining dollar and $16.50 is due to predominant buying.
As time goes on we fully expect the dollar and gold to function as two separate currencies. However if the U.S. has to return to a gold standard, gold will once again be pegged to the dollar.
The Great Gold Confiscation of 1933
The 1920’s were good for most Americans. The stock market was thriving and most citizens were employed and happy. The stock market ended in frenzy in 1929 on what is now Called Black Tuesday. All of the prosperity of the 1920’s was virtually erased and many Americans were left broke and unemployed. The Great Depression then ensued and eventually Americans looked to Washington for help.
Back then the United States was on a gold standard. What that meant was the U.S. could only print one dollar for every 1/20 of an ounce of gold it had in reserves. Therefore in order to inflate the economy, in other words “to bail it out,” the government needed to be able to print more money and flow it into the hands of the banks and consumers. Because the dollar was pegged to gold the only way this could be done was to increase its gold reserves. Thus the confiscation of all privately owned gold in the U.S. was cooked up under executive order 6102.
The executive order stated that all gold coin, gold bullion and gold certificates needed to be turned in to a Federal Reserve Bank or Branch. If this order was willfully violated, that person could suffer up to 10 years imprisonment or up to a $10,000 fine or both. The depository institution that received the gold was instructed to pay the value of the gold in the equivalent paper currency or coin.
After the government confiscated gold they could now print more dollars. The catch here was that they paid people in paper dollars then immediately devalued the U.S. dollar and increased the value of gold. So not only did citizens have to turn in their only true safe haven, but they also were given paper dollars in return that were then devalued.
Many experts today believe that the falling dollar will once again be pegged to gold and that privately owned gold will once again be confiscated. The only gold that was protected from confiscation was coins that were of numismatic value (coins having a recognized special value to collectors of rare or unusual coins). This emphasizes that all portfolios should contain some U.S. rare gold coins, as they were not confiscated in the past.