As many citizens struggle to re-learn gold’s importance, what are the monetary experts – who never forgot gold’s power – doing to preserve and maximize their advantage? I am referring, without intended irony, to central bankers. Can we predict their next moves?
Short-term fluctuations in the dollar/gold exchange rate are of little interest to holders of the physical metal itself. And I take it for granted that the expected long-term exchange rate is a meaningless number, as the fiat dollar will eventually cease to exist. By contrast, if the course of the dollar/gold exchange rate over the medium term (1-3 years) can be projected, this is valuable to investors and crusaders alike.
Monetary science cannot determine a demonstrably correct exchange rate value. We can, however, take a central banker’s perspective, and see where the thought experiment leads. After limiting gold convertibility in 1933, and abandoning any formal gold link in 1971, is there anywhere left for governments to run? Their unconditional surrender, and a return to gold and silver as the sole constitutional money, would appear the only logical next step. Or is it?
The dollar/gold exchange rate was re-valued in gold’s favor after ’33 and ’71. Whether the full extent of the debasement of the dollar in each case was properly reflected is not immediately relevant. Both times, the amount of the revaluation was sufficient to avoid the need to return to gold and silver as circulating currency. Would a third dollar de-valuation, combined with some sort of formal re-linking to gold, do the trick again?
I used to assign a low probability to a third dollar de-valuation as central bank strategy, as it seems the process would be too difficult for authorities to neatly manage. A recent Jim Rickards interview made me alter my estimates. He explained how, despite appearances, America was essentially the only nation with a Plan B for coping with the monetary crisis. The rest of the world is at the mercy of the US.
Rickards was referring to other nations’ gold reserves stored on US soil. It would be easy for Washington to declare a global monetary emergency, “temporarily” take ownership of foreign governments’ metal, and thereby double America’s de facto gold holdings overnight. If reported figures are accurate, the total amount would be over 16,000 tons, or roughly 10% of all above ground gold, including jewelry. It might then be possible for the US Treasury / Fed to defend a new dollar/gold exchange rate.
America could thus stabilize the dollar domestically with some sort of convertibility, and dictate to the world how foreign-held dollars or dollar-denominated debts would be valued in gold ounces. Alternately, America could neglect its own middle class and hand pick a new set of international allies with selective, favorable restructuring of its foreign debts, payable in gold.
The dollar/gold exchange rate required, whether $5,000 per ounce or $50,000, would be determined by an estimate of how much dollar debasement must be recognized and admitted in order to stabilize the financial system. If domestic and/or foreign individuals are denied the convertibility privilege, either formally or by setting a 400 ounce bar as the minimum amount redeemable, the exchange rate could probably be set lower than otherwise necessary.
We can’t know whether dollar devaluation might buy global monetary stability for 10 years or 10 weeks. Would returning to the sort of foreign-government-only dollar/gold convertibility prevailing from 1933-1971 roll back uncertainty sufficiently to allow the required global economic growth? If economic catastrophe could be postponed by the half-measure of a partial surrender / ceasefire in governments’ war on gold, should citizens rejoice?
For the cause of freedom and individual rights, the side effects would be mixed at best. Gold’s image as a critical part of the financial system can only be improved if its dollar exchange rate were to increase dramatically. It would also help the reputation of gold’s intellectual advocates, and hard money promotional efforts should find better financing. Finally, depending on how other asset class valuation levels adjust to gold’s new prominence, there might arise a whole class of suddenly wealthy investors. Many of these individuals, no matter how boastful or modest, would become implicit ambassadors for gold.
On the negative side, however, there may be a loss of interest in questions of how the monetary system should operate. People might think government had already admitted defeat and “returned to the gold standard”. That the official re-introduction of gold into the financial system gave a mere figurehead role to the metal would likely escape notice. And, as Robert Landis noted, if the fiat system collapsed totally a few years later, people may again be under the false impression that gold deserved the blame.
A worse aspect comes to mind. Silver might not benefit from dollar de-valuation. The Fed would likely prefer if silver actually lost ground on both an absolute and relative basis. This would keep the idea of bimetallism out of the public imagination. If bankers fear recognizing gold as money, they must really dread letting silver join it. Silver coin circulating alongside gold, and once again becoming working wages, would recall a time when banks were unnecessary to a healthy, growing economy.
Overall, it saddens me to conclude, a partial surrender by central banks in their war with gold could be a step backwards for gold money advocates.
First published in January 2011 in ‘The Gold Standard’, the monthly journal of The Gold Standard Institute.