Gold:
The "New" Money By Paul Nathan |
Jun 18 2010 2:01PM
Ben
Bernanke said in testimony in front of congress that he did
not understand what was causing the gold price to go up. In
fact he said he didn't understand gold. Larry Kudlow has been
asking everyone on his program "what is causing the price
of gold to move up?" The use of the term "gold standard"
and "new reserve currency" has been used more in
the last few months than in the last few decades. Perhaps
that is the tip off.
Some commentators are beginning to join the debate on the
pro's and con's of a return to the gold standard. One said
he would bet his career that this will never happen. Most
laugh at the prospect. The fact is it is happening now.
The new controversy over a reversion to a gold standard
is welcome. Many who comment, pro and con on the possibility
are new to the subject, and as such have not really thought
through some of the implications. I have been writing articles
on the gold standard since the early 70's and I welcome
the new commentators to this debate. Two points I would
like to make to anyone who participates: One, any return
to a gold standard will come well into the future. A return
to the gold standard will be incremental. You can not graft
a gold standard onto the present system. It presupposes
fiscal responsibility , balanced budgets, monetary stability
and free trade. A political and economic transformation
would need to occur first. And two, it will look much different
from gold standards of the past. No one knows -- or can
know -- what a future gold standard will look like. The
reason is that technology has changed.
Today we can compute values of gold, silver, ETF's in precious
metals, or anything else and convert those values into paper
claims in a nano second. Which means we could pay for goods
and services with a credit or debit card which are backed
by our savings or checking accounts. Which means we could
save in gold or silver or whatever we want and use the credit
or debit card as our medium of exchange.
My suggestion to Ron Paul and all those wanting to return
to gold, is the best way to accomplish this is not by proclaiming
your determination to replace the Federal Reserve Board
with the gold standard, but to attack the legal tender laws
of this country. I was one of the few back in the early
70's along with Ron Paul that fought for the legalization
of gold to be allowed back into the American system. That
was the first step in returning to the gold standard. Today
is very much the same. The next step is to institutionalize
competing monies.
The key is to go after the governments monopoly on money.
If broken, gold will find it's way into the monetary system,
as it is today, and reclaim it's superior role as long as
it is not prevented from doing so. Legal tender laws do
just that. They prevent choice.
Today, to be an advocate of a gold standard is to be laughed
at and ridiculed as naive. But, to be against legal tender
laws, wipes the snickers off the face of those against gold
very quickly. To be against legal tender laws is to be for
freedom of choice and against government coercion. You will
not find the same chuckles from "intellectuals"
when confronted with a proposal of this nature. On the contrary,
you will find terror.
This goes to the heart of government power. It goes to
the use of force. It goes to governments ability to control
people, raise taxes, borrow money, and inflate. This is
the tactic and strategy required to achieve an honest money
once again in this country. Let the private market develop
a private money and compete with government money, and then
we will see who has money and who does not.
With this in mind, the following is an article I wrote
recently on the subject:
Government has a monopoly on money. It declares what can
and can not be legal tender. It controls the value of money
through setting the supply and the price of money by setting
short term interest rates. We have been on a fiat standard
for a century. Fiat means "decree" and that is
what government does -- sometimes subtly, sometimes brutally.
But make no mistake, the government controls money.
The force of a monopoly alone, however, is insufficient
to prevent individuals from protecting their wealth. So,
governments best chance of preserving stability is through
trust, confidence, and credibility. Lose these things and
government will eventually lose control. Today, we see this
very scenario playing out before our eyes.
Over the last few years, there has been a move away from
government money and towards gold. Not too long ago, governments
were net sellers of gold. Every year they would announce
how much gold they were going to sell into the market. It
was part of "demonitization", which represented
a monetary philosophy that accepted the fact that gold was
a "barbarous relic" that had little relevance
in today's modern financial system. If governments needed
money, they would simply print it. If they needed more gold,
they would print that too. They created "paper gold",
known as Special Drawing Rights, or SDR's. These would act
as reserves instead of the metal itself.
Flash forward. Today, there is a steady run on gold by
a growing number of governments everywhere. As creditor
nations begin to question the value of their paper reserves
they have been converting them into gold. Gold is becoming,
once again, the reserve currency of the world banking system.
(See my article "Are The Fiat And Gold Standards Converging?"
under "more articles" at the top of this page).
More importantly, individuals are accumulating gold like
never before. In five years the ETF that tracks the price
of gold, GLD, has bought more and more gold as demand has
risen. It now holds more gold in trust for individuals than
most governments do. And gold coin sales are breaking records
throughout the world as individuals clamor to own physical
gold. This is the re-monitization of gold. Yet, only a fraction
of individuals still actually own gold.
The free market is a marvelous thing to behold. It has
a life of its own. It represents the values and judgements
of free individuals -- right or wrong -- apart from government
decree or "informed opinion". Even in dictatorships
you will find black markets where you can find pretty much
anything you want for a price. So, when you see a trend
- as you do today- toward gold accumulation, you need to
take notice. What is it telling us?
Personally, I view it as a market response to the need
of an honest currency outside the influence of governments.
At a time when government debt, currencies, and financial
institutions are all under suspicion, is it any wonder that
the market demands an historic form of money, devoid of
government influence and promises? That demand is being
sought out and satisfied daily.
Many investors look at the price of gold and claim it is
in a bubble. But it is not a matter of price -- it is a
matter of possession. If only a fraction of individuals
around the world posses gold today, what would a future
price of gold be when almost everyone wanted gold?
If governments fail to get their fiscal houses in order
there is no telling what the future will bring. Gold offers
some semblance of security. Among other things, it is a
hedge against stupidity. Given the almost criminally reckless
fiscal policies of government, who in his right mind would
not want to protect himself. And if a currency crisis occurs,
who would believe the promises of a new government paper
currency in light of the broken promises of governments
everywhere. Gold is not a promise that can be broken, and
therein lies its present appeal.
In my opinion the private market is in the process of developing
a private competing money. No one can predict where this
will lead us, but it is happening as we speak. We are seeing
the emergence of gold ATMs whereby individuals can convert
dollars for gold on demand. If those machine eventually
are equipped to also accept gold for paper money, we will
have the specter of convertibility on street corners everywhere.
"We are going to make gold public with these machines,"
said Thomas Geissler, CEO of Ex Oriente Lux AG, which owns
“GOLD to go." Fifty thousand machines are being
produced to be placed in countries all over the world. And
retailers such as Sears and K-Mart have announced they will
now be dealing in gold. Companies that buy gold are everywhere,
and companies that sell gold are increasing. Convertibility
is becoming an industry. This is a further sign of the establishment
of the "new" private money.
How this will evolve, not even the market "knows".
But it is obvious the market is telling us that there is
a demand for gold as money. Will we start computing commodity
prices, stock values, and possibly all prices in terms of
gold as well as the dollar to know whether we have deflation
or inflation and to what degree? Will credit card companies
start pricing and translating purchases of goods and services
in terms of dollars and gold as they do foreign currencies?
Will financial institutions store gold as a new form of
savings account, en masse? In a new world of modern technology
there is no telling how gold will be used, but it is being
explored by entrepreneurs world wide as we speak.
To be sure, it will be a long time before we are walking
around with gold, silver, nickel, and copper coins in our
pockets as we did in the past; there is a long way to go
before we ever see gold in the form of a medium of exchange.
But there is little doubt that gold will be needed more
by governments in the future to shore up their failing fiat
standard, and desired more by individuals as a money of
last resort in case they don't.
In either case gold is back -- and back big time. Those
that argue that the price of gold is approximating a bubble,
miss the point. What if governments around the world lose
the confidence of those that hold their paper money? What
if individuals through the private market desire a non-governmental
money, as they are starting to today? What if the billions
of individuals who do not own gold start to demand it? What
price of gold then, knowing that all the gold ever produced
would fit into a large swimming pool? Point? Talk of a bubble
within this context becomes meaningless and is way premature.
(This is not a prediction of sky high gold prices yet to
come, but rather the realization that what we are experiencing
is not a bubble in gold, but a steady increase in demand.
Gold prices are rising due to a "walk" on gold
worldwide.)