What the Price of Gold Is Telling Us By Ron Paul Dr. Ron
Paul is a Republican member of Congress from Texas.
The financial press, and even the network news shows, have
begun reporting the price of gold regularly. For twenty years,
between 1980 and 2000, the price of gold was rarely mentioned.
There was little interest, and the price was either falling
or remaining steady.
Since 2001 however, interest in gold has soared along with
its price. With the price now over $1000 an ounce, a lot more
people are becoming interested in gold as an investment and
an economic indicator. Much can be learned by understanding
what the rising dollar price of gold means.
The rise in gold prices from $250 per ounce in 2001 to over
$1000 today has drawn investors and speculators into the precious
metals market. Though many already have made handsome profits,
buying gold per se should not be touted as a good investment.
After all, gold earns no interest and its quality never changes.
Its static, and does not grow as sound investments should.
Its more accurate to say that one might invest in a
gold or silver mining company, where management, labor costs,
and the nature of new discoveries all play a vital role in
determining the quality of the investment and the profits
Buying gold and holding it is somewhat analogous to converting
ones savings into one hundred dollar bills and hiding
them under the mattress yet not exactly the same. Both
gold and dollars are considered money, and holding money does
not qualify as an investment. Theres a big difference
between the two however, since by holding paper money one
loses purchasing power. The purchasing power of commodity
money, i.e. gold, however, goes up if the government devalues
the circulating fiat currency.
Holding gold is protection or insurance against governments
proclivity to debase its currency. The purchasing power of
gold goes up not because its a so-called good investment;
it goes up in value only because the paper currency goes down
in value. In our current situation, that means the dollar.
One of the characteristics of commodity money one
that originated naturally in the marketplace is that
it must serve as a store of value. Gold and silver meet that
test paper does not. Because of this profound difference,
the incentive and wisdom of holding emergency funds in the
form of gold becomes attractive when the official currency
is being devalued. Its more attractive than trying to
save wealth in the form of a fiat currency, even when earning
some nominal interest. The lack of earned interest on gold
is not a problem once people realize the purchasing power
of their currency is declining faster than the interest rates
they might earn. The purchasing power of gold can rise even
faster than increases in the cost of living.
The point is that most who buy gold do so to protect against
a depreciating currency rather than as an investment in the
classical sense. Americans understand this less than citizens
of other countries; some nations have suffered from severe
monetary inflation that literally led to the destruction of
their national currency. Though our inflation i.e.,
the depreciation of the U.S. dollar has been insidious,
average Americans are unaware of how this occurs. For instance,
few Americans know nor seem concerned that the 1913 pre-Federal
Reserve dollar is now worth only four cents. Officially, our
central bankers and our politicians express no fear that the
course on which we are set is fraught with great danger to
our economy and our political system. The belief that money
created out of thin air can work economic miracles, if only
properly managed, is pervasive in D.C.
In many ways we shouldnt be surprised about this trust
in such an unsound system. For at least four generations our
government-run universities have systematically preached a
monetary doctrine justifying the so-called wisdom of paper
money over the foolishness of sound money. Not
only that, paper money has worked surprisingly well in the
past 35 years the years the world has accepted pure
paper money as currency. Alan Greenspan bragged that central
bankers in these several decades have gained the knowledge
necessary to make paper money respond as if it were gold.
This removes the problem of obtaining gold to back currency,
and hence frees politicians from the rigid discipline a gold
Many central bankers in the last 15 years became so confident
they had achieved this milestone that they sold off large
hoards of their gold reserves. At other times they tried to
prove that paper works better than gold by artificially propping
up the dollar by suppressing market gold prices. This recent
deception failed just as it did in the 1960s, when our government
tried to hold gold artificially low at $35 an ounce. But since
they could not truly repeal the economic laws regarding money,
just as many central bankers sold, others bought. Its
fascinating that the European central banks sold gold while
Asian central banks bought it over the last several years.
Since gold has proven to be the real money of the ages, we
see once again a shift in wealth from the West to the East,
just as we saw a loss of our industrial base in the same direction.
Though Treasury officials deny any U.S. sales or loans of
our official gold holdings, no audits are permitted so no
one can be certain.
The special nature of the dollar as the reserve currency
of the world has allowed this game to last longer than it
would have otherwise. But the fact that gold has gone from
$252 per ounce to over $1000 means there is concern about
the future of the dollar. The higher the price for gold, the
greater the concern for the dollar. Instead of dwelling on
the dollar price of gold, we should be talking about the depreciation
of the dollar. In 1934 a dollar was worth 1/20th of an ounce
of gold; $20 bought an ounce of gold. Today a dollar is worth
1/1000th of an ounce of gold, meaning it takes $1000 to buy
one ounce of gold.
The number of dollars created by the Federal Reserve, and
through the fractional reserve banking system, is crucial
in determining how the market assesses the relationship of
the dollar and gold. Though theres a strong correlation,
its not instantaneous or perfectly predictable. There
are many variables to consider, but in the long term the dollar
price of gold represents past inflation of the money supply.
Equally important, it represents the anticipation of how much
new money will be created in the future. This introduces the
factor of trust and confidence in our monetary authorities
and our politicians. And these days the American people are
casting a vote of no confidence in this regard,
and for good reasons.
The incentive for central bankers to create new money out
of thin air is twofold. One is to practice central economic
planning through the manipulation of interest rates. The second
is to monetize the escalating federal debt politicians create
and thrive on.
Today no one in Washington believes for a minute that runaway
deficits are going to be curtailed. In March alone, the federal
government created an historic $85 billion deficit. The current
supplemental bill going through Congress has grown from $92
billion to over $106 billion, and everyone knows it will not
draw President Bushs first veto. Most knowledgeable
people therefore assume that inflation of the money supply
is not only going to continue, but accelerate. This anticipation,
plus the fact that many new dollars have been created over
the past 15 years that have not yet been fully discounted,
guarantees the further depreciation of the dollar in terms
Theres no single measurement that reveals what the
Fed has done in the recent past or tells us exactly what its
about to do in the future. Forget about the lip service given
to transparency by new Fed Chairman Bernanke. Not only is
this administration one of the most secretive across the board
in our history, the current Fed firmly supports denying the
most important measurement of current monetary policy to Congress,
the financial community, and the American public. Because
of a lack of interest and poor understanding of monetary policy,
Congress has expressed essentially no concern about the significant
change in reporting statistics on the money supply.
Beginning in March, though planned before Bernanke arrived
at the Fed, the central bank discontinued compiling and reporting
the monetary aggregate known as M3. M3 is the best description
of how quickly the Fed is creating new money and credit. Common
sense tells us that a government central bank creating new
money out of thin air depreciates the value of each dollar
in circulation. Yet this report is no longer available to
us and Congress makes no demands to receive it.
Though M3 is the most helpful statistic to track Fed activity,
it by no means tells us everything we need to know about trends
in monetary policy. Total bank credit, still available to
us, gives us indirect information reflecting the Feds
inflationary policies. But ultimately the markets will figure
out exactly what the Fed is up to, and then individuals, financial
institutions, governments, and other central bankers will
act accordingly. The fact that our money supply is rising
significantly cannot be hidden from the markets.
The response in time will drive the dollar down, while driving
interest rates and commodity prices up. Already we see this
trend developing, which surely will accelerate in the not
too distant future. Part of this reaction will be from those
who seek a haven to protect their wealth not invest
by treating gold and silver as universal and historic
money. This means holding fewer dollars that are decreasing
in value while holding gold as it increases in value.
A soaring gold price is a vote of no confidence
in the central bank and the dollar. This certainly was the
case in 1979 and 1980. Today, gold prices reflect a growing
restlessness with the increasing money supply, our budgetary
and trade deficits, our unfunded liabilities, and the inability
of Congress and the administration to rein in runaway spending.
Denying us statistical information, manipulating interest
rates, and artificially trying to keep gold prices in check
wont help in the long run. If the markets are fooled
short term, it only means the adjustments will be much more
dramatic later on. And in the meantime, other market imbalances
The Fed tries to keep the consumer spending spree going,
not through hard work and savings, but by creating artificial
wealth in stock markets bubbles and housing bubbles. When
these distortions run their course and are discovered, the
corrections will be quite painful.
Likewise, a fiat monetary system encourages speculation and
unsound borrowing. As problems develop, scapegoats are sought
and frequently found in foreign nations. This prompts many
to demand altering exchange rates and protectionist measures.
The sentiment for this type of solution is growing each day.
Though everyone decries inflation, trade imbalances, economic
downturns, and federal deficits, few attempt a closer study
of our monetary system and how these events are interrelated.
Even if it were recognized that a gold standard without monetary
inflation would be advantageous, few in Washington would accept
the political disadvantages of living with the discipline
of gold since it serves as a check on government size
and power. This is a sad commentary on the politics of today.
The best analogy to our affinity for government spending,
borrowing, and inflating is that of a drug addict who knows
if he doesnt quit hell die; yet he cant
quit because of the heavy price required to overcome the dependency.
The right choice is very difficult, but remaining addicted
to drugs guarantees the death of the patient, while our addiction
to deficit spending, debt, and inflation guarantees the collapse
of our economy.
Special interest groups, who vigorously compete for federal
dollars, want to perpetuate the system rather than admit to
a dangerous addiction. Those who champion welfare for the
poor, entitlements for the middle class, or war contracts
for the military industrial corporations, all agree on the
so-called benefits bestowed by the Feds power to counterfeit
fiat money. Bankers, who benefit from our fractional reserve
system, likewise never criticize the Fed, especially since
its the lender of last resort that bails out financial
institutions when crises arise. And its true, special
interests and bankers do benefit from the Fed, and may well
get bailed out just as we saw with the Long-Term Capital
Management fund crisis a few years ago. In the past, companies
like Lockheed and Chrysler benefited as well. But what the
Fed cannot do is guarantee the market will maintain trust
in the worthiness of the dollar. Current policy guarantees
that the integrity of the dollar will be undermined. Exactly
when this will occur, and the extent of the resulting damage
to the financial system, cannot be known for sure but
it is coming. There are plenty of indications already on the
Foreign policy plays a significant role in the economy and
the value of the dollar. A foreign policy of militarism and
empire building cannot be supported through direct taxation.
The American people would never tolerate the taxes required
to pay immediately for overseas wars, under the discipline
of a gold standard. Borrowing and creating new money is much
more politically palatable. It hides and delays the real costs
of war, and the people are lulled into complacency
especially since the wars we fight are couched in terms of
patriotism, spreading the ideas of freedom, and stamping out
terrorism. Unnecessary wars and fiat currencies go hand-in-hand,
while a gold standard encourages a sensible foreign policy.
The cost of war is enormously detrimental; it significantly
contributes to the economic instability of the nation by boosting
spending, deficits, and inflation. Funds used for war are
funds that could have remained in the productive economy to
raise the standard of living of Americans now unemployed,
underemployed, or barely living on the margin.
Yet even these costs may be preferable to paying for war
with huge tax increases. This is because although fiat dollars
are theoretically worthless, value is imbued by the trust
placed in them by the worlds financial community. Subjective
trust in a currency can override objective knowledge about
government policies, but only for a limited time.
Economic strength and military power contribute to the trust
in a currency; in todays world, trust in the U.S. dollar
is not earned and therefore fragile. The history of the dollar,
being as good as gold up until 1971, is helpful in maintaining
an artificially higher value for the dollar than deserved.
Foreign policy contributes to the crisis when the spending
to maintain our worldwide military commitments becomes prohibitive,
and inflationary pressures accelerate. But the real crisis
hits when the world realizes the king has no clothes, in that
the dollar has no backing, and we face a military setback
even greater than we already are experiencing in Iraq. Our
token friends may quickly transform into vocal enemies once
the attack on the dollar begins.
False trust placed in the dollar once was helpful to us,
but panic and rejection of the dollar will develop into a
real financial crisis. Then we will have no other option but
to tighten our belts, go back to work, stop borrowing, start
saving, and rebuild our industrial base, while adjusting to
a lower standard of living for most Americans.
Counterfeiting the nations money is a serious offense.
The founders were especially adamant about avoiding the chaos,
inflation, and destruction associated with the Continental
dollar. Thats why the Constitution is clear that only
gold and silver should be legal tender in the United States.
In 1792 the Coinage Act authorized the death penalty for any
private citizen who counterfeited the currency. Too bad they
werent explicit that counterfeiting by government officials
is just as detrimental to the economy and the value of the
In wartime, many nations actually operated counterfeiting
programs to undermine our dollar, but never to a disastrous
level. The enemy knew how harmful excessive creation of new
money could be to the dollar and our economy. But it seems
we never learned the dangers of creating new money out of
thin air. We dont need an Arab nation or the Chinese
to undermine our system with a counterfeiting operation. We
do it ourselves, with all the disadvantages that would occur
if others did it to us. Today we hear threats from some Arab,
Muslim, and far Eastern countries about undermining the dollar
system- not by dishonest counterfeiting, but by initiating
an alternative monetary system based on gold. Wouldnt
that be ironic? Such an event theoretically could do great
harm to us. This day may well come, not so much as a direct
political attack on the dollar system but out of necessity
to restore confidence in money once again.
Historically, paper money never has lasted for long periods
of time, while gold has survived thousands of years of attacks
by political interests and big government. In time, the world
once again will restore trust in the monetary system by making
some currency as good as gold.
Gold, or any acceptable market commodity money, is required
to preserve liberty. Monopoly control by government of a system
that creates fiat money out of thin air guarantees the loss
of liberty. No matter how well-intended our militarism is
portrayed, or how happily the promises of wonderful programs
for the poor are promoted, inflating the money supply to pay
these bills makes government bigger. Empires always fail,
and expenses always exceed projections. Harmful unintended
consequences are the rule, not the exception. Welfare for
the poor is inefficient and wasteful. The beneficiaries are
rarely the poor themselves, but instead the politicians, bureaucrats,
or the wealthy. The same is true of all foreign aid
its nothing more than a program that steals from the
poor in a rich country and gives to the rich leaders of a
poor country. Whether its war or welfare payments, it
always means higher taxes, inflation, and debt. Whether its
the extraction of wealth from the productive economy, the
distortion of the market by interest rate manipulation, or
spending for war and welfare, it cant happen without
infringing upon personal liberty.
At home the war on poverty, terrorism, drugs, or foreign
rulers provides an opportunity for authoritarians to rise
to power, individuals who think nothing of violating the peoples
rights to privacy and freedom of speech. They believe their
role is to protect the secrecy of government, rather than
protect the privacy of citizens. Unfortunately, that is the
atmosphere under which we live today, with essentially no
respect for the Bill of Rights.
Though great economic harm comes from a government monopoly
fiat monetary system, the loss of liberty associated with
it is equally troubling. Just as empires are self-limiting
in terms of money and manpower, so too is a monetary system
based on illusion and fraud. When the end comes we will be
given an opportunity to choose once again between honest money
and liberty on one hand; chaos, poverty, and authoritarianism
on the other.
The economic harm done by a fiat monetary system is pervasive,
dangerous, and unfair. Though runaway inflation is injurious
to almost everyone, it is more insidious for certain groups.
Once inflation is recognized as a tax, it becomes clear the
tax is regressive: penalizing the poor and middle class more
than the rich and politically privileged. Price inflation,
a consequence of inflating the money supply by the central
bank, hits poor and marginal workers first and foremost. It
especially penalizes savers, retirees, those on fixed incomes,
and anyone who trusts government promises. Small businesses
and individual enterprises suffer more than the financial
elite, who borrow large sums before the money loses value.
Those who are on the receiving end of government contracts
especially in the military industrial complex during
wartime receive undeserved benefits.
Its a mistake to blame high gasoline and oil prices
on price gouging. If we impose new taxes or fix prices, while
ignoring monetary inflation, corporate subsidies, and excessive
regulations, shortages will result. The market is the only
way to determine the best price for any commodity. The law
of supply and demand cannot be repealed. The real problems
arise when government planners give subsidies to energy companies
and favor one form of energy over another.
Energy prices are rising for many reasons: Inflation; increased
demand from China and India; decreased supply resulting from
our invasion of Iraq; anticipated disruption of supply as
we push regime change in Iran; regulatory restrictions on
gasoline production; government interference in the free market
development of alternative fuels; and subsidies to big oil
such as free leases and grants for research and development.
Interestingly, the cost of oil and gas is actually much higher
than we pay at the retail level. Much of the DOD budget is
spent protecting our oil supplies, and if such
spending is factored in, gasoline probably costs us more than
$5 a gallon. The sad irony is that this military effort to
secure cheap oil supplies inevitably backfires, and actually
curtails supplies and boosts prices at the pump. The waste
and fraud in issuing contracts to large corporations for work
in Iraq only add to price increases.
When problems arise under conditions that exist today, its
a serious error to blame the little bit of the free market
that still functions. Last summer the market worked efficiently
after Katrina gas hit $3 a gallon, but soon supplies
increased, usage went down, and the price returned to $2.
In the 1980s, market forces took oil from $40 per barrel to
$10 per barrel, and no one cried for the oil companies that
went bankrupt. Todays increases are for the reasons
mentioned above. Its natural for labor to seek its highest
wage, and businesses to strive for the greatest profit. Thats
the way the market works. When the free market is allowed
to work, its the consumer who ultimately determines
price and quality, with labor and business accommodating consumer
choices. Once this process is distorted by government, prices
rise excessively, labor costs and profits are negatively affected,
and problems emerge. Instead of fixing the problem, politicians
and demagogues respond by demanding windfall profits taxes
and price controls, while never questioning how previous government
interference caused the whole mess in the first place. Never
let it be said that higher oil prices and profits cause inflation;
inflation of the money supply causes higher prices!
Since keeping interest rates below market levels is synonymous
with new money creation by the Fed, the resulting business
cycle, higher cost of living, and job losses all can be laid
at the doorstep of the Fed. This burden hits the poor the
most, making Fed taxation by inflation the worst of all regressive
taxes. Statistics about revenues generated by the income tax
are grossly misleading; in reality much harm is done by our
welfare/warfare system supposedly designed to help the poor
and tax the rich. Only sound money can rectify the blatant
injustice of this destructive system.
The Founders understood this great danger, and voted overwhelmingly
to reject emitting bills of credit, the term they
used for paper or fiat money. Its too bad the knowledge
and advice of our founders, and their mandate in the Constitution,
are ignored today at our great peril. The current surge in
gold prices which reflects our dollars devaluation
is warning us to pay closer attention to our fiscal,
monetary, entitlement, and foreign policy.
Meaning of the Gold Price Summation
A recent headline in the financial press announced that gold
prices surged over concern that confrontation with Iran will
further push oil prices higher. This may well reflect the
current situation, but higher gold prices mainly reflect monetary
expansion by the Federal Reserve. Dwelling on current events
and their effect on gold prices reflects concern for symptoms
rather than an understanding of the actual cause of these
price increases. Without an enormous increase in the money
supply over the past 35 years and a worldwide paper monetary
system, this increase in the price of gold would not have
Certainly geo-political events in the Middle East under a
gold standard would not alter its price, though they could
affect the supply of oil and cause oil prices to rise. Only
under conditions created by excessive paper money would one
expect all or most prices to rise. This is a mere reflection
of the devaluation of the dollar.
Particular things to remember:
If one endorses small government and maximum liberty,
one must support commodity money.
One of the strongest restraints against unnecessary war
is a gold standard.
Deficit financing by government is severely restricted
by sound money.
The harmful effects of the business cycle are virtually
eliminated with an honest gold standard.
Saving and thrift are encouraged by a gold standard; and
discouraged by paper money.
Price inflation, with generally rising price levels, is
characteristic of paper money. Reports that the consumer
price index and the producer price index are rising are
distractions: the real cause of inflation is the Feds
creation of new money.
Interest rate manipulation by central bank helps the rich,
the banks, the government, and the politicians.
Paper money permits the regressive inflation tax to be
passed off on the poor and the middle class.
Speculative financial bubbles are characteristic of paper
money not gold.
Paper money encourages economic and political chaos, which
subsequently causes a search for scapegoats rather than
blaming the central bank.
Dangerous protectionist measures frequently are implemented
to compensate for the dislocations caused by fiat money.
Paper money, inflation, and the conditions they create
contribute to the problems of illegal immigration.
The value of gold is remarkably stable.
The dollar price of gold reflects dollar depreciation.
Holding gold helps preserve and store wealth, but technically
gold is not a true investment.
Since 2001 the dollar has been devalued by 60%.
In 1934 FDR devalued the dollar by 41%.
In 1971 Nixon devalued the dollar by 7.9%.
In 1973 Nixon devalued the dollar by 10%.
These were momentous monetary events, and every knowledgeable
person worldwide paid close attention. Major changes were
endured in 1979 and 1980 to save the dollar from disintegration.
This involved a severe recession, interest rates over 21%,
and general price inflation of 15%.
Today we face a 60% devaluation and counting, yet no one
seems to care. Its of greater significance than the
three events mentioned above. And yet the one measurement
that best reflects the degree of inflation, the Fed and our
government deny us. Since March, M3 reporting has been discontinued.
For starters, Id like to see Congress demand that this
report be resumed. I fully believe the American people and
Congress are entitled to this information. Will we one day
complain about false intelligence, as we have with the Iraq
war? Will we complain about not having enough information
to address monetary policy after its too late?
If ever there was a time to get a handle on what sound money
is and what it means, that time is today.
Inflation, as exposed by high gold prices, transfers wealth
from the middle class to the rich, as real wages decline while
the salaries of CEOs, movie stars, and athletes skyrocket
along with the profits of the military industrial complex,
the oil industry, and other special interests.
A sharply rising gold price is a vote of no confidence
in Congress ability to control the budget, the Feds
ability to control the money supply, and the administrations
ability to bring stability to the Middle East.
Ultimately, the gold price is a measurement of trust in the
currency and the politicians who run the country. Its
been that way for a long time, and is not about to change.
If we care about the financial system, the tax system, and
the monumental debt were accumulating, we must start
talking about the benefits and discipline that come only with
a commodity standard of money money the government
and central banks absolutely cannot create out of thin air.
Economic law dictates reform at some point. But should we
wait until the dollar is 1/1,000 of an ounce of gold or 1/2,000
of an ounce of gold? The longer we wait, the more people suffer
and the more difficult reforms become. Runaway inflation inevitably
leads to political chaos, something numerous countries have
suffered throughout the 20th century. The worst example of
course was the German inflation of the 1920s that led to the
rise of Hitler. Even the communist takeover of China was associated
with runaway inflation brought on by Chinese Nationalists.
The time for action is now, and it is up to the American people
and the U.S. Congress to demand it.
Dr. Ron Paul is a Republican member
of Congress from Texas.