Guest Post: A Comeback For Gold-Backed Money?
Submitted by Andrey Dashkov of Casey Research
A Comeback for Gold-Backed Money?
Several legislative initiatives caught our attention recently. All of
them are related to the monetary role of gold and range from proposals
to return to the gold standard, to minting gold and silver as an alternative currency, to having all state transactions carried out in gold and silver coins, to permitting citizens to run their own mints.
these proposals signal a significant attitude change among politicians
and mainstream economic institutions toward gold? No. They are largely
regarded as fringe ideas and dismissed out of hand. The third link above
is written in a condescending tone that implies everyone knows that the
gold standard is bad for an economy and it caused the Great Depression.
Still, it’s quite telling that opinions that gold can be incorporated
into a modern economy are becoming numerous, and actually making it onto
the legislative agenda in various jurisdictions.
clearing house ICE Europe began accepting gold bullion as initial margin
for crude oil and natural gas futures. This year, JPMorgan Chase
announced that it would accept physical gold as collateral for a number of transactions. According to the Wall Street Journal,
stock exchanges in New York, Chicago and Europe recently agreed to
accept gold as collateral for certain trades, too. The World Gold
Council is gaining traction in its push to have the Basel Committee on
Banking Supervision accept the precious metals as a Tier-1 asset for
banks, along with government bonds and currencies. Private and public
institutions alike are clearly rethinking their attitude toward gold.
Perhaps most telling of all, the world’s central banks were net buyers of gold in 2010and
in 2009, after being net sellers for the previous 20 years. As World
Bank President Robert Zoellick said last November, gold has become the
"yellow elephant in the room" that needs to be acknowledged by
policymakers of major economies.
No one can predict exactly how this will all shake out, but Doug Casey has long said that a return to a gold standard,
or some modern equivalent, is almost inevitable. That’s because, for
the reasons Aristotle outlined 2,000 years ago (it’s durable, divisible,
consistent, convenient, and has intrinsic value), gold is hands-down
the world’s best money.
Now, Gresham’s Law tells
us that bad money drives out good, but that’s only true when legal
tender laws hold sway (incentivizing people to hoard what’s perceived to
be “good” money and spend the “bad” money as fast as they can). When
people give up on the local legal tender, Gresham’s Law goes into
reverse, and good money chases out bad. The dollarization of third-world
economies is an example of this, the dollar being perceived as being
good when compared to many shakier currencies.
So, what happens if
fiat currencies as a class start to be perceived as bad money? Gresham,
and history, tells us that they’ll eventually be abandoned, unless made
good (put back on some acceptable standard of value, like gold).
key point here is that it can’t happen just a little bit, just as you
can’t get a little bit pregnant. Once it starts, the good money will
drive out the bad, and in today’s wired global economy, the phenomenon
will be worldwide, fast and devastatingly thorough.
The investment implications, broadly, are obvious; you want to own gold for safety and speculate on gold stocks for profit. The details on how best to do this are the current raison d’être of our metals publications.