Is A Gold Standard Possible?

Tyler Durden's picture

From Deutsche Bank's Daniel Brebner:

A Future Gold Standard?

A common theme in discussing the gold market is the prospect for a new gold standard in the future. That such a topic is now common says much about the change in attitudes by investors, many who would have ridiculed the mere mention of such a thing as little as five years ago. It also, perhaps, gives a hint as to the desperation of investors in their search for assets which they believe may protect their wealth over the long-term, a period which may experience more than its fair share of event risk.

If gold were to regain its crown as the primary medium of exchange it would dramatically change the way that governments manage their economies – which some would say is a good thing given the results of their management skills thus far. Nevertheless, the imposition of a gold standard would limit the ability of government to affect the supply of money in the economy. The supply of money would rest entirely with the volume of gold holdings that a country would possess and grow in line with its trade balances plus domestic gold production (depending on domestic resources and whether these resources in fact became state property – which we expect should be of consideration).

Why it can work

Many economists shudder at the notion of a gold standard; this is understandable given the school of thought to which most adhere: Keynesian or Keynesian derivative. Keynes saw flexible monetary policy as an important tool in optimising an economy. Gold ostensibly removes this flexibility – and was therefore derided as a ‘barbarous relic’ by Keynes himself. In fact we agree that during certain periods of extreme economic imbalance, such as the Great Depression, substantial monetary flexibility may be required.

Most economists see the great problem of gold as twofold: 1) there is insufficient supply and 2) there is insufficient supply growth.

The first argument is spurious. The volume of gold is not important; instead it is the value that is ascribed to this gold that is important. A zero can easily be added to a paper bill to change its value; similarly it can be added to the value of an ounce of gold. Absolute values are in fact unimportant. As we have already asserted, gold is infinitely divisible. Does it matter that a paper bill is backed by a gram or a kilogram of gold? Theoretically it shouldn’t matter in our view.

The second argument, in addition to being fallacious, shows a certain lack of humility. In order to achieve reasonable price stability within a growing economy money supply also needs to grow. The critical question is, how fast. The rate is important, grow the money supply too quickly and inflation results, too slowly and deflation is the consequence (assuming money velocity is constant in both situations).

We believe there are two key elements which are needed to approach an appropriate rate of money supply growth.

The first: population growth – as the number of users of money changes, a money supply adjustment is needed to prevent the distortions in pricing that this would create.

The second: unleveraged productivity – an estimate of the increase in per capita productivity (or value creation) that a society experiences over time – without the assistance of credit growth.

We start by using general metrics for economic activity. There are several, including GDP and trade figures. The difficulty however is stripping out the impact of significant credit growth on these figures to get the genuine, unassisted, growth for a specific economy. For example, over the past 32 years real US GDP has averaged 2.7% (CAGR). Over the same time frame the US population has grown by 1.1% on average. On this basis   average US GDP growth after a population adjustment is around 1.6%. Of this rate, what has been the debt contribution to growth? If, to keep things simple, we assume that credit has contributed roughly 0.5% per year, this leaves an average 1.1% per annum increase in value or productivity for the US. For this reason we believe that humility is a necessity – there is considerable evidence to suggest that the impressive growth rates and productivity advances experienced over the past several decades have been temporarily boosted by the assumption of unprecedented quantities of debt, on a global level. Perhaps we are not the geniuses we think ourselves to be.

On this basis our expectation would be that the US would need to grow its monetary base by only about 2.2% or so. Long-term gold supply growth trends show a CAGR of 1.6%. While this is close to the necessary 2.2% rate needed to avoid deflationary pressure, it could still be asource of concern for those looking at gold as a viable currency alternative. However this need not invalidate gold as a preferred medium of exchange for while volume growth may remain a challenge, the exact value is still determinable by government – in fact periodic valuation adjustments for gold could conceivably be an ongoing option. Thus a low growth rate in gold volumes could be offset by a small revaluation of the metal itself, thereby preventing deflationary price pressure in an economy.

The problem with the above solution for gold’s apparent excessive scarcity is that it puts government monetary policy makers back in a position whereby they can misprice money with consequential capital distortions a possibility. This is something that market purists would rather not see, but may make a transition to gold more palatable for those accustomed to the flexibility that a fiat currency affords.

Why it probably won’t

While a gold standard could work, we remain sceptical that it will be considered (barring a serious financial crisis, perhaps associated with highly volatile inflation).

In large part we blame the low probability on culture. The world economy has, over the past century, morphed into a highly integrated, government dominated system guided by conventional wisdom (group think). The self-reliant, individualism of the free market has been left behind in favour of a ‘new age’ of coddled consumerism. Culturally this represents a very powerful force in our view, one which minimises creative options/solutions to economic impasses. On this basis we are cautious of predicting such a radical solution to monetary imbalances.

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The Alarmist's picture

Yeah, after the survivors come up out of their bunkers and start to clean up the smoking, radiating ruin that was western civilisation.

Flakmeister's picture

You may very well be right,,,,


Divided States of America's picture

It is but first we need to deal with all the 'gold' that is 90% filled by tungsten.

The Alarmist's picture

Hopefully the heat blast will take care of separating the metals.

Mae Kadoodie's picture

Tylers, is that a picture of the elusive Golden Turd?

iDealMeat's picture

Nothing can be used as any "standard" because everything is manipulated. All systems fail because those that build them exempt themselves from the rules governing them. 

Humanities past and future is to muddle through failure. It is our nature.



AldousHuxley's picture

REALITY CHECK: US is not going to pay China back with gold backed currency

The Alarmist's picture

I thnk the plan is to ship china gold in the circuitry of smart bombs and nukes when TSHTF.

SilverTree's picture

We never went off the gold standard.

Captain Planet's picture

Considering that .gov rhetoric is just that: rhetoric, I agree.

Gold is still money, eh? And every currency can find its price in gold. +1

To the not-so brilliant banker who wrote this: if supply is your obstacle, why not a gold and silver standard?

Add some copper coinage and some paper vouchers for iPhones, and we can have a truly capita-iCaste monetary system.

AlaricBalth's picture

Coincidently this was just posted on another site. Was going to rip it to shreds but figured there are numerous people here on ZH who are more well versed on the topic of gold than I am. The moment I read the author, David Burch, quote Paul Krugman I knew it would be ripe for the picking. So have at it ZHers.

"It's something we hear every time the Federal Reserve announces a new injection of money into the economy. Responses typically include anger about the devaluation of the dollar, but this is usually just a segue into a rant on the "stability" of relying on the gold standard.
If you ever hear this, it is a very reliable indication that the individual has no idea what they're talking about, is an idiot, or both.

Significant banking panics occurred in 1873, 1884, 1890, 1893, 1907, 1930, 1931, 1932, and 1933. What do all of these have in common? They all happened under the gold standard. Noted economist Irwin Stelzer elaborates the problem a bit, quoted in a BBC interview saying "picture this: if the amount of money you could issue depends on gold, and let's assume three major gold mines blow up like the coal mine did in Chile -- You wouldn't have any money around, or not enough. So I think it's a silly idea. The Wall Street Journal loves it, conservative economists love it, because they trust it more than they trust politicians."
There seems to be a popular misconception that gold's purchasing power is very stable, relative to the fiat money most mortals never think twice about. In reality, it's exactly the opposite.

Nobel Prize winning economist Paul Krugman sums up how an economy on the gold standard would have fared in the most recent financial crisis. "Faced with the kind of shock we’ve just experienced, the real price of gold would “want” to rise. But under a gold standard, the nominal price of gold would be fixed, so the only way that could happen would be through a fall in the general price level: deflation. So if we’d had a gold standard operating in this crisis, there would have been powerful deflationary forces at work; not exactly what the doctor ordered." "The truth is that returning to gold is an almost comically (and cosmically) bad idea."

AldousHuxley's picture



1875 = Rothschild and British PM Disraeli purchase majority shares Suez Canal - regional domination for decades.


1882 = Rothschild establishes first Jewish Colonies in Palestine. *(Full funding, supply, support for? decades) - 1924 = Rothschild establishes "Jewish Palestine Colonization Association" -- Enter Jewish Terrorist Groups - IRGUN, STERN


1930's = British build OIL - PIPELINE from - Kiruk, IRAQ -- to -- Haifa, PALESTINE/ISRAEL.


Great Britain dropping the gold standard in 1931

NOTHING happens by chance

flacon's picture

Did you know that the "Nobel Prize in Economics" is issued by a Swedish BANK?! No wonder they bestow these prizes on economists who think PRINTING MORE MONEY TO BAIL OUT THE BANKS is the answer:


The Nobel Memorial Prize in Economic Sciences, commonly referred to as the Nobel Prize in Economics, but officially the Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel (Swedish: Sveriges riksbanks pris i ekonomisk vetenskap till Alfred Nobels minne)

markmotive's picture

Gold price would need to get pretty high to make  this happen.

supermaxedout's picture

1930's = British build OIL - PIPELINE from - Kiruk, IRAQ -- to -- Haifa, PALESTINE/ISRAEL.

Thats very interesting. Now it should be obvious to everybody why the Brits and the US are so much engaged in Syria.  Such a pipeline has to cross Syrian territory.  This time the pipeline is not  planned to end in Haifa but at an harbour in Syria.

Israel has many problems. One of their biggest is the fossil energy supply.

The natural gas pipeline from Egypt is often interrupted and can not be regarded as a sure supply line anymore.  Israel claims to have its own huge natural gas field called Goliath. But there is trouble with this alternatives

a) the biggest chunk of the field does not belong to ISrael. It lies in front of Cyprus, Gaza, Turkey, Lebanon, Syria to. No peaceful coexistence of Israel at the moment in sight, nor a domination of the area via US and UK is in sight. That means the gas stays in the ground.

b) Big oil needs a pipeline from Kurdistan through Syri to bring their conquered oils to the markets. This would also ensure Israels supply. But in Syria the things do not go the way Big Oil and US/UK would like the things going to. The war in Syria can draw on for years with huge negative impact on the Syrians but without significant progress for Big Oil, US/UK.  The Syrian conflict is typical. Huge amounts of money, mercenaries, weapons are flooding the country. The origin of this deadly load does sit in the power centers of this world. The fighting is only then going to stop in case the powers behind this conflict find an agreement.  This is not in sight. So the alternative is that high level of fighting only stops when neither side can win anything anymore. Or in other words when Syria is complete rubbish and a territory of rivaling war lords.  Then the conflict runs on its own feet and needs much lesser supply and money and attention. But its a patt, a deadlock, a stalemate.

c) supply from Lybia which is for sure also planned to find its way to Israel is also not increasing. Has long not reached the level under Gadafi.  And this oil is badly needed in Europe due to the boycott against Irans oil industry.

So something has to give. Without additional oil supply (under tight US control) to the markets the time plays for Iran and against Israel and the US.  The Dollar hegemony of the financial markets is endangered which is needed to finance the US military whose prime job it is to secure the Dollar hegemony in natural resources, most important energy and metals.

So we are at present in some kind of end game. This makes it understandble that Israel is war mongering against Iran but this could also be a propaganda operation while another dirty trick is on the way.   Who knows.

But one things is clear. The US are going to loose a lot once the Dollar goes bust. But for Israel it would be much more dramatic because then the neccesety would arise to be in good terms with their sorrounding neighbours. The friends with the big sticks went home to care for their own problems. This makes it necessary that Israel manages to survive on its own. They can also do without doubt but it needs a long,long time. Generations.

Scalaris's picture

Purely coincidental, that Nathaniel Rothschild raised $2 billion for his investment vehicle 'Vallares', prior to installing ‘BP's’ Tony Hayward as a CEO, prior to buying 'Genel Energy', an oil producer in the Kurdistan region of Iraq with stakes in two producing fields, a major natural gas discovery and significant exploration acreage in Kurdistan.

Another pure coincidence, is the negotiations for percentage ownership, between Chinese military controlled company ‘Poly Energy’, and Nathan Rothschild's listed cash shell ‘Vallares’, for the control of one of the largest oil field in Kurdistan, Taq-Taq, one of the last elephant fields, with estimated reserves of approximately six billion barrels in the ground. These negotiations are based on the argument of Hayward and Rothschild offering ‘Sinopec’ a value proposition, by bringing world-class BP-style managerial and engineering depth to ‘Vallares/Genel’, which will in turn open opportunities for Sinopec, while the Chinese could easily put up the cash to acquire those other ‘Genel’ partners like ‘DNO’ and ‘Heritage’, and roll up the Kurdish fields into a nice-sized JV, to be overseen by Hayward.

The field is presently owned by Sinopec a Chinese state company and ‘Genel Energy’, a company owned by Mehmet Emin Karamehmet, one of the richest Turks in the world, whose assets, including Turkcell, the mobile operator, ‘Genel Energy’ - Northern Iraq's largest oil producer, ‘Baytur Construction’ with $1.5 billion in contracts, ‘Digiturk’ - Satellite TV, Show TV - Entertainment channel, ‘Aksam’ - Daily newspaper, ‘Geden Lines’ with 40 tanker ships and bulk carriers and power distribution and toll road operating companies, have been squeezed out of his control, by the current Turkish government, after he was sentenced to almost 12 years in jail for alleged fraud related to the collapse of ‘Pamukbank’, a bank he previously controlled, despite the overturn of his conviction, pending his retrial.

And as Hayward said last November, ‘Genel Energy’ is planning to build a $400 million oil pipeline to link its Taq-Taq oilfield with Iraq's export pipeline to Turkey's Mediterranean port of Ceyhan, hoping to start construction on the 400,000-barrel-per-day pipeline in the spring and finish by the second half of 2013.

The purest coincidence of all, is that around last year, US agreed to supply Turkey with three Super Cobra helicopters, to replace the helicopters it lost during its campaign against the PKK, as well as predator drones, to aid its fight against Kurdish rebels who have bases in Iraq.


Quinvarius's picture

Banking panics have nothing to do with being on or off a gold standard.   They are caused bank solvency issues, usually after the bankers extend way too much credit and use way too much leverage.  Adding banking panics to a gold standard argument is pure nonsense.  Fraud is fraud.  Failure is failure.  

Besides, I question the assumption that bank panics and bank failures are bad for the economy. If criminals and frauds are bailed out, they never go away.

The gold standard will always come back on its own.  It is up to governments if they wish to have the stabiity that comes with gold money.  If they don't, they can just reboot every 40 years and let their economies fail.  Money is what it is.  No amount of Krugspew is going to make paper money do anything but damage the economy or gold do anything but add stability.

economics9698's picture

I second that.  Banks like creating money out of their ass, and they do it, and when they do the panics follow.

Gavrikon's picture

Exactly.  Or banks issued so many bank notes they could not possibly redeem them in specie.  This equals a run on the bank.

SAT 800's picture

Merely propaganda and ignorance.

deflator's picture

  "..noted economist Irwin Steltzer..."

I think it should be "noted" that the Hudson institute is the epitome of the status quo of infinite government growth.

 Banking crises occur because banks issue(too many) more claims than reserves regardless of the monetary standard.

 As far as Krugmans, "missive" goes, this crises isn't out of the woods yet--it's just getting deeper because the whole world "has" been going along with bailing out the banks.

 The same dynamics of human greed will eventually overwhelm the system globally.

  Interesting that the article would cite both Irwin Steltzer(neo conservative) representative of the modern Republican party and Paul Krugman(progressive) of the modern Democrat party. What I find interesting is that both "intellectuals" are in such agreement in condemning sound money.

Revert_Back_to_1792_Act's picture

I like the first date you list 1873.  Please read this really old book and educate yourself.

The panics were caused by bad legislation.

It starts a little slow..but give him time.

Read the book, you are in for a big surprise.


NidStyles's picture

People that know very little or essentially nothing should not listen to Krugman. The man is a hypocritical moron and will say anithing if it ensures his position and easy life. He's a true to the breed Statist.


To add, had we been on a gold standard and not had a Fed, the monetary crisis and crash of 2007 would never have happened.

Thisson's picture

We need both sound money AND an end of fractional reserve banking.  It's the expansion of credit that leads to financial crises.  IF we switch to gold without limiting fractional reserve banking, we will still have crises.

NidStyles's picture

No we wouldn't. I would be fine.

Mr Lennon Hendrix's picture

'Tis true.

14k tonnes of gold sit as a reserve on the Fed's books for that reason.

Although the Fed can use gold as money, you may not.

So move along!

Al Gorerhythm's picture

You are correct and the price set is still $42.00 and change.

I can't see for the life of me why we have to keep harping back to a system that was open to manipulation. It was an arbitrary price anyway, which is manipulation in the first price. I keep thinking that a country's currency should be valued by the amount of gold and silver it has in circulation, as a competing currency in the hands of the people. A national capital based monetary system competing with a debt based bankers credit note. Crooked bankers open to balance sheet exposure would be a pleasent change, Barry. Not a bad measure of faith anf hope.

SAT 800's picture

You probably don't understand how hi-bypass ratio single shaft turbine engines operate, either; but for some reason you feel free to comment on the operation of the gold standard; it's a college level course. Why do you imagine you understand any part of it? You have no knowledge of what was open to manipulation, or not; or what that means; or how and why it can be eliminated; you know nothing. Why don't you write us a note about the thermodynamics of turbine engines?

Al Gorerhythm's picture

Sure. The turbine engine relies upon compression of gasses without the need of moving parts such as pistons. The turbine is used to transfer energy to a shaft as the gasses in the combustion chamber expand upon ignition of the fuel air mix. 

Other than your oxymoronic linking of the discussion of a gold standard to the by-pass ratio of a turbine engine, who the fuck made you the arbiter of who can pass comment on a given subject. I now know one more thing about you; you are a (edit) banker's apologist. 

So, write us a little note on the gold standard (pick any one) and how it worked out so well in the past. Not manipulated, eh? Ask Roosevelt about that, moron. Study the London gold pool manipulation for manipulation, under the management of experts (such as yourself no doubt).

What, did I mention something that upset you, like a reference to Barry?


Oh, and the gold standard is a college entry course!!! Wow! Say's it all. Where did you get your degree, Ha ha havaaad?  Maybe Ponceton? The Bernank needs you, give him a call.

Edit again. Further, the Treasury's book price of gold is $42.2222 / fine ounce. Are they negligent in their management responsibilities, or IS the real price  really $42.2222? Perhaps is it just something they overlooked, their day being absobed in tranny porn and all.. Perhaps you can drop a note to Timmy and get him to fix that for us. Shit, might even save us.

Boeing Boy's picture

What do you reckon about a "partial" gold standard in the future, paving the way for gold to become part of the resolution of the crisis?  Reading between the lines and the impressive argument set out by Tyler, this could have merit, a classic compromise politicians always seem to favour..

Al Gorerhythm's picture

Sorry about the short reply but my understanding of money is that I want to be assured that if I lend out my capital, I want a return of it, not some fractional representation of it. The fractional reserve is not a standard. Gold is a standard because it is a weight, a measure that is inelastic. It measures honesty in exchanges between credit note and capital holders. Because gold measures the worhiness of a promise, what's the problem with adding a few zeros to the gold exchange rate of dollars?

Compromise on gold's ability to make honest measures is a mistake, IMHO (if I'm allowed one, that is).

Boeing Boy's picture

I don't doubt you are correct, but having witnessed the totally unconnected (and totally erroneous) group-think, on behalf of western intelligence agencies in the run up to GulfWar2 I can't help but think that the same thing is going on here.  A bunch of Central Bankers all trained to think the same way all pushing in the opposite direction of a gold standard.  Here in the UK politicians bask in the independence of BoE and its ability to printprint print and devalue at whim.  Politicians, being power seekers and control freaks will surely never give up the degree of control required in a gold standard, unless of course we really are headed for the nuclear wasteland scenario?

Thisson's picture

Please understand that there is a difference between using gold as a medium of exchange and having a gold standard.  A gold standard implies the use of fiat currency, which puts the central authorities in a position to abuse the printing power.  Note, also, that if you don't limit the creation of credit by banks, you still have the effect of money printing (the credit issued spends just like currency).  We need both sound money and sound limits on banking to have a stable system.

Al Gorerhythm's picture

Which is the essence of my post above that SAT 800 attacked. ?

GoodMorningMr.VanRumpoy...'s picture

@ SliverTree

That will puzzle some and frighten others.

More right than many here will know or understand. But that type of knowledge is only for the select few insiders, and certain inexplicable unconnected individuals that have a "unique" ability

to figure out and learn things they shouldn't be able to.

GoodMorningMr.VanRumpoy...'s picture

Btw this site is crawling with the so-called "illuminated" ones.

Since day one I've seen you. Yes, I've seen your obvious direct references to me. I've seen much more...

I see YOU. No really I see YOU.

Understand it's not negligence, I chose not to hide myself. You're not surveilling me, I'm surveilling you.

Yes, I know the true meaning of what a "Tyler" is.

DosZap's picture

Yes, I know the true meaning of what a "Tyler" is.

You amigo are not alone,many here know now.

Bolweevil's picture

I am Tyler Duden's self inflicted gunshot wound to the face hole.

hmmtellmemore's picture

"That will puzzle some and frighten others."


What are you refering to?

HurricaneSeason's picture

Yeah, the standard is: If you can't see it, it ain't there.

Sheeple Shepard's picture

+1 for you

The elites have never left the gold standard, all they did was take the peasents off it by removing their ability to convert their currency into something of value. When you think about it it is genius, the serfs brake their backs for 50 years for what? Next weeks toilet paper.

economics9698's picture

The whole fucking idea of a gold standard is to neuter the governments ability to print.  Is this asshole a fucking banker?

Ignatius's picture

And the whole point of the Bill of Rights was to prevent government tyranny.  How's that one working out? Patriot Act, Military Commissions Act, NDAA, Drone Kills of U.S. citizens, loss of Habeas Corpus and torture, etc..

A gold exchange standard is the beginning of the con.  Spend fiat, save gold and invest in whatever floats yer boat.

AldousHuxley's picture

laws are deterrents and social guard rails.


murder is illegal but people still committ it for various reasons.


but you've got to be an idiot to buy a house with young children in a bad neighborhood with law breakers as neighbors.


same goes for citizens....time to move out of a country when laws signal direction of a country. You can't stop bad governments but you can relocate yourself to safety. Joos are smart because all the stupid ones died when hitler started to pass laws against them so only vigilant Joos escaped and survived.


US empire is crumbling and going to use her citizens to fight the wars. don't end up in a bodybag and be ready to move out. No flag,  king, president, land, culture is worth your life. NOT GOD SAVE THE QUEEN, FUCK THE QUEEN.

economics9698's picture

"FUCK THE QUEEN" I second that.

SAT 800's picture

Reality is a bitch. Darwin is a bitch. Darwinian Reality is a bitch. Fuck our Queen; that;s for sure.

Turin Turambar's picture

Fractional reserve banking is the con not the gold standard. 1 to 1 ratio eliminates the fraud and the bubbles. Statists don't like it because it handcuffs the spending. Oh yeah, the guy who wrote this is a complete dumbass, but I've wasted enough of my life's energies refuting these ridiculous monetary fallacies, so I'm not going to throw good time after bad. He should try reading some Rothbard to get a clue.

Ignatius's picture

The con was when the government called in all the gold in '33 (then defaulted on the rest of the world in '71). 

Governments will always break the faith if expedience demands it. Always. 

Full reserve lending is fine after the 'crack-up boom' if one desires an essentially sustainable, no-growth economy.  Otherwise, it would be hyper-deflationary if enacted now.

SAT 800's picture

If one desires? you mean if the central monetary authority desires a "no-growth" economy. News flash; we don't want or need a central monetary authority; and a no-growth economy is what you're going to get; so you better learn how to like it. All the propaganda about "growth" is just that; propaganda. You want employment? Shut off the ships from china. Why does China have most favored nation trade status? who signed that legislation? Bill Clinton. Who sponsored it? Corporate chieftans. We don't need anything from China; Americans can make shoes and underware and everything else; it's called industry. Study the real problem, understand the reality; there's no reason to enrich China except to make billions for Apple; and two dozen other international capitalists. The producer gets all the money and the consumer gets broke; this is called the industrial age; the little joke is there is no post-industrial age; this is it; this is all there is. When I graduated from high school it was illegal to import anything from China and Americans exported shoes to China. What happened? Crooked politicians sold your country out from under you in the pay of corporate chiefs. Start fighting the right battle. Shut off the Chinese Imports; a miracle will occur; employment; and an end to the balance of payments problem. The British ran the world by understanding this; the joke is there is no post-industrial economy; that was a propaganda line they fed you. Globalism means give all your money to China and become bankrupt. Shut off the shipping and watch China implode; it'll be amuzing.