The mainstream generally treats the gold standard as a bygone relic of a primitive past - something grandpa might remember fondly along with 5 cent eggs and walking to school uphill both ways.
A recent article in The Economist extolled the virtues of the gold standard and advises “make a strategic allocation to gold.”
"It’s the counterweight to paper money which is continuing to lose credibility as a store of value.”
Chirag Mehta tells the story of the gold standard through the eyes of his 82-year-old grandfather who points out the absurdity of the Federal Reserve printing trillions of dollars.
"They don’t really have the money, though, do they?” And so they are just going to print it, aren’t they? Out of nothing? Is there any real backing, like Gold in earlier days?”
“No,” Mehta answers.
But that’s not right, is it?”
Grandpa went on to insist that the Fed is “making a grave mistake” with its loose monetary policy and 24-7 dollar-printing, adding that “it is not going to work as it would not lead to real economic growth.”
This is exactly what Peter Schiff said in a recent podcast. Printing dollars and pumping money into the economy is nothing more than pumping in inflation. It’s not like the government is putting real products into the economy. It’s not creating wealth. It’s not adding resources. It’s not creating anything of value.
Well, if you just increase the supply of money, it doesn’t do anything to change the supply of goods and services. So now, when you divvy those goods and services up, you just have to assign a higher price to all of those goods and services so that the market clears. But nothing of real value is actually added.”
Grandpa goes on to explain the gold standard – that money used to be backed by physical metal. That put some restraint on the amount of currency the government could issue. Fractional reserve banking tore down some of those restraints, but today we have a pure fiat system. Currency has no intrinsic value. It’s really just a confidence game.
If too much money is created the public will lose confidence in its purchasing power and the perceived value of the money can collapse. Remember, fiat money has no intrinsic value; it only has perceived value. This is why most of the fiat currencies met with disaster if you look back in history.”
Today, the Federal Reserve is testing whether it can grow its “balance sheet tree” to the sky. This will lead to a devaluation of the dollar, grandpa says.
Our Government calls this ‘inflation,’ when in reality it’s devaluation. This devaluation will eventually lead to a loss of faith in the dollar and people will no more want to hold the fiat currency. As a result, people will want to convert their cash/wealth to something that they believe in, something that can protect their wealth with, something that has intrinsic value and that has proved its worth over decades.”
This is a mainstream article, so don’t expect to find a call to a return to a gold standard. But for something published by The Economist, the conclusion is still pretty radical. Gold should be viewed as a “monetary asset,” not a commodity.
Given the current economic backdrop, where governments are struggling with problems like rising deficits and unsustainable debts, it is indeed logical for gold prices to increase in value. With policymakers continuously debasing currencies, gold will be viewed as ‘the real liquid store of value’ investment, lending some calm to the chaos.”
Gold will likely continue increasing in value because it is the only currency with a highly constrained supply.
When a central bank increases their money supply, the price of other currencies adjusts upwards. This is true for all currencies including gold. Therefore, the one thing against which global currencies are truly perishing is the ultimate form of real monetary asset i.e. Gold.”