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Create Your Own Gold Standard
At last week’s Freedom Fest in Las Vegas, about 2,000 attendees and most of the 150+ speakers favored a return to the gold standard. Gold’s leading standard bearer at this year’s Freedom Fest was the former Presidential candidate (and long-time magazine publisher) Steve Forbes, who just co-wrote a new book: “Money: How the Destruction of the Dollar Threatens the Global Economy.” The core of the book is an historical examination of the success of the gold standard, which reigned supreme for 180 years, vs. the destruction of the dollar’s value in the 43 years since Nixon took America totally off the gold standard.
Steve Forbes is a regular speaker at the Freedom Fest. In his various talks – including a guest shot on the “Stossel Show” on Fox Business News (airing this week), Forbes likened the gold standard to a system of unchanging weights and measures. What if an hour were 60 minutes today, 43 minutes tomorrow and 22 minutes next week? What if a foot were 12 inches today and 8 inches tomorrow? There would be no way to measure time or erect buildings. He argued that gold was the unchanging North Star of monetary value.
In a lighter touch, on Saturday night’s closing banquet, Forbes played the role of “Merlin the Magician” in a reenactment of portions of the Lerner & Loewe musical, “Camelot.” In various comic asides, Merlin (Steve) compared his magic medieval potions to how the Federal Reserve creates money out of thin air.
At Freedom Fest, Steve Forbes won the prestigious “Leonard Reed” award (named after the founder of the Foundation for Economic Education, or FEE) for writing the most freedom-oriented book of the year. Freedom Fest founder and producer Mark Skousen is also a fan of the gold standard. One of his many books is “The Economics of a Pure Gold Standard.” A frequent speaker at previous Freedom Fests is another former Presidential candidate, Dr. Ron Paul, who also favors a return to a 100% gold standard.
Elsewhere at Freedom Fest, there was a panel praising the virtues of Bitcoins as the new replacement currency to the U.S dollar, for purposes of privacy and sustained value, due to programmed scarcity. “The Future is Bitcoin” panel featured best-selling author George Gilder, the winner of the 2013 Leonard Read book award. However, these fans of electronic Bitcoins should agree that the perfect monetary system for privacy and sustained value has already been invented and is already honored by billions of people: Gold.
The Decline of the Dollar is (almost) Certain
In his opening talk at Freedom Fest, Steve Forbes played a song popular in 1971 to underline the fact that it has now been 43 years since the U.S. went off the gold standard. In those years, gold has risen from $35 per ounce to around $1330. The dollar has also declined in terms of the major European currencies – first to the German mark and Swiss franc in the 1970s and then with the Pan-European currency, the euro.
In his book, Forbes went back even further, to the birth of the Federal Reserve Act of 1913, which mandated that the Federal Reserve to provide America with an “elastic” currency, i.e., one which could expand or contract as the nation’s needs required. However, the word “elastic” implies stretching in and out. Mostly, the dollar’s elastic band has stretched further and further out, to the point where it has almost reached the snapping point. Specifically, the dollar has lost 98.4% of its purchasing power vs. gold since 1913, when gold was valued as legal tender at $20.67 per ounce, and the dollar has lost 97.4% of its purchasing power to gold since President Nixon closed the gold window on Sunday, August 15, 1971.
From 2001 to 2008, the U.S. dollar fell on a steep downward arc, pushing the price of gold up in U.S. dollar terms. Since 2008, the dollar has stabilized somewhat, but it is still edging down in terms of the euro and gold. Some days we see a “strong dollar” but that is usually a brief, unsustainable trend.
Over 2400 years ago, Aristotle spelled out the virtues of gold as a currency. His arguments still stand the test of time. He cited gold’s rarity, portability, immutability and resistance to corrosion. Aristotle said that gold is Durable, Portable, Divisible and Intrinsically Valuable. It is impossible to mass-produce gold. Established gold mines (like those in South Africa) are running dry. Finding new gold deposits has become increasingly difficult and politically unpopular, but it is still easy to print more paper money.
New Gold Supplies Continue to be Flat
Some of our Navellier Gold readers have reminded us that new deposits of gold are constantly being discovered, and new techniques for bringing gold out of the earth’s crust could create a gold “glut.” They point to the crude oil market, where fracking and horizontal drilling are creating an energy glut. Perhaps something like that could revolutionize the mining of gold to the point where we have too much gold.
While that is theoretically conceivable that gold’s price could eventually soar high enough (over $2,000) to make the world’s marginal deposits more profitable, the trend has been in the opposite direction – toward smaller deposits with much lower-grade ore, found in hard-to-reach corners of the globe, ruled by uncooperative or greedy despots who don’t think twice about nationalizing assets of a foreign corporation that dares to “exploit” the riches of their home nation. Gold is cleverly hidden throughout planet earth, in very small quantities – unlike oil or copper. Despite the rise in gold’s price since 2001, mining companies are still finding it harder and harder to make a profit finding and mining new gold supplies.
Vancouver-based mining analyst Lawrence Roulston has pointed out that the average gold grade in the 1960s was 12 grams per ton of ore. That dipped to four grams per ton in the 1990s and 1.5 grams per ton now. That’s a microscopic amount: There are a million grams in a metric ton (31.1 grams per Troy ounce and 32,150 Troy ounces per metric ton). At $1335 per ounce, a gram of gold is worth only $43. Roulston concluded that, “There is a shortage of deposits and grades are lower.” That’s one reason why gold mining stocks are performing so poorly, compared with gold bullion over the last five years or so.
Is There any Chance for a Return to a Gold Standard?
A return to a 100% gold standard (i.e. one U.S. dollar exchangeable for a fixed weight in gold on demand) is about as likely as Ron Paul or Steve Forbes being elected President. There is no way the “doves” at the Federal Reserve, the big spenders in Washington DC will accept the stern discipline of gold. A cold-turkey plunge into a pure gold standard now would likely cause severe deflation, unless the price of gold were set at an unsustainably high multiple of today’s price, say $8,000 per ounce or more.
More importantly, however, Americans are now free to create their own gold standard. Say gold is priced at $1330 per ounce. If you think there will less new gold mined this year (as a percentage increase in above-ground supply) than the percentage increase in the number of dollars available for circulation, then you exchange some of those weaker pieces of paper for something with a solid long-term record of value.
While many of the traditional “gold bugs” meeting in Las Vegas last week call for a return to the gold standard, don’t hold your breath for that minority position to sweep the nation any time soon. Any return to the gold standard would most likely be a desperate last-minute gesture if the dollar enters into free-fall.
Instead, private investors can create their own personal gold standard by owning gold. That takes the power of currency manipulation out of the hands of politicians. For gold to prevail, we do not need a return to an official (government-sponsored) gold standard, as in the years before 1934. When people own gold, they become the owners of the standard by which all paper currencies are eventually judged.