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(re)adopting the gold standard?

Finally I am getting around to post my two tidbits about the video which you can find right here from yahoo finance about Utah being one step closer to (re)adopting the gold standard.

As it turns out – once you watch the video – Utah has recently decided that if someone wants to pay for something using gold rather than US dollars they can do so.  Of course this is still a long-shot as far as getting back to the actual gold-standard, and to be honest with you, the title of this post itself is a little bit mis-leading.

What’s a gold standard?  To put it in simple terms, it simply means that a given currency is backed by the amount of physical gold that a given government is holding in their coffers.  It does not mean that everyone will be able to carry gold coins 🙂

I personally do not think that there will be such a thing as a gold-standard (or a silver-standard) ever.  The reason for that is because the amount of US dollars floating around are so astronomical that in order to sustain the value of the US dollar, the US government would have to a) get its hands on an astronomical amount of gold and b) this gold would have to be devalued to way beyond its current area of $1500USD.

A silver standard is a little bit more feasible than the gold-standard but it is also considered a precious metal and therefore it might be too “risky” by conventional standards to actually have a currency based on that.  It is a great (alongside with gold – but with more swings) investment / safety vehicle but not “stable” enough by current standards to be considered a good enough standard to back a nation’s currency.

As of now, the US dollar is backed by the stock market – which in theory makes sense – why?  Because in its purest form, the strength of the stock market should be directly proportional to the economic output of a given country.  The more a country produces, the more it exports goods filling the need of other countries, the stronger its production output, the higher the companies are valued resulting in the stock market increasing which should result in a strong US dollar.  The problem with this scheme however is that productivity is very prone to manipulation.  As we have all seen, the stock market movers a lot of the time tend to make a “quick” buck by speculating and acting very much on human sentiment and emotions – the internet dot-com bubble, the real-estate bubble for example, where company prices on the stock market were hyper-inflated to degrees which had nothing to do with the country’s productivity and a lot to do with making money to a selected group of insiders.  On top of that, the introduction of derivatives (essentially mathematical formulas predicting how a certain sector or sectors will do as a result of the increase in stock of some other somewhat related securities – something which nobody can accurately predict) has introduced an incredible amount of risk into the stock-market itself, further skewing the true output of the American economy.  Essentially, what we have now is the US stock market being driven in large by human emotions – the least stable factor on this planet.

So what is going to happen?  Something, somewhere, someplace always results in a balance.  As of now, the US dollar’s value is kept at its existing valuation in a synthetic manner.  The US government has a deficit of trillions of dollars – i.e. the country’s economic output is not proportional to the amount of dollars floating out there.  Further, the US’s debt is held in a massive part by China (amongst others) which essentially owns the American debt to a large degree.  This is a keen to you defaulting on your mortgage and / or other debt payments and having your creditors (such as the bank in the mortgage case) essentially saying “your house is now ours”.  Not a good position to be in.

A partial solution to this dilemma would be to back the US dollar by something tangible.  One of the best tangible assets would be a natural resource – not a precious metal, but something which is common all around, there is plenty of it and is also useful in industrial processing.  What could that be?  Copper would be a decent resource to back US dollars with I think.  Back in the 80’s when I was growing up in Italy, some – if not all – Italian paper currency had a thin strip of copper embedded in the paper money, representing the direct value of the amount the Lira was imprinted with.

There is plenty of copper in the world, and more than likely it is not a natural resource which will run out any time soon, as it is also a very recyclable material.

On a side note, Utah, is not the only US state to adopt gold as a possible currency – other US states adopting similar resolutions are (Click on the bill names to view the details):

Interestingly enough, the Washington State House Memorial actually called for the dissolution of the Federal Reserve and instead accept gold and silver as legal tenders due to the fact that the original dollar was supposed to be a silver coin and not a piece of paper.

These are pretty interesting times we are living on – but whatever times we live on, opportunities to make a profit are always there.

M

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About Michael W.

Project Manager for a large financial services company. Non-denominational closet investor. Entrepreneur running a small shop with a big idea

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