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Gold Up; How About a Gold Standard?

blog4The price of gold vaults upward, surpassing predictions and hits $1000 per ounce this week.  Not surprising, given consumers and investors concerns about the stability of the American dollar.  The value of gold always flies in the opposite direction of the dollar’s value.  That is, if investors think the dollar is going up, the value of gold drops in proportion.  If investors are worried about the dollar holding value, the price of gold goes up.

And every so often, we hear some naysayer suggest that what is truly needed is a return to the “gold standard” of yesteryear.  What is a gold standard?

A gold standard is a monetary system in which the regions common media of exchange (we’ll use the dollar as our example today) is a paper note that is freely, normally convertible to pre-set, fixed quantities of gold.  The gold standard is not in use by any government currently, having been replaced by currency.  (Although there are occasional, rare private currencies backed by gold.)

Every once in awhile, when financial concerns are weighing heavily, someone suggests that “all would be right if we would just return to the gold standard.”   We suggest that is probably not a likely scenario.

Why?  Let me offer you a few of the disadvantages of a gold standard system.

* The total amount of gold ever mined is believed to be in the amount of 142,000 tonnes.  Assuming a gold price of $1000 per ounce (which is sorta handy, at the moment!) that would bring a value of about $4.5 Trillion.  There is more American currency circulating than that, currently, so using a gold standard might be a little embarrassing.

* Most mainstream economists believe that adding currency to troubled economies helps.  If we relied on the gold standard, that would be impossible.

* Monetary policy and politics would be determined by gold production.  Do you really want mining companies running world politics?

The advantage: we might all feel more confident in the government, which is good at times of economic uncertainly like what we are facing, but in fact our government needs more freedom to operate in the face of such difficulties than a gold standard would induce.

Gold standard: the name sounds good, but the prospects aren’t likely or likeable in the long-term.

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