Would Gold Rise With a New Gold Standard?

There is always talk about a new gold standard coming within small circles.  But with the election of Trump and more focus on auditing the Federal Reserve, there is more talk than normal about the possible coming of a new gold standard.

The U.S. dollar has been the world’s reserve currency since at least the end of World War 2.  The dollar is a global currency.  It is used frequently in international trade.  Most importantly, it is used for trade in the oil market.  The Saudi’s use of the dollar is probably one of the main reasons that the U.S. government favors the House of Saud so heavily, despite its ties to terrorism.

As time goes on, the U.S. dollar will lose its status as the world’s reserve currency.  It is not because the yuan (China) or any other currency is going to replace it.  With globalism and today’s technology, there is just less of a need for a reserve currency.  The currency markets are digital and very liquid.  If some country wants to sell oil to Japan, they don’t need to get dollars.  They can easily accept yen and quickly convert them into their own currency, or whatever currency they want.

With massive worldwide debt (run up by national governments), and with major economic uncertainty, it is not out of the realm of possibility that gold will become something of a world currency again.  Of course, gold is already a reserve asset, as most major central banks hold a significant amount of gold.

While I don’t think the return of a gold standard (internationally, or by a national government) is imminent, I do think it is a possibility in the future.  There is already a wave of skepticism against central banks.  If there is a worldwide economic downturn and financial crisis that rivals 2008 (or worse), then public opinion can move quickly.

What would happen if the U.S. or some other major country were to adopt a gold standard?  What would happen if gold were used once again in international trade, basically taking the place of the U.S. dollar?

In the case of a national government adopting the gold standard, this would mean that a government-issued currency would be redeemable in gold.  It would mean that the government would have to store gold representing the currency in circulation.  This would severely limit its ability to issue new debt and engage in massive monetary inflation.

As a side note, in a true free market, the issue of money would be left for the market to decide.  People could use gold, silver, a basket of commodities, cryptocurrencies or any number of things.  History has shown that gold is the most favored commodity for use as a medium of exchange, closely followed by silver.  But in today’s world, it is doubtful that we would go straight to this step.  It would be more likely that we would have some kind of government-controlled gold standard.

If the U.S. adopted a gold standard, or if gold were widely used in international trade, it would drastically increase the demand for gold.  And as we know, there just isn’t that much of the yellow metal to go around in this world.

If every individual on this planet owned the same amount of the entire supply of gold that has ever been mined from the ground, then each person would get less than one ounce each.  In other words, if you own just one ounce of gold, then you own more than your share already if it were divided up equally on the planet.  This includes all of the gold held by central banks.

I believe that just the announcement of some kind of gold standard, whether by the U.S., China, or some other major country, would instantly send gold prices soaring.  Again, I don’t think this is likely in the near future, but I don’t discount something in the longer run.

If the U.S. were to back every dollar by the gold that is reportedly currently held by the central bank, then the price of gold would be multiples higher than it is currently.  Depending on the money supply used, estimates vary from $10,000 to $40,000 or more per ounce.

It is also possible that the U.S. or any other government could provide a partial backing of gold to its currency.  This would not be the first time.  Even a backing of less than 100% would still likely result in a big spike in the gold price.

The bottom line is that any serious announcement or consideration of a new gold standard, or the widespread use of gold in international trade, would lead to an increased value for gold.  You would want to own gold before any such announcement or event takes place.

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