The New Case for Gold James Rickards
After two best sellers, Currency Wars and The Death of Money, Jim Rickards brings us another excellent analysis of the international monetary system this time by making an excellent case for gold. In Currency Wars Mr. Rickards looked at the first stage of the collapse of the international monetary system characterised by devaluation of currencies. Each country tries to gain a competitive advantage by devaluing its currency forcing the other countries to devalue until the whole monetary system collapses. By devaluing their currencies countries try to steal growth from their trading partners.
This leads to a financial crisis and the collapse of the international monetary system which already happened three times in the past hundred years in 1914, 1939 and 1971. In The Death of Money Mr. Rickards says that money is transitory and ephemeral and it may soon be worthless if central bankers and politicians continue on their current path. But true wealth like gold is permanent and tangible and it has real value worldwide.
In The New Case for Gold Jim Rickards starts by demolishing common arguments against gold. One of them being that there is not enough gold to support finance and commerce. This is an argument that I get the most every time I mention a return to the true unadulterated gold standard. A conservative estimate gives an amount of 183,600 tonnes of above ground gold stock of which official gold reserves represent 32,813 tonnes so around 17.87 percent of above ground stock of gold. The annual gold production growth follows world population growth very closely. As you can see in the charts bellow population growth has been recently around 1.2 and gold production 1.7 percent.
US monetary base on the other hand had an annual growth of approximately 22.5 percent just in the last 5 years. And this is only for the United States. If we return to some form of gold standard the gold price will have to be adjusted at approximately $5,000 if we take 40 percent of the monetary base or slightly above $10,000 if we choose 100 percent of monetary base as you can see in Nick Laird’s chart bellow of the monetary base by capita (www.sharelynx.com).
There are several measurements of money supply (M3, M2, M1, M0). M0 is the narrowest consisting of bank reserves and currency. M0 is also called base money. However, Mr. Rickards calls gold “M-Subzero” because even if economists don’t recognize it, it is the real base money behind the paper money supply. There is always enough gold for a gold standard as long as you specify a stable and noninflationary price for gold. Every time a gold or a bimetallism (gold and silver) standard failed it was because of an unrealistic fix between fiat and gold or between gold and silver.
Gold is constant says Mr. Rickards. It is not gold that fluctuates but rather fiat currencies like the US dollar. He says to think instead of “gold as a constant unit of measurement, what economists and mathematicians call a numéraire or counting device.” He concurs here with Roy W. Jastram who called gold a constant in his book published in 1977 The Golden Constant. Bellow is a chart updated by Nick Laird of gold adjusted for inflation since 1560 created by Roy Jastram. Even if not a perfect constant in the mathematical sense we can see that gold has remained in time relatively constant. Roy Jastram himself remarked that there is no intent to define “constant” in the scientific sense of a mathematical parameter. Mr. Rickards recommends to think about the quantity of gold by weight, not dollar price.
Gold, says Mr. Rickards, is an insurance against the enormous debt accumulated by the US. He explains very well how gold will protect you against both the inflation and deflation scenarios.
Jim Rickards also covers the topics of complexity of the markets, gold price manipulation and the war on cash in very simple terms. He is an exceptional analyst that can make sense out of a complex financial world and explain it in laymen terns.
Gold is money, he says, and understanding gold provides a framework of reference for understanding the future of the international monetary system. “The world is already on a shadow gold standard and is moving back to a more formal gold standard treating gold as money”, Mr. Rickards says. “Countries around the world are acquiring gold at an accelerated rate in order to diversify their reserve positions. This trend, combined with the huge reserves held by the U.S., Eurozone and the IMF amount to a shadow gold standard.”
Depending on how the present dollar based international monetary system ends, collapse and chaos or consensus at the global level, will determine what will come out of the reset. In a chapter he wrote in a book edited by Sara Eisen, Currencies after the Crash, Mr. Rickards ends by saying that “when all else fails, possibly including a new SDR plan, gold is always waiting in the wings as a stable, widely accepted store of value and universal money”. Gold and the SDR are the two most likely outcomes he says also in The New Case for Gold.
Jim Rickards makes an outstanding case for gold in a very easy to read and understand book and to my surprise in less then two hundred pages. If you want to understand gold and its role in the future international monetary system after the reset you should read this book and also his two previous books, Currency Wars and The Death of Money, if you haven’t done it yet.