A reader recently asked about a gold revaluation:
Does revaluing gold to $10k usd with all the major countries make sense?
The US government wants the usd to remain the world’s reserve currency, but it has a very high government debt to GDP ratio. Historically, nations with a >90% ratio end up collapsing. If all the major currencies devalued, would that actually reduce the US government debt:GDP ratio?
This idea of a gold revaluation to $10,000 is a thesis put forward by best-selling author and Pentagon insider Jim Rickards. You can read a full explanation of the idea here. But here is a summary of his theory:
– Trump could be planning a radical reboot of the US dollar.
– The currency reboot will see leading nations devalue their currencies against gold.
– The new gold price would be nearly 8 times higher at $10,000 per ounce.
– The price will be based on mass exit of foreign governments and investors from the US dollar.
– Total US debt is now over $80 trillion – $20 trillion national debt and $60 trillion consumer debt.
– Monetary reboots or currency devaluations are seen frequently, even in modern history.
– Buy gold and silver coins, including monster boxes and gold bars.
– Have a 10% allocation to gold, and a smaller allocation to silver.
This has actually happened in the US twice in the past 80 years. Rickards explains:
The first time was in 1933 when President Franklin Roosevelt ordered an increase in the gold price from $20.67 per ounce to $35.00 per ounce, nearly a 75% rise in the dollar price of gold.
He did this to break the deflation of the Great Depression, and it worked. The economy grew strongly from 1934-36.
The second time was in the 1970s when Nixon ended the conversion of dollars into gold by U.S. trading partners. Nixon did not want inflation, but he got it.
Gold went from $35 per ounce to $800 per ounce in less than nine years, a 2,200% increase. U.S. dollar inflation was over 50% from 1977-1981. The value of the dollar was cut in half in those five years.
History shows that raising the dollar price of gold is the quickest way to cause general inflation. If the markets don’t do it, the government can. It works every time.
It’s likely that the US GDP would go up as a result. Because it would be measured in the “New Dollar”. So it would seem like US exports would have gone up because in dollar terms they would have, as a result of the instant inflation and prices of everyday goods increasing. But cunningly while they’d be repaying their debts in new devalued dollars, the total debts owed would still be in “old dollars”.
Let’s use some example numbers to make it clearer. Let’s say Government debt was $20 trillion and GDP was $18 trillion. So debt to GDP ratio is 111%.
The US dollar was devalued against gold by let’s say 5 to 1.
Now government debt remains $20 trillion. But we have instant inflation of let’s say 100%. So GDP might therefore be $36 trillion.
Now the debt to GDP ratio is just 55%. So under a gold revaluation the Debt to GDP ratio might actually be reduced quite rapidly. Putting the government books in a better position.
The $10,000 per ounce gold price is based upon a ratio of physical gold to printed money. The amount of physical gold doesn’t go up very much, but printed money goes up a lot over time, so the dollar target goes up more over time because of all the money printing.
It’s not made up. It’s the implied non-deflationary price of gold. Everyone says you can’t have a gold standard, because there’s not enough gold. There’s always enough gold, you just have to get the price right.
That was the mistake made by Churchill in 1925 [GSG: when he returned the British Empire to the gold standard at the same price after WWI causing deflation. Even though a whole lot of money had been created to fund the war] The world is not going to repeat that mistake.
…The analytical question is, you can have a gold standard if you get the price right; what is the non-deflationary price? What price would gold have to be in order to support global trade and commerce, and bank balance sheets, without reducing the money supply? [GSG: such as happened after WWI]
The answer is, $10,000 an ounce. The math is where I use M1, based on my judgment. You can pick another measure if you choose (there are different measures of money supply). I use 40 percent backing. A lot of people don’t agree with that. The Austrians say it’s got to be 100 percent. Historically, it’s been as low as 20 percent, so 40 percent is my number.
If you take the global M1 of the major economies, times 40 percent, and divide that by the amount of official gold in the world, the answer is approximately $10,000 an ounce.
Now, if you go to 100 percent, using M1, you’re going to get $25,000 an ounce. If you use M2 at 100 percent, you’re going to get $50,000 an ounce.
If you use 20 percent backing with M1, you’re going to get $5,000 an ounce.
All those numbers are going to be different based on the inputs, but just to state my inputs, I’m using global major economy M1, 40 percent backing, and official gold supply of about 35,000 tons. Change the input, you’ll change the output, but there’s no mystery. It’s not a made-up number. The math is eighth grade math, it’s not calculus.
It likely makes sense from the point of view of those with the debt!
That is the US government and most western governments too for that matter. A gold revaluation, as our reader points out, is actually a currency devaluation.
Thereby enabling the debtor to repay the creditor in devalued currency units. So yes the debtors (in this case the governments) debt load is effectively lessened.
This may be useful to the indebted government, helping them to restructure their finances and repay their past debts with devalued currency.
However this gold revaluation is likely not very helpful to the average citizen who would likely be taken by surprise. As a result the purchasing power of their everyday currency would be dramatically damaged overnight. So their cost of living would go up dramatically. There would be instant inflation. Good for government debts. Bad for the average working man or woman.
Unless of course they had tangible assets such as gold and silver, land, art etc to help “store value”.
It depends on who you are – and how prepared you are! If you own gold and silver and other tangible assets, these should protect your purchasing power in a currency devaluation – a.k.a. a gold revaluation. But cash in the bank certainly won’t.
The monetary system is so out of balance that it will require restructuring and rebalancing.
Check out this article to learn why the monetary system is so out of balance: The gold standard | Generator and protector of jobs>>
This restructuring would need to occur either before some kind of collapse (to avoid it) or after (to get out of it). Or perhaps we will have a different system altogether.
Read this article to see how a currency revaluation might work out for New Zealand: If the US Dollar Was Again Linked to Gold, How Would This Affect New Zealand?>>