Excellent questions from our readers keep on coming. A while back we received a question asking how a new gold standard might affect New Zealand. Given New Zealand doesn’t have any gold reserves:
Jim Rickards is predicting that as early as January 2018 Donald Trump will devalue the usd and peg it to gold at $10,000usd. I think Jan 2018 is too early, but you never know..
My question is, if that were to happen, would NZ be able to do the same even when we don’t have any gold reserves?
Thanks very much
Another reader asked a similar question:
What is the likely impact on the NZ economy of a USD step by step fall – eventually a dissolution and replacement by the (partially Gold backed?) SDR? (Given that I understand NZ has NO Gold reserves) So we’d be at the mercy of Central Banks….has this been covered?
Then recently someone else posed this related question to us:
Many had speculated that we were heading towards the reinstatement of the gold standard at one stage. While this seems highly unlikely to happen, what would be the actual implications on price, availability, production etc if the world did return to a gold standard?
I haven’t seen anyone explain it with any clarity.
Table of Contents
- How Would a New Gold Standard Come into Being?
- If the World Did Return to a Gold Standard, How Would This Affect Price, Availability and Production of Gold?
- Here’s Why New Zealand Couldn’t Peg It’s Dollar to Gold
- How Likely is the US Dollar to Remain the Global Reserve Currency?
- What Else Might the Future Monetary System Look Like?
- The Answer: Create Your Own Gold Standard
Estimated reading time: 10 minutes
How Would a New Gold Standard Come into Being?
Putting out a specific date is a pretty bold call. We hadn’t seen this specific prediction of Rickards, or at least hadn’t seen the date of January 2018. If we wanted to be cynical, this could be a bit of marketing spin. By placing a date in the near future to create a sense of urgency and encourage people to sign up to his subscription newsletter perhaps?
Of course, January 2018 has been and gone and this didn’t happen. But that doesn’t mean a return to some kind of gold backed monetary system is out of the question.
From recall Rickards has talked about $10,000 being the level gold would need to reach to have anything resembling a gold standard:
“I’m not saying that we will have a gold standard. I’m saying if you have anything like a gold standard, it will be critical to get the price right. To this regard, Paul Volcker said the same thing.”
Now, let’s think this through.
If this came to pass the US dollar would be linked to gold at the rate of $10,000 USD per ounce. Here’s how Rickards arrives at this figure:
“That eye-popping sum [$10,000] “is not a made up number,” Rickards insisted. “It is the implied non-deflationary price,” he reasoned. Rickards referred to “M1,” the base money supply printed by the Federal Reserve plus active checking accounts. The value of M1 is derived in large part from the value of gold and represents the day-to-day money supply that people can use to spend.”Global M1 has about 40 percent gold backing. There’s about 35,000 tons of official gold on the world. That comes out to about $10,000 an ounce to use gold to create confidence in the dollar,” explained Rickards. “The dollar price of gold moves around, but gold itself stays constant.”
So the non deflationary price simply means ensuring gold is not linked at too low of a price in dollars. Such as what occurred in the UK after WWI. Back then Churchill returned the UK to a gold standard at the same price as it was pre-war, causing deflation.
A New Bretton Woods?
If the US dollar was linked to gold, and assuming no other changes to the global monetary system, then that is basically a return to the Bretton Woods system of 1944. Where the US dollar was tied to gold and all other currencies were tied to the USD.
Bretton Woods relied upon the USA keeping the dollar “good as gold” – which of course they didn’t.
Indirectly other currencies would therefore have a fixed gold value due to their link to the US dollar.
Under Bretton Woods:
“Other currencies could devalue against the dollar, and therefore against gold, if they received permission from the International Monetary Fund (IMF). However, the dollar could not devalue, at least in theory. It was the keystone of the entire system — intended to be permanently anchored to gold.”
Or a Gold Backed SDR?
Or perhaps as our 2nd reader puts it we will see a partially gold backed IMF Special Drawing Right (SDR) taking over from the US dollar at the top of the global monetary system. More on that below…
If the World Did Return to a Gold Standard, How Would This Affect Price, Availability and Production of Gold?
Now onto our third question…
What would be the implications on price, availability, production etc if the world did return to a gold standard?
Gold Price is Currently Too Low For a Return to a Gold Standard
We’ve already outlined why gold would have to reach at least US$10,000 per ounce to return to a gold standard.
This could happen gradually or the gold price could be adjusted suddenly overnight. Either way, the gold price would have to be set a lot higher before any new gold standard could be implemented. As currently the price is too low, given the amount of gold in the world compared to the amount of fiat currency.
How Would a Return to a Gold Standard Affect Availability and Production?
As for availability and production. The odds are neither of these would be greatly that affected. Why?
Because there is so much gold available above ground currently. That is the very factor that has made gold money for thousands of years. While gold is somewhat scarce in the ground, just about all the gold ever mined still exists.
Unlike other commodities where the supply varies year to year according to things such as weather or increased demand, gold is not “used up”. It has limited industrial uses.
This is what is called a high stocks to flow ratio. You may want to read more about that here: Why Gold is More Valuable Than Worthless Paper
Or a full explanation of stocks to flow by Ronni Stoeferle here.
But to summarise there would not be much change in gold supply/availability because it is so difficult to increase production from the gold mining. While there has been improved technology to get gold out of the ground this has merely kept up with the fact it is harder to find.
So overall the main change in a move to a new gold standard would simply be price. It would have to be much higher, because the supply is not likely to change very much.
Here’s Why New Zealand Couldn’t Peg It’s Dollar to Gold
Whether we see a return to a gold backed US Dollar or a gold backed SDR, either way the impact on New Zealand is likely to be similar…
The US treasury (supposedly anyway) has around 8000 tonnes of gold, still more than any other individual nation, although China is likely catching up fast.
So if the US dollar were linked to gold, New Zealand couldn’t peg its dollar to gold. Because unlike the US there is nothing to back this change with. See this article on New Zealand’s lack of gold reserves.
However if this new gold standard followed the Bretton Woods system, then the New Zealand dollar would be indirectly backed by gold again due to its link to the USD dollar.
But bear in mind that, given the US dollar would have been devalued significantly to link gold at US$10,000 per ounce, the same thing would need to happen to the NZ dollar. At current exchange rates gold in NZ dollars would be revalued to $13,800 per ounce.
Of course, the exchange rate would depend upon how the New Zealand economy was performing compared to the USA, what interest rates were etc. But the question would not be if there was a devaluation, but rather how large it would be.
This ‘New Bretton Woods”would of course require the USD remaining the global reserve currency.
How Likely is the US Dollar to Remain the Global Reserve Currency?
We think it seems not particularly likely.
Because the US dollars position on the throne is slowly but surely being eroded. The likes of Russia and China are none too impressed with the USA’s “exorbitant privilege” as the global reserve currency. Seen as effectively being able to print money to fund its ever growing debts.
Also at Bretton Woods in 1944 the USA had almost all the gold and therefore got to set all the rules. Times are quite different today, with China and Russia having added to their stockpiles in recent years.
The other angle is that this East versus West financial battle is all part of an elaborate facade to move the planet towards a global SDR currency. Much as our reader points out in his more recent question.
In a centrally planned world we would likely end up with a basket of currencies making up the global reserve currency, likely with some gold backing too.
See this article for more on the SDR, China and global monetary system changes: China Joins the SDR Old Boys Club. What’s the Significance?
What Else Might the Future Monetary System Look Like?
Our preferred option remains a decentralised free market for money. Where people would decide how they wish to transact with each other.
See this past article for more on what is a very foreign concept for most people.
The Answer: Create Your Own Gold Standard
We don’t know what the future will hold. We don’t know what the monetary system will look like, but odds are that in the next decade it will have undergone some serious change.
There are a lot of technological changes going on currently. But gold is the only currency that has stood the test of time for Millenia. Gold will likely still be around and of value (and likely more valuable than today) in 10 years time.
So it seems like a good idea to create your own gold (and silver) standard. Become your own central bank and start your own gold (and silver) reserves.
To learn more about the role gold may play in the global monetary system check out this article: If/When the US Dollar Collapses, What Will Gold be Priced in? >>
Editors Note: This article was first published on 2 August 2017. Last updated 9 February 2021 to include new information on the SDR, plus how price, availability and production would be affect, along with an updated exchange rate for NZD gold price.