The truth about a gold standard for global currencies

I can't tell you the number of really smart people I know who just don't get the fact that not only is a gold standard possible, some form or fashion of it is actually the most likely eventual outcome.  We have a corrupt global money supply consisting of debt based money along with a corrupt global banking system which is also bankrupt.  It cannot be saved.  It will collapse.  Something must be ready to replace it and it must be something that people can have real confidence it.  Period. Nothing less will be acceptable to those who will lose everything while just being told to start over again from scratch.  They might indeed start over if they were convinced that they would not get screwed by the moneymen again.  But nobody is going to agree to anything without some strong assurances at a time when governments have lost the confidence of the people.  Gold is the only thing that will satisfy this need.

What throws people off the gold standard trail every time is the high price of a 1 Troy Oz. gold coin which currently goes for about $1680 on Monex.com.  The naysayers look at average people and know that they cannot afford to buy very many oz of gold and thus the gold standard is unworkable.  Plus, who buys $1600 items with any regularity?  Very few, that's who.  I've explained to these folks that most transactions will take place for far less than one oz of gold and that all you have to do is create electronic (or paper) "shares" that, as a whole, match up to whatever amount of gold weight is available in the economy at some ratio paper currency units to oz of gold. 

In other words, 10 measly lbs of gold could easily back the entire world's paper currency supply if you set the ratio of real money (gold) to Cheerios box top coupon money (Dollars, Euros, Yen, Rubles, Lire, Francs, etc.) low enough.  For example, if 1 USD were backed by 1 trillionth of an oz of gold then 1 trillion dollars could exist for every oz of gold owned by the US government.  Yes, it really is that simple!  And it would also be a significant upgrade from what we have today which is a fraudulent money supply that is worth literally nothing: 1 trillionth of an Oz of gold per paper currency unit is infinitely better than zero Oz, would you not agree?

Of course, the risk with the use of such small numbers is that gold miners can scrape the gold traces off of their shovels and become millionaires.  A ratio must be picked such that gold miners cannot change the supply dramatically each year.  This is actually quite an easy number to select because the US is supposed to have 8133.5 metric tonnes of gold in its back pocket (2010 figure).  So all you have to do is to determine the number of physical dollars that government wants circulating in the economy and add it to the existing debt on the books and then divide the gold weight by that sum.  Given the amount of debt that needs to be paid back (you would want enough money in the economy to actually pay all debts, public and private, should the desire to do so arise).  It would probably come out to $10,000-$15,000 per Troy Oz. 

If the government is lying about owning that much gold, the dollar price per Oz could be much higher.  At the end of the day, it doesn't really matter what the price of gold is because everything else will adjust in price automatically.  If gold becomes 5x more expensive in dollar terms, expect gas, food, energy, health care and eventually salaries to follow suit.  Ever been to Japan or Taiwan?  Stuff in their markets always costs thousands of Yen and NT respectively.  The price of items will adjust automatically based on how diluted the currency is relative to production.  The absolute numbers are immaterial; actual purchasing power is what determines whether or not you are wealthy.  1 USD=1165 Korean Won.  Does it bother you if lunch costs 5 thousand Won?  It shouldn't because your salary will be a large number of Won as well. 

To underscore my point, please consider that Switzerland is now discussing a new "gold" coin that would be a parallel currency to the Swiss Franc which it seems to be selling down the river by tying it to the dying Euro.  Of course, the Franc is just fiat currency and therefore has an intrinsic worth of zero.  Eventually it will be worth exactly that and the quicker the people are given better alternatives, the quicker they will abandon the money that is worth nothing and which is tied to the dying Euro in favor of currency that has at least calculable and historical value based upon some guaranteed content of real gold.

So how are they doing this?  Backing a paper note with some known quantity of real, existing gold is one thing.  But then you have to trust whoever is auditing the gold and trust in governments is running very short these days.  You could also issue pure gold coins of very small size but who wants to deal with gold coins the size of a shirt button or even the size of a grain of rice?  The answer is beyond simple: you don't have to.  Simply mix a known quantity of gold into a big vat with a known quantity of lesser metals at some known ratio and use this diluted mixture to stamp out coins from.

And so that is what the Swiss are considering.  Read for yourself!.  As to the dilution level, the article states, "A single new gold franc, on the other hand -- with a gold content of 0.1 grams -- could be purchased for just 5 francs (at current prices), which would, in theory, make the metal more widely owned throughout the population. That could lead it to become a medium of exchange as is the case in several U.S. states, where gold has become legal tender."  Since 5 Swiss Francs currently trade for about 5.25 USD, the new coins would value 1/10th of a gram of gold at $5.25.  1 gram of gold therefore would be worth $52.20.  Since there are 31.103 grams in a Troy Oz, this new coin would value 1 Troy Oz of pure gold at $52.20*31.103 or $1632.91.  The fact that this is a few percent cheaper than the price of a pure gold coin today would make such coins a very popular option for initial introduction. 

But more importantly, gold-content coins do not require anyone to trust the government.  It would be ridiculously easy to audit coins in the money supply without the government's knowledge or blessing.  If you ever found them cheating on their promise you could sue them or simply write them off as not serious about supporting honest money.  The fact that you actually have the gold in your hand means you don't have to take government's word for anything.

At the end of the day, people are going to find that gold-content coins and audited gold standards for paper money are not only not impossible, they will instead become the savior of the global economy.  Or maybe there will be world war 3 first and THEN gold becomes money again in the aftermath.  But sooner or later, expect gold to be part of the money supply because, as JP Morgan once said, "Gold is money and everything else is not".