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Tom’s Opinion: The Gold Standard — Still A Bad Idea

HANGZHOU, CHINA – AUGUST 23: (CHINA OUT) An employee shows a golden panda ingot at a gold store on August 23, 2011 in Hangzhou, Zhejiang Province of China. Gold advanced to an all-time high above $1,910 as investors sought to protect their wealth against financial turmoil amid speculation that the global economy is slowing. (Photo by ChinaFotoPress/Getty Images)

The Gold Standard is a monetary system that values the dollar to a fixed amount of gold. The United States has used either gold or silver, or both, to back up the value of the dollar since the 1800’s. However in recent years the way money is valued or devalued across the globe has changed. Backing up dollars with gold in today’s global economy is an outdated idea, which is why no other country on the planet backs their currencies with precious metals.

 “Gold is just an old fashioned form of money.  Using gold to back up money is like using old poker chips to back up new ones.”— Dr. Rick Boettger.

“The Cross of Gold” Speech

On July 9, 1896, William Jennings Bryan (D-NE) gave one of the greatest political speeches in American history. In his speech he rejected the gold standard by saying, “you shall not crucify mankind upon a cross of gold.” Bryan felt that the future of America was in bimetallism otherwise known as “free silver.” The speech catapulted him to the Democrat Parties nomination for president. He was unsuccessful and William McKinley defeated Bryan in the presidential election.

What’s Wrong With The Gold Standard?

Shouldn’t the dollar be backed by more than just an IOU? As my good friend Mike McCormick says, “I like a currency that’s backed by the US Navy.” And I tend to agree with Mike on that one. But here are some other concerns I have about going back on the gold standard.

  • Would you feel comfortable relying on Russia and South Africa, the leading gold producers, to supply the US with gold for it’s growing economy? I don’t think I would.
  • We’ve witnessed vast corruption in many countries around the world. Would it stand to reason that international politics, subterfuge and blackmail might be possible risks to a gold backed US dollar?
  • I’m not a particular fan of everything the Federal Reserve does, but I have far more confidence in them than I do in foreign interests who would be in control of the world’s gold supply.
  • If the dollar should collapse that would cause a worldwide panic and I doubt that people would be rushing around looking for gold. I think food; water and ammo would become the new currencies of the day.

Some Final Thoughts

We’ve all watched the price of gold tank over the last few months. The real problem with investing in gold is it only has value if someone other than you wants to own it. Its price only goes up or down based on demand.

Contrast that with the stock market where companies can develop new profit centers. In essence they create money by creating value. Something gold simply cannot do. If you want to hold about 2-3% of your portfolio in gold, more power to you. But I would ask myself this question the next time you see someone hocking gold on TV. Ask yourself, “Why they are so anxious to trade their appreciating asset (gold) for your depreciating asset (your dollars)?” The US government is asking the same question.

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