By George Albert
Gold bugs and sound money proponents can be cautiously optimistic. After lagging US President Barack Obama in the polls for quite some time, Republican nominee Mitt Romney has finally caught up with or is leading the race now, depending on which numbers you are looking at. So what has this got to do with gold?
Okay, here it comes.
In a little corner of the Romney campaign platform is a note calling for a new gold commission. This is the first time in several decades that a presidential platform has promised to look at a gold standard. This brings hope for gold bugs, inflation-haters and people longing for monetary stability. But a little bit of history first.
If you remember, in 1971, Richard Nixon abandoned the Bretton Woods system in favour of pure fiat money. The Bretton Woods system made each country stick to an exchange rate by tying its currency value to the US dollar. The US dollar was then fully convertible to gold. President Nixon in 1971 severed the gold-US dollar link to make the greenback a fiat currency, thereby surrendering the value of global currencies to the whims and fancies of profligate politicians and elitist central bankers. The result was a multi-decade debasement of paper money.
With no requirement to convert paper money to gold on demand, politicians and central bankers printed currency like drunken sailors. If you want to see the effects of an unhinged currency look at how the value of the dollar has fallen against gold. On the website www.pricedingold.com, a chart shows an interesting price history of the US dollar versus gold. (Click here for chart ). Notice that the dollar was steady from the 1900s to 1930 and then had a sudden drop. That's when the great depression set in and the US was producing much less. Since the dollar could not buy much, it's value fell. Also US government began it's welfare programmes like social security which put more downward pressure on the US dollar.
But notice that from the 1930s to the 1970s, the US dollar held steady against gold. It was only when President Nixon abandoned the gold standard in 1970 that the dollar plunged and has since continued to fall and also turned volatile against other currencies. The steadying hand of gold over the fiat money market was lost. A look at the dollar index chart shows how volatile the currency markets have been. (Click here for the dollar index chart) The dollar index measures the greenback against six major currencies.
Sitting in India you must be wondering what happened to the rupee against gold. Well, since the 1970s, gold has appreciated in geometric leaps against the Indian rupee. Put differently, the value to the rupee has fallen. The website www.goldprice.org has the chart showing the gold rally since 1973. (Click here for chart)
Some of you will say who cares about gold. It has no value except for ornamental purposes. That's completely missing the point. The point here is that gold more than held its value against things people buy in their lives rather than the Indian rupee or US dollar. For instance, a two bedroom apartment in the suburb of Malad in Mumbai cost around Rs 25 lakh in 1995. Today, that flat will fetch about Rs 1.25 crore so the value jumped by a multiple of five.
Gold prices, on the other hand, hovered around Rs 10,000 a troy ounce in 1995 and now the price is around Rs 93,000, which is a jump of over nine multiples. After negotiations with some home builders, you could have bought two flats today if you had invested the Rs 25 lakh in gold. That is the power of gold, a 4,000-year-old metal currency, over juvenile fiat currencies that morphed into their true unhinged form in 1970.
So this long history brings us back to the gold commission that Romney wants. The last time there was a gold commission was in 1981. It recommended against going back to the gold standard with two dissents -- one by Congressman Ron Paul and the other by a businessman Lewis Lehrman. Adding to this bad recommendation, a good thing that happened put gold on the sidelines. President Ronald Reagan's supply-side revolution licked inflation, kickstarted the economy and sent the dollar soaring against other currencies. The dollar index rallied from the 80s to 160. Due to the good thing that Reagan did, people forgot about the gold standard.
Now with the dollar index back at 80 and gold rallying, the talk of a gold standard is back on the table. And if the talk gathers steam we could see the price of gold take another spike as the demand for the yellow metal will go up not only from central bankers but individuals too. Central bankers will buy gold to ensure they have enough reserves to back their fiat money. And as the global economies transition to a gold standard, individuals will seek the steadiness of the precious metal as currencies of various countries adjust to the new monetary world.
So here is a prayer from this author who prefers the calm and discipline that a gold standard brings...let Romney win the election, let the gold commission be formed, may Ron Paul chair it and let gold be our standard bearer once again. Also, a quiet thank you to Ron Paul for keeping the gold standard discussion alive.
Some of you may say if Reagan could strengthen the dollar why do you need a gold standard. Okay readers, a Ronald Reagan comes once in a lifetime and in between Reagans there are profligate politicians like Bush, Obama, Sonia Gandhi as well as loose central bankers such as Mario Draghi of the ECB and Ben Bernanke of the Federal Reserve. The gold standard is to ensure that these drunken sailors are kept in check.
And as the gold bugs hope for another rally in the precious metal on the possibility of a gold standard, this author is signing off to go to the movies. I am seeing Atlas Shrugged - 2. It is recommended viewing for all free market, gold standard people, but only after you have read the book.
George Albert is Editor, www.capturetrends.com
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Updated Date: Dec 20, 2014 20:12:10 IST