Thursday, August 11, 2022

Does Gold Back The Us Dollar

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Causes Of The Great Depression

What gives a dollar bill its value? – Doug Levinson

Economists, such as Barry Eichengreen, Peter Temin and Ben Bernanke, blame the gold standard of the 1920s for prolonging the economic depression which started in 1929 and lasted for about a decade. It has been described as the consensus view among economists. In the United States, adherence to the gold standard prevented the Federal Reserve from expanding the money supply to stimulate the economy, fund insolvent banks and fund government deficits that could “prime the pump” for an expansion. Once off the gold standard, it became free to engage in such money creation. The gold standard limited the flexibility of the central banks’ monetary policy by limiting their ability to expand the money supply. In the US, the central bank was required by the Federal Reserve Act to have gold backing 40% of its demand notes.

The forced contraction of the money supply resulted in deflation. Even as nominal interest rates dropped, deflation-adjusted real interest rates remained high, rewarding those who held onto money instead of spending it, further slowing the economy. Recovery in the United States was slower than in Britain, in part due to Congressional reluctance to abandon the gold standard and float the U.S. currency as Britain had done.

In the early 1930s, the Federal Reserve defended the dollar by raising interest rates, trying to increase the demand for dollars. This helped attract international investors who bought foreign assets with gold.

Underpinning The Value Of Money

Fiat currency is legal tender whose value is backed by the government that issued it. The U.S. dollar is fiat money, as are the euro and many other major world currencies.

This approach differs from money whose value is underpinned by some physical good such as gold or silver, called commodity money. The United States, for example, used a gold standard for most of the late 19th and early 20th century. A person could exchange U.S. currency — as well as many public and even some private debts — for gold as late as 1971.

A fiat currency’s value is underpinned by the strength of the government that issues it, not its worth in gold or silver.

Politicians Are Clueless And Only Do One Thing Create Bills For More Spending

Since politicians dont get elected by raising taxes, that leaves only one viable answer to pay for the bills Congress creates printing it or creating credit. Or in other words, DEBT. Its a nice legacy that our generation is leaving future generations isnt it?

The George W. Bush administration was spending out of control and President Obamas administration is piling on debt at an even more alarming rate to prevent the system from collapsing mind you. Any bets on their success? The system will collapse as long as government keeps spending. Its just a matter of when.

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Money Is Both Public And Private

One key dynamic to watch as digital currency evolves is the tension between the government and private firms, a theme that runs like a golden thread through the history of money.

Consider the case of America in the mid19th century, when almost any bank could print its own paper money. The $2 bill from Stonington Bank in Connecticut had a whale on the front the $5 bill from the St. Nicholas Bank of New York City had a picture of Santa Claus. At one point, private banks were printing more than 8,000 different kinds of money.

This was still the era when paper money was a claim check for gold or silver. If a bank went bust, the valuable claim check was suddenly just a piece of paper with a picture of Santa Claus on it.

This presented a problem for merchants who faced customers using thousands of kinds of money. How could they know which banks were sound? For that matter, how could they tell real money from counterfeit? Publications called banknote reporters sprang up to solve both problems. They were little magazines that listed bills from all around the country, with brief physical descriptions and recommendations for whether to accept the money at full value or, in the case of shaky banks, at a discount.

That world disappeared around the time of the Civil War, when a new federal tax on paper money drove most of the old banknotes out of existence. But even as the variety of paper money declined, money created by private banks persisted.

Spot Gold Price Vs Gold Futures Price

Ten facts about Alexander Hamilton on the $10 bill

There is usually a difference between the spot price of gold and the future price. The future price, which we also display on this page, is used for futures contracts and represents the price to be paid on the date of a delivery of gold in the future. In normal markets, the futures price for gold is higher than the spot. The difference is determined by the number of days to the delivery contract date, prevailing interest rates, and the strength of the market demand for immediate physical delivery. The difference between the spot price and the future price, when expressed as an annual percentage rate is known as the forward rate.

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What Would Happen If The Us Returned To The Gold Standard

Going back to the gold standard would have a huge impact on the US economy.

For one thing, it would make it impossible for the Fed to offer fiscal stimulus. After all, if the US had to have enough gold reserves to exchange for dollars on an as-needed basis, the Feds ability to print paper currency would be incredibly limited.

Supporters believe that could be the perfect way to get the US out of debt, but it could also cause problems during times of economic crisis. Its important to remember that because 68 percent of the US economy is based on consumer spending, if inflation rose due to the gold price rising, then a lot of consumers would cut spending. That would then affect the stock market as well, which could very well lead to a recession or worse without the ability of the government to soften that blow via money supply.

That means that a return to the gold standard would also expose the US economy to the yellow metals sometimes dramatic fluctuations while some think that gold would offer greater price stability, its no secret that its been volatile in the past. Looking back past the metals recent stability, it dropped quite steeply from 2011 to 2016.

As can be seen, returning to the gold standard would be a complex ordeal with many pros and cons associated. What do you think about the idea? Do you think the US should bring back the gold standard? And do you think a future president might do so? Let us know in the comments.

Three Leading Indicators For Our Gold Price Predictions

We apply a limited number of leading indicators for our gold price predictions:

  • The Euro .
  • Bond yields.
  • Inflation indicators.
  • All three combined help us forecast the future path of the price of gold. Moreover, it is by using these 3 indicators that we were able to accurately forecast annual gold price targets 6 to 9 months prior to the market hitting them.

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    What Really Backs The Us Dollar

    Since 1971, U.S. citizens have been able to utilize Federal Reserve Notes as the only form of money that for the first time had no currency with any gold or silver backing.

    This is where you get the saying that U.S. dollars are backed by the full faith and credit of the U.S. Government. In other words, Nixon implied take our paper dollars or dont.

    The U.S. at this time was a world super power having been victorious in WWII and there really wasnt much anyone could do about the decision by the U.S. government to abandon metal backing.

    What Happens If The Dollar Crashes

    What Does It Mean When The US Dollar Loses Value?

    A collapse would wipe out the value of their dollar holdings. These are denominated in foreign currencies, which rise when the dollar falls. Focus on economies with strong domestic markets. Also, ask about commodities funds, such as gold, silver, and oil, which tend to increase when the dollar declines.

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    Stuff Priced In Ounces Instead Of Dollars

    If the US dollar was somehow completely wiped out, we could see a return to goods and services being priced in ounces of gold and silver rather than in dollars.

    This may seem antiquated at first blush. However monetary systems operated for centuries in the past like this. Up until 1971 the dollar was defined as 1/35th of an ounce of gold. Although this was only between governments, not for the man in the street.

    The Gold Standard: A History

    “We have gold because we cannot trust governments,” President Herbert Hoover famously said in 1933 in his statement to Franklin D. Roosevelt. This statement foresaw one of the most draconian events in U.S. financial history: the Emergency Banking Act, which forced all Americans to convert their gold coins, bullion, and certificates into U.S. dollars. While the legislation successfully stopped the outflow of gold during the Great Depression, it did not change the conviction of gold bugs, people who are forever confident in gold’s stability as a source of wealth.

    Gold has a history like that of no other asset class in that it has a unique influence on its own supply and demand. Gold bugs still cling to a past when gold was king, but gold’s past also includes a fall that must be understood to properly assess its future.

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    What Is The Gold Standard

    What is the gold standard and how does it work? Put simply, the gold standard is a monetary system where the value of a countrys currency is directly linked to the yellow metal. Countries using the gold standard set a fixed price at which to buy and sell gold to determine the value of the nations currency.

    For example, if the US went back to the gold standard and set the price of gold at US$500 per ounce, the value of the dollar would be 1/500th of an ounce of gold. This would offer reliable price stability.

    The goal of this type of monetary policy is to prevent inflation as well as deflation, and to help promote a stable monetary environment.

    The Classical Gold Standard

    $1 Note

    The Gold Standard was a system under which nearly all countries fixed the value of their currencies in terms of a specified amount of gold, or linked their currency to that of a country which did so. Domestic currencies were freely convertible into gold at the fixed price and there was no restriction on the import or export of gold. Gold coins circulated as domestic currency alongside coins of other metals and notes, with the composition varying by country. As each currency was fixed in terms of gold, exchange rates between participating currencies were also fixed.

    had two overriding monetary policy functions under the classical Gold Standard:

  • Maintaining convertibility of fiat currency into gold at the fixed price and defending the exchange rate.
  • Speeding up the adjustment process to a balance of payments imbalance, although this was often violated.
  • The classical Gold Standard existed from the 1870s to the outbreak of the First World War in 1914. In the first part of the 19th century, once the turbulence caused by the Napoleonic Wars had subsided, money consisted of either specie or of specie-backed bank issue notes. However, originally only the UK and some of its colonies were on a Gold Standard, joined by Portugal in 1854. Other countries were usually on a silver or, in some cases, a bimetallic standard.

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    How The Gold Standard Worked

    Under the Gold Standard, a countrys money supply was linked to gold. The necessity of being able to convert fiat money into gold on demand strictly limited the amount of fiat money in circulation to a multiple of the central banks gold reserves. Most countries had legal minimum ratios of gold to notes/currency issued or other similar limits. International balance of payments differences were settled in gold. Countries with a balance of payments surplus would receive gold inflows, while countries in deficit would experience an outflow of gold.

    In theory, international settlement in gold meant that the international monetary system based on the Gold Standard was self-correcting. Namely, a country running a balance of payments deficit would experience an outflow of gold, a reduction in money supply, a decline in the domestic price level, a rise in competitiveness and, therefore, a correction in the balance of payments deficit. The reverse would be true for countries with a balance of payments surplus. This was the so called price-specie flow mechanism set out by 18th century philosopher and economist David Hume.

    The use of such methods meant that any correction of an economic imbalance would be accelerated and normally it would not be necessary to wait for the point at which substantial quantities of gold needed to be transported from one country to another.

    But What Happens When Theres Economic Uncertainty And The Us Dollar Weakens

    Investors identify alternative investments and safe havens. They may turn to tangible assets such as precious metals, real estate, or other currencies causing those alternative asset prices to rise.

    And yet these drivers do not always work in concert with each other. Contributing to these movements and complicating the relationship, the action of central banks and foreign countries impact the price of gold. Central banks and foreign countries will commonly trade in different currencies, including U.S. dollars to stimulate their economies or hedge their own currencies.

    However, certain patterns still emerge. If you take a look at the chart below, youll notice the typical pattern between currency movement and gold prices. The comparison is depicted by the DXY Currency Index, which measures the dollars strength vs. a trade-weighted basket of other major currencies including the euro, the Japanese yen, the British pound, the Canadian dollar, the Swedish krona and the Swiss franc.

    For the near term, we are unlikely to return to a commodity-backed currency system tied to gold, so golds fluctuating value will continue to reflect how strong or weak both the U.S. dollar and our economy is as well as global demand for precious metals. Therefore, this precious metal will continue to be used to hedge against currency devaluation and serve investors as a safe haven in time of economic uncertainty, political instability and market turbulence.

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    A Common Theme In All These Options

    A common theme in all these options is that the purchasing power of gold and silver will have increased significantly from what they are today.

    Why?

    Well, there would be no reason for the monetary system to change if they didnt! We could just carry on as we are today, with the US dollar at the centre.

    Gold and silver remain very undervalued against all other assets. So they will likely have to reach higher prices yet in order to achieve a balance. See our blog category on valuing gold and silver for more on this.

    What do you think? What would a new monetary system look like? Would things be priced in gold or gold still priced in another or other currencies? Let us know leave a comment below

    If youve enjoyed this heres a related article you might also like. Reader Question | Why is Gold More Valuable Than Worthless Paper

    Editors Note: This article was first published 18 March 2014. Last updated 5 October 2021.

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    Golds Leading Indicator #: Bond Yields

    What The Pyramid On The Back Of A One Dollar Bill Means

    Bond yields are inversely correlated to gold. They are not as strong a leading indicator as the Euro. Gold can rise when bond yields are flat or range bound.

    The weekly bond yields chart is now in a narrow range. Any fast move higher will push gold back. A slow rise or range bound setup can support rising gold prices.

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    What Is The Lbma

    Based in London, the London Bullion Market Association is an international trade association, which represents the precious metals markets including gold, silver, platinum and palladium. It is not an exchange. Its current members include 140 companies made up of refiners, fabricator, traders, etc. The LBMA is responsible for setting the benchmark prices for gold and silver as well as for the PGMs. For the refining industry, the LBMA is also responsible for publishing the Good Delivery List, which is widely recognized as the benchmark standard for the quality of gold and silver bars around the world.

    Box: Early Forms Of Money In Australia

    When the colony of New South Wales wasestablished in 1788, colonists relied on barter and rum as a makeshift currency. In 1792, a shipment ofSpanish dollars was sent to Australia for use ascurrency alongside the other international currenciesthat were used in the colony at the time. To addresspersistent coin shortages, new forms of money weredeveloped in the following decades. These includedthe creation of the holey dollar and dump byGovernor Macquarie , the use of promissorynotes or IOUs, and copper tokens issued by businesses. IOUs and coppertokens proved an unreliable source of currency, partlybecause they had no official guarantee.

    In 1910, legislation for a national currency wasenacted. The Australian Government issuedsuperscribed banknotes, whereby words wereoverprinted on notes purchased from the privatebanks . These were the firstcurrency notes accepted across the nation. Thefirst true Australian banknote was produced inMay 1913, with additional denominationsproduced from 1913 to 1915.

    Learn more about how banknotes are produced in the Bulletin article on Money in the Australian Economy.< >

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