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Thoughts
on the Gold Standard, Risk & Speculation
By
Steve Saville The
Speculative Investor
May
26, 2009
Below
are excerpts from recent commentaries posted at www.speculative-investor.com.
Return to a Gold Standard?
The
most commonly cited reason against returning to a gold standard is
that there isn't enough gold in the world, but no one with a good
understanding of money's role within an economy would argue against
a gold standard on the basis of insufficient gold supply (for the
uninitiated, Frank Shostak explains why in: How
Much Money Should There Be?). There is, however, a good reason
to argue against a gold standard.
Although a gold standard would undoubtedly be vastly superior to the
current monetary system, any government-imposed monetary standard
would be fatally flawed, even the gold variety, because governments
cannot be trusted to monitor and control something as important as
money. To get an idea of how the monetary system would evolve over
time if we were to return to a gold standard, look at what has
happened to money over the past 100 years. In a nutshell, returning
to a gold standard would eventually lead us back to where we are
today.
The optimum solution is not to return to a gold standard; it is,
instead, to get the government out of the money business. Amongst
other things, this would entail getting rid of the central bank,
legal tender laws, and deposit insurance*. Once the government was
out of the way the market could then select the medium of exchange.
Given such a choice the market might decide to stick with paper
dollars, euros, Yen, etc., but history tells us that it would more
likely choose gold or a combination of gold and silver. As we
explained back in the good old days of 2005 (the 12th October 2005
Interim Update):
"When the market has been free to choose it has, over
thousands of years, invariably chosen gold (and silver) as money,
and given the choice it will almost certainly do so in the future.
However, the possibility also exists that a superior monetary system
to one based on gold will be discovered at some point. It is,
therefore, important for the market to have the freedom to opt for
some form of money other than gold.
To further explain, gold never became money because some government
decided that it should be money. Rather, during those times
throughout history when governments have decreed gold to be money
they have done so only because gold was already money in the eyes of
the people. Unfortunately but not surprisingly, without exception
these governments subsequently decided that gold should not be money
because a gold standard places severe restrictions on the size and
scope of government (you can't print gold in order to buy votes). A
more 'flexible' monetary system -- one that places no limits on the
amount of new money that can be borrowed into existence (created out
of thin air) -- was thus phased-in over many decades. This, in turn,
is why governments must never be allowed to become involved in the
monetary system in the first place even if their initial involvement
is to set-up and monitor a gold standard. The problem is that as
soon as they do become involved in some way then the door will be
open to eventual government abuse of the system. If history is any
guide this abuse will begin as a temporary measure justified by some
sort of emergency, but will later become entrenched."
The current monetary system can be likened to a legion of termites
methodically gnawing away at the foundations of the economy. But
very few people in the world understand this, so when the
foundations eventually give way there's every chance that the
diagnosed reason for the collapse will be completely off the mark.
In fact, the way things are going the collapse could well be used to
justify even greater government control of money, perhaps via a
World Central Bank and a global fiat currency.
*Deposit insurance is a scam because the only
way the government can ever make good on the losses suffered by some
depositors is to steal the purchasing power of other depositors via
additional taxation or inflation.
You
can reduce risk, but you can't avoid speculation
Despite
the strong rebounds of the past two months we are sensing general
disinterest in the financial markets. Most people got burned during
last year's panic, almost regardless of what they were invested in.
As a result they have either withdrawn from the markets or become
far more circumspect.
The desire to reduce financial risk is a rational response to
today's economic reality and the policies being implemented/planned
by most governments, but speculation cannot be avoided altogether.
If you have some form of savings then you are a speculator whether
you like it or not. For example, if you take what most people would
consider to be the ultra-conservative approach of having your entire
net worth in cash then you are, in effect, speculating that your
government will fail in its efforts to substantially devalue your
cash.
In our opinion, the lowest risk investment portfolio would comprise
50% US$ cash and 50% gold bullion. It is possible that both of these
positions will do well over the years ahead, although it is more
likely that one will do well while the other fares poorly (regular
TSI readers know which one we expect to do well). We cannot,
however, envisage a multi-year scenario under which both of these
positions do poorly. The reason is that if the US$ were to collapse
for any reason then the gold price would rocket upward by enough to
more than offset the losses on the US$ part of the portfolio; and a
large decline in the gold price would only become a realistic
possibility if there were a rapid deflation of the US money supply
leading to a rapid appreciation of the US$.
By adding equities, other commodities and other currencies into the
mix it should be possible to do much better than the ultra-low-risk
cash-bullion portfolio mentioned above, but giving oneself the
potential to achieve greater returns invariably entails taking on
additional risk.
Regular
financial market forecasts and analyses are provided at our web
site:
http://www.speculative-investor.com/new/index.html
We
aren’t offering a free trial subscription at this time,
but free samples of our work (excerpts from our
regular commentaries) can be viewed at:
http://www.speculative-investor.com/new/freesamples.html
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