Copyright 2012 by John T. Reed

Gold ads make me laugh.

I heard one today that gold may go to $10,000 an ounce because of the U.S. going back onto the gold standard.

What is the kernel of truth behind this?

The Republican party platform committee called for a metallic commission to consider putting the U.S. dollar back onto a gold or silver standard. People are calling this a gold commission because that was the name of the group the last time this was done in 1981.

That 1981 commission said no.

This was apparently put into the platform to placate Ron Paul supporters.

How sleazy are the gold sellers that they would use this to try to sell gold?

Very simply, a gold standard would mean that the U.S. government would set a dollar price on gold and sell you and the rest of the world all the gold everyone wanted at that same price forever.

The ad is saying the U.S. adopting a gold standard is likely as a result of the Republican party platform mention and that if and when such an adoption takes place, presumably during the first Romney term, the price that would be selected would be $10,000 per troy ounce.

Gold is currently selling for $1,692.62 per troy ounce.

If the U.S. were to go back to a gold standard and pick any price above $1,692.62, it would be a monstrous devaluation of the U.S. dollar. Today, you only need $1,692.62 to buy an ounce of gold. Tomorrow, after returning to the gold standard, you would need $10,000. That would mean all your dollars and dollar-denominated assets would be worth 17% of what they are worth today.

The Congress and president who did that would be thrown out of office if not lynched.

Actually, they are going to do worse in the near future by way of Quantitative Easing III and its successors, but the public does not recognize what those easings mean. But I digress.

In fact, the U.S. government is not going to go back onto any gold standard at all. No country on earth is on any metallic standard at present. Switzerland was the last country on a metal standard—gold—and they got off it in 1999.

If any country did, they would probably choose the current market price of $1,692.62 as the standard.

If the government set a price above that, all the gold owners on earth would instantly sell their gold to the U.S. government for that price.

But neither the U.S. nor any other country is going to go onto a metallic standard because it prevents printing or “printing” money. Being on a gold standard prevents monetizing debt, that is, using inflation to make it easier to pay debt.

That’s pretty technical. Here is a simpler version. The U.S. government does not have enough tax revenue to pay its bills, primarily Social Security checks and Medicare. At present, they are borrowing the money to pay those bills in part and “printing” it in part. Borrowing is selling bonds to real bond buyers. “Printing” means selling bonds to the U.S. Federal Reserve which conjures the money it uses to buy U.S. bonds out of thin air. In every sense of the word other than a narrow, legal, technical definition, the Fed “printing” money to buy U.S. bonds is really the U.S. government counterfeiting money to pay its bills.

A gold or silver standard would end the federal government’s ability to counterfeit money. That, in turn, would force the Congress and president to vote for or sign a law cutting Social Security, Medicare, Medicaid, etc. by about 50%. (Federal speding is currently $3.6T; federal tax revenues, $2.4T.)

There is no way on earth the Congress and president are going to vote for such a law until after hyperinflation devastates the country so badly that the public will re-elect people who vote to cut Social Security and so on. Hyperinflation ends overnight when the federal government says you can use any money you want. You do not have to use U.S. dollars. But the day they say that is also the day they can no longer counterfeit which is also the day they announce we cannot pay your Social Security, etc. The public could no longer vote for candidates who would promise to borrow money to keep paying Social Security, etc. because no one on earth would lend the U.S. government money. And the hated hyperinflation would prevent the Fed from “printing” any more. No borrowing and no “printing” means the government can only write Social Security checks covered by tax revenues.

Contrary to what the sleazy gold sellers are arguing, a gold standard would totally, by definition, end all possibility that the price of gold would rise even one penny. Since the only reason on earth to own gold, which is inedible and pays no interest, is to profit from its going up, the U.S. adopting a gold standard would totally, by definition, obliterate all possibility of benefitting from owning gold.

John T. Reed