Around the world, sovereign nations, private investors, central banks, and the über rich are taking delivery of physical gold by the ton. Relatively few economists understand why. Keynes called the gold standard a “barbaric relic.” As it turns out, the ‘golden constant’ is money par excellence.
“Gold is a currency. It is still, by all evidence, the premier currency. No fiat currency, including the dollar, can match it.” Alan Greenspan (former Federal Reserve Chairman), at the Council on Foreign Relations, Oct. 29, 2014, Gillian Tett, “The Financial Times.”
PHENOMENON OF THE GOLDEN CONSTANT
Throughout history, gold has played a central monetary role. Although gold is referred to as a commodity, the rare metal is not consumed. All great civilizations have conducted trade with gold (until they declined).
A business professor at the University of California at Berkeley re-discovered why gold has always been the premier currency. After years of ground-breaking research, he uncovered gold’s unique monetary value.
In his book, The Golden Constant, Professor Roy Jastram charted the relationships between gold and numerous commodities over the centuries.* Starting from the year 1560, the data reveal the nearly constant purchasing power of gold. Over time, gold maintains relationships with individual commodities that are constant.
Professor Jastram proved 1 oz of gold buys
the same amount of a particular commodity
today as it did at almost any time in the past.
THE GOLDEN MEASURING ROD
Various factors can cause commodity prices to get out of line with the golden measuring rod. At times, supplies of products are scarce; at other times, some commodities are extremely abundant.** Weather, wars, catastrophes, and government interference affect market pricing. But prices for the commodities re-adjust quickly, and fall back into line with their constant relationships to gold.
The purchasing power of gold is nearly
a mathematical constant during times
of inflation or during periods of deflation.
Archaeologists have uncovered records from antiquity which point to the constant relationship between gold and wheat.*** Clay tablets unearthed in Babylon suggest Nebuchadnezzar could have purchased the same amount of wheat with one ounce of gold as we can buy today.
Ancient gold coin
found near the wall
of a storage room
There is an ancient law of money now associated with Copernicus and a British financier named Sir Thomas Gresham. Gresham’s Law explains why it is now rare to find gold and silver coins in circulation. Millions of silver and gold coins exist everywhere in the world. But today, if a person comes upon an old silver or gold coin, he will save it, rather than spend it at its monetary face value.
THE ANCIENT LAW OF MONEY:
Bad money drives out good money.
Countless numbers of U.S. 90% silver coins exist (pre-1965 coins); but it is extremely rare to find old silver dollars, dimes, quarters, and halves in our change. People always retain the good money and spend the bad money (coins made of base metals such as copper and nickel). We save the silver coins because we all know precious metals have intrinsic monetary value. Over time, prices of silver and gold coins rise compared to the diminishing value of “fiat” currency.
According to this ancient law of money, paper currency that is not backed by gold or silver would fall into the category of bad money. According to the Constitution of the United States, bad money is illegal: “No State shall… make any thing but gold and silver coin a tender in payment of debts….” [U.S. Constitution, Article I, Section 10].
In 1792, Congress under George Washington specifically fixed the U.S. dollar to gold [and silver]: $1 equaled 1/20th of an ounce of gold. Until 1933, England and America shared a true “gold standard.” Paper dollars, paper pounds, and gold coins were interchangeable currencies for everyone. The British gold pound (£1 gold coins below) equaled $4.86.
U.S. $50 bill: “Fifty dollars in gold coin payable to the bearer on demand.”
The dollar and pound’s standard exchange relationship changed when both countries completely severed their ties to gold. The dollar had been ‘as good as gold’ [coins or redeemable in gold coins] from 1792 until Aug. 15, 1971. On that date, the United States dollar became a “fiat” currency.
When neither dollars nor pounds were tied to the discipline of gold, savvy investors began purchasing common-date, non-rare gold coins such as the British gold pound to protect their savings from currency debasement. At the end of 1973, my mother paid $10.55 for one gold pound (£1 British Sovereign below) and gave it to me.
British gold pound (£1)
1817-1933: Gold £1 = $ 4.86
1973: Gold £1 = $ 10.55
Nov. 1, 2015: Gold £1 = $284.75
Feb. 5, 2016: Gold £1 = $330.40
Feb. 6, 2017: Gold £1 = $364.90
Over time, good money preserves wealth and bad money loses value. Today [Feb.5, 2016], one would need 330 dollars to buy my British gold pound (Victoria). That means the dollar has lost more than 3,000% in purchasing power since 1973. On the other hand, the gold pound can buy the same goods and services today as the gold coin could buy back in 1973, or when Victoria was crowned Queen in 1838.
Old U.S. $20 Gold Pieces are an excellent way to own gold. The $20 coin went up 69% against the dollar during the Great Depression. Since August 9, 2007 (the first day of the credit crisis), $20 Gold Pieces have almost doubled. Since 1933, common-date, $20 gold coins have risen from $20 to $1,280. In 80 years, old Double Eagles are up more than 6,000%.
Old U.S. $20 Gold Piece
1849 – 1933: $20
Feb. 5, 2016: $1,280
Feb. 6, 2017: $1,305
Today, debt is rising exponentially because the world is in an industrial depression and demand is collapsing. The entire financial system is sustained by exotic, financial instruments called “derivatives.” It is estimated derivatives debt exceeds 1.3 QUADRILLION dollars (10 to the 15th power).****
$1 trillion = one million million dollars
$1 quadrillion = one thousand million million dollars.
The Federal Reserve monetizes debt: new debt becomes brand-new credit. From nowhere, trillions of dollars digitally spring into existence. Since 2007, HYPER-CREDIT-CREATION has delayed a monetary catastrophe; but it cannot override simple math forever. Suddenly, inter-bank lending will lock up and credit will FREEZE. Because of the existence of financial laws, bad money always ends in disaster. There are no historical exceptions:
“Every other attempt of the same kind in human history… show the existence of financial laws as real in their operation as those which hold the planets in their courses.” Andrew Dickson White, Fiat Money Inflation in France, p. 63, 1896.
Precious metals are “monetary metals.” Gold is good money because of its scarcity. The golden constant is “portfolio insurance” because there is never an over-supply of gold. Gold coins and bars will retain purchasing power during periods of hyper-deflation, hyper-inflation, or credit collapse. And there is no counter-party risk if you have them in your own possession.
U.S. gold coins: $5 Indian, $20 St. Gaudens, $10 Indian
In 1933, anyone could have exchanged U.S. dollar bills for the coins above at face value: $5 + $20 + $10 = $35. Today, the gold coins would cost $2,408. Put another way: It now takes 68 times as many paper dollars to buy the same amount of PHYSICAL gold!
While you can, exchange your bad money for good money. Trading dollars for actual gold coins is a prudent decision.
By Denise Rhyne
* Professor Roy W. Jastram, The Golden Constant: The English and American Experience 1560-1976, John Wiley & Sons, Inc. for the American Finance Association, “A Ronald Press publication,” 1977, (Carmel Valley, California, June, 1977).
** Until 2015, crude oil prices demonstrated the phenomenon of the golden constant. In 1873, 1 oz of gold could buy 15 or 16 barrels of oil. In 1973, 1 oz of gold could buy 15 barrels of oil. In Nov. 2014, 1 oz of gold could buy 16 barrels of oil. Due to an oil supply ‘glut,’ 1 oz of gold can now buy 38 barrels of oil (Feb. 5, 2016).
*** Creating Economic Order–Record-keeping, Standardization, & Development of Accounting in Ancient Near East, Inst. for the Study of Long-term Economic Trends, Intl. Scholars Conference Ancient Near Eastern Economies, British Museum, Nov. 2000, Volume IV, A. Mederos, C. C. Lamberg-Karlovsky.
**** Credit FROZE in 2007; the world banking system came close to locking up again in Nov. 2011, Oct. 2014, and Aug. 2015. To ‘paper over’ the fragile system, the Federal Reserve and other central banks have issued credit which has created, financed, or enabled more than one thousand trillion dollars of derivatives debt.
Derivatives derive value (cash flows) by reference to underlying assets. What possible collateral could give value to more than one QUADRILLION dollars of debt?
There are 3 more zeros of derivatives
debt than the combined value of all
goods and services produced on earth!