Demolishing Three Common Arguments Against Gold

Demolishing Three Common Arguments Against Gold, by James Rickards, American lawyer, economist, and investment banker with 35 years of experience working in capital markets on Wall Street and with the US defense establishment.

“Experts” say there’s not enough gold to support a global financial system. Gold can’t support all the world’s paper money, its assets and liabilities, its expanded balance sheets of all the banks and the financial institutions in the world.

[No,] just take the amount of money supply in the world, the amount of physical gold in the world, divide one by the other, and there’s the gold price.

If you want 40% of money to be backed gold, the price of gold would be over US$10,000 per ounce (it is currently US$1,260 per ounce).

But if you want to back up 100% of the money supply, that number is $50,000 an ounce. I’m not predicting $50,000 gold. But I am forecasting $10,000 gold, a significant increase from where we are today. But again, it’s important to realize that there’s always enough gold to meet the needs of the financial system. You just need to get the price right.

Regardless, my research has led me to one conclusion — the coming financial crisis will lead to the collapse of the international monetary system. When I say that, I specifically mean a collapse in confidence in paper currencies around the world. It’s not just the death of the dollar… or the demise of the euro… it’s a collapse in confidence of all paper currencies.

In that case, central banks around the world could turn to gold to restore confidence in the international monetary system. No central banker would ever willingly choose to go back on a gold standard.

But in a scenario where there’s a total loss in confidence, they’ll likely have to go back to a gold standard.

The second argument is that gold supply only grows at 1.5% per year, while the world’s economy grows at 3.5%. The simple answer is that the price of gold goes up at 2% per ear to cover the difference, which as it happens is the inflation rate preferred by central banks.

The third argument you hear is that gold has no yield. It’s true, but gold isn’t supposed to have a yield. Gold is money. I was on Fox Business with Maria Bartiromo recently. We had a discussion in the live interview when the issue came up. I said, “Maria, pull out a dollar bill, hold it up in front of you and look at it. Does it have a yield? No, of course it has no yield, money has no yield.”

If you want yield, you have to take risk. You can put your money in the bank and get a little bit of yield — maybe half a percent. Probably not even that. But it’s not money anymore. When you put it in the bank, it’s not money. It’s a bank deposit. That’s an unsecured liability in an occasionally insolvent commercial bank.

You can also buy stocks, bonds, real estate, and many other things with your money. But when you do, it’s not money anymore. It’s some other asset, and they involve varying degrees of risk. The point simply is that if you want yield, you have to take risk. Physical gold doesn’t offer an official yield, but it doesn’t carry risk. It’s simply a way of preserving wealth.

I have given these reasons often enough myself, talking for several years at the Sydney Gold Symposium. At one of those Joanne and I had the pleasure of having dinner with Jim. Good guy.