How Does $9,000 Gold Sound?


"The SDR is a basket of fiat currencies. . .44% of an SDR is the dollar."

While some observers have focused on the potential debasement of the U.S. dollar by the aggressive monetary and fiscal policies of both the Bush and Obama Administrations, many investors are worried about the viability of the whole universe of paper money.

As Gillian Tett, award-winning journalist at the Financial Times, put it earlier this month, there has been a four-decade long experiment with fiat currencies not backed by gold or silver. This crisis is so profound that increasingly it appears to have shaken confidence in the experiment. At the same time, the crisis looks to have widened the range of possibilities.

The Special Drawing Rights that the Chinese and others have suggested to eventually replace the dollar does not get beyond paper money. The SDR is a basket of fiat currencies. It is not and cannot be a serious alternative to the U.S. dollar.

Consider that 44% of an SDR is the dollar. The IMF's figures show that roughly two-thirds of the world's reserves are in dollars. If countries' reserves were allocated according to the SDR, the dollar's share of reserves would fall by about a third. While the euro would pick up some slack the big winners would be the yen and sterling, whose share of the SDR is 11% a piece, two to three times larger than their reserve allocation.

Can gold return to its role as the anchor for currencies? To appreciate why gold is ill-suited today to once again back paper money, we need to consider why the gold standard ended in the first place. Simply put, the gold standard provided an economic barrier to the political agenda. That political agenda called for rapid growth to resist the spread of communism.

The same problem exists with a new gold standard that existed with the old. There is simply an insufficient amount of gold. The U.S. would need gold to be worth about $6,000 an ounce to reintroduce a gold standard. However, it may not be sufficient to simply have the U.S. adopt a gold standard. For the U.S., China, and Japan, the three largest economies as measured by purchasing power parity, to back their money with gold would require a price closer to $9,000 an ounce.

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