My rating: 4 of 5 stars
This sometimes academic-sounding book takes a levelheaded look at the implications of a global return to the gold standard–a return that the author regards as already under way.
From 2002 to 2011 the price of gold ran up from $300 an ounce to $1900 an ounce; its closing price yesterday was $1781.30. When I open National Geographic magazine I find ads selling gold coins; TV ads urge people to take advantage of high prices to sell their old scrap gold. Gold bugs have been saying “I told you so” for years, while mainstream financial gurus like Warren Buffett disparage gold as an unproductive, useless asset not worth the attention of serious investors. For the average, interested person who has no special knowledge of economics or finance, what is the right attitude to take toward gold?
In this short book, John Butler, an experienced financial “strategist” now running his own investment firm in London, argues that we all should be aware of what’s happening with gold, for the sake not only of our financial well-being, but also of the quality of society itself as it emerges from the transition to a world gold standard, which is now inevitable. It has been made inevitable by the explosion of debt in the world since the last link between gold and the U.S. dollar, the world’s reserve currency, was severed by President Nixon in 1971. For 41 years the world has been operating on a so-called fiat-money system–one in which money is created from nothing by central banks–and, like all fiat-money systems that have existed previously, this one is collapsing in an orgy of public and private debt financed with ever-increasing amounts of newly created money. We’re already in the end-game of this process. What’s next?
Next is a global gold standard. According to Butler, there is no possibility whatever of avoiding this, nor should we want to avoid it, for a world on the gold standard will be more rational, more honest, and more just than a world running on fiat money. As the value of paper money evaporates through the promiscuous printing of it, people will seek a more stable store of value for their earnings and savings; they will seek gold and silver. When that happens, the value of any currency will depend on how credibly it is backed by gold. Whoever comes up first with a credible gold-backed currency will have the jump on other countries in the next phase of the world economy.
The United States, which has (supposedly) the world’s largest reserves of gold, and whose dollar is still hanging on by its fingernails to world reserve-currency status, is, in Butler’s opinion, in a good position to do this. He presents a number of scenarios by which it might be done. There is nothing to stop the government from implementing the orderly, well-planned return to gold set out by Henry Hazlitt in his 1960 book What You Should Know About Inflation (showing that there were sober thinkers even then who wanted to avoid the mess that we have got ourselves into since). It would not require 100% backing of all dollars by gold, but only a “credible” amount of backing. And what we find credible is up to each of us, but Butler observes that the longer this step is delayed, and the greater the disarray that we allow the world’s finances to fall into, the higher this reserve requirement will be in order to seem credible.
But in any event, for this to occur, the dollar price of gold will have to be substantially higher than it is today. It could not conceivably be done at less than about $5,000 an ounce, and Butler presents a scenario for a reasonably credible gold-backed dollar, assuming a 40% reserve backing for today’s M2 definition of the supply of money of $9 trillion, which implies a gold price of $13,200 an ounce.
That’s right: a 640% increase from today’s price. But in Butler’s own words:
Some readers might express disbelief at the prospect of a gold price in excess of $10,000. I would advise these readers to express their disbelief rather at how the Federal Reserve has grown the money supply by such a colossal amount since President Nixon closed the gold window in 1971.
This assumes a timely, orderly, planned transition undertaken by the United States government, but there is no particular reason to expect that (unless those running the country suddenly become wise, prudent, and concerned exclusively with the public good). Just as likely, or more likely, are transitions to gold undertaken by other governments, either singly or acting together, to shake off the ill effects of the monetary inflation being exported at ever higher levels by the U.S. (it was this exportation of inflation that prompted first France, then other countries, in the 1960s to start redeeming their dollars for U.S. gold–the international “bank run” that prompted Nixon to shut the window).
Then there is the possibility of a disorderly transition not planned by anyone, one in which people simply flee to gold in a global melee. No one knows what financial system would emerge after the smoke clears, but it’s certain that this scenario would lead to the highest prices for gold during the transition period.
Butler’s book is laid out logically in three parts, examining why the days of the fiat dollar are numbered, then looking at various transition scenarios, and finally examining the likely implications of the new gold standard for banking, investing, and society generally. Butler’s style is dispassionate and well-informed, but sometimes rather wonkish, as though he were writing for experts (there are even economics equations in a couple of spots). He is maybe too enthusiastic about certain niceties of economic theory for my taste, and his writing is marred by a few bad habits, like the persistent and incorrect use of the phrase “as such” to mean “thus” or “therefore” (an instance of what Bryan Garner calls “slipshod extension” of a phrase).
But I liked this book. Butler is optimistic and nonpolemical. Gold is a topic that usually provokes a lot of emotion, but Butler remains clear-eyed and practical in his treatment of it. He is not stridently trying to convince us that the gold standard is returning; he is simply informing us that a cool, objective analysis of facts shows this to be inevitable. And a person who is cool and objective will take the appropriate steps in good time.
The main takeaway is this: Get gold. Get it now, while you can still afford it.