The New Case for Gold | James Rickards

Summary of: The New Case for Gold
By: James Rickards

Introduction

Delve into the fascinating world of gold as James Rickards unravels its unique significance as a store of value in his book, ‘The New Case for Gold.’ Although gold has prominent detractors, this summary outlines the key reasons why it remains relevant and should be considered as a critical part of an investment portfolio. It systematically addresses common objections to gold through a nuanced understanding of its history, role in past economic crises, and position in the financial system. By reading this user-friendly and instructive summary, you will gain insight into gold’s unmatched combination of traits that make it an integral element in today’s global economy.

Gold’s Misunderstood Legacy

Gold is a widely misunderstood asset, even by famed economic and financial experts like Milton Friedman, Paul Krugman, and Warren Buffett. Despite gold’s redeeming qualities, such as its scarcity and practicality as a store of value, these “gold bashers” reject its value as an asset and its role in a monetary system. However, their rejection of gold often stems from misinterpretation, such as citing John Maynard Keynes’s critique of the gold standard as a rejection of gold itself. In reality, Keynes’s critique was against the gold standard as applied in the 1920s and 1930s. In fact, Keynes saw the value in gold as a reliable store of value and advised Winston Churchill against returning to the gold standard at prewar prices, warning him that it could lead to a “deflationary disaster.” Overall, gold’s legacy is complex and nuanced, and its true value is often overlooked.

Gold Standard Misconceptions

Many critics argue that there is not enough gold to support a global currency system, but this claim is based on the assumption that there is not enough gold at current prices. The reality is that the world has plenty of gold to operate on a gold standard. The price of gold and the amount that is required to back a money supply are the key variables. From 1913 to 1965, the US Federal Reserve mandated a gold backing of at least 40%. In Britain from 1815 to 1914, the ratio was 20%. The gold exchange standard was flawed and should have been abandoned long before its demise during World War II. The notion that the gold supply doesn’t grow fast enough to support world growth is false. From 1815 to 1971, the world’s economy grew while tethered to the gold standard. The argument for inflationary growth, which only benefits certain ideologies, is the favorite of critics who desire inflation to transfer wealth from the rich to the poor and from taxpayers to the government.

Myth of Gold’s Role in the Great Depression

The role of gold in the Great Depression has been misconstrued. According to scholars such as Ben Bernanke, the Depression was caused by the Fed’s monetary policy and exacerbated by government intervention. Despite popular belief, the gold standard did not constrain the money supply during the Depression. The crisis was a result of consumer and lender mistrust and government experimental policy interventions. Shaming gold as a “shiny metal” is a disservice to its potential as a form of money. Businesses and investors hoarded cash rather than invest due to unpredictability in regulations, labor laws, and tax rates.

Debunking the Myth of Gold

Gold is often misunderstood as an investment due to the common belief that it has no yield. However, it serves as a medium of exchange, a store of value, and a unit of account, just like paper currency. Both gold and dollars lack returns because they are risk-free. Bitcoin also falls in the same category. Deposits in banks are not money but rather unsecured liabilities, and during financial crises, might not be redeemable, as observed during the 2013 and 2015 crises in Cyprus and Greece, respectively.

The True Value of Gold

Gold lacks intrinsic value, but its worth lies in its function as money. The concept of intrinsic value was replaced with subjective value, where the buyer’s desire determines the price. While gold may not have industrial use, it plays a crucial role in the economy as a medium of exchange and a store of value. Therefore, dismissing gold as worthless is a flawed argument.

The Hidden Asset that Underpins the Financial System

While America has abandoned the gold standard and some officials belittle gold’s importance, the Federal Reserve holds a hidden asset worth approximately $300 billion in the form of 8,000 metric tons of gold in Fort Knox, West Point, and other locations. Though the Fed hasn’t priced gold certificates for market value since 1971, recent gold values reveal the government’s gold would be worth more than $300 billion. This shows that, whether acknowledged or not, gold is crucial to the US financial system, underpinning the Federal Reserve’s solvency, and supporting the value of the dollar.

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