The New Case for Gold | James Rickards

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

Introduction

Welcome to the summary of “The New Case for Gold,” where James Rickards debunks common misconceptions about gold and presents its unique characteristics that elevate its importance as an asset and insurance against financial risks. This summary explores the historical and chemical context that makes gold exceptional, examines gold’s performance during inflation and deflation, and sheds light on countries steadily building their gold reserves, such as China and Russia. Delve into the relationship between gold and the monetary system, the role of gold in a digital world threatened by cyberattacks, and the potential impact of a return to a gold standard.

The Misunderstanding of Gold’s Value

Gold has been fiercely criticized and labeled as a barbarous relic by renowned economic experts such as Keynes, Krugman, and Greenspan. Despite this, gold remains a reliable and practical store of value due to its physical characteristics and proven success as a monetary system foundation. Keynes himself only condemned the gold standard as applied by Great Britain in the 1920s and 1930s. He initially supported the gold standard until World War I when he argued that leaving it would strengthen the UK’s credit rating, and he was right. Years later, he advised against returning to the gold standard at prewar prices because it would lead to economic disaster, a warning that proved accurate. In 1944, Keynes suggested a new world currency backed by gold and other commodities at the Bretton Woods conference, indicating his nuanced view of gold’s value. Ultimately, people are fascinated by gold not just for its shininess but also because it represents money.

The Myth About Gold Supply

Gold supply is often criticized for being insufficient to support the global economy. However, this argument is not entirely accurate. The actual problem is the price of gold and the amount of gold required to back the money supply. From 1913 to 1965, the US Federal Reserve maintained a 40% gold backing for the money supply, while in Britain from 1815 to 1914, the ratio was 20%. The gold supply has been more than enough to support growth, but not the inflationary growth that benefits certain ideologies. Arguments that gold supply cannot keep up with world growth are simply disguised calls for inflation, which leads to a transfer of wealth from taxpayers to the government. The gold supply is adequate for global currencies to be backed by a gold standard.

The Myths of Gold

The Great Depression was not caused by gold, but by the Fed’s monetary policy and government policies. Despite being criticized as a ‘pile of rocks,’ gold played no role in constraining the money supply during the Depression. The crisis of confidence was due to consumers’ reluctance to borrow and lenders’ hesitance to lend, while businesses hoarded cash out of fear of unpredictable policies.

The True Value of Gold

Gold is often criticized for having no yield, but this misses the point that it serves as a widely recognized medium of exchange, store of value, and unit of account just like paper money. However, unlike paper money held in banks, gold is risk-free, making it a reliable asset during financial upheavals when banks may not be able to redeem deposits. This is a quality that digital currencies like bitcoin lack. As such, gold remains a valuable commodity that serves an important role in the global economy.

Gold’s Value as Money

Gold’s value is rooted in its function as money despite objections to its intrinsic value theory. Economists have adopted the concept of “subjective value,” where the buyer’s desire for an asset determines its price, dismissing intrinsic value. While gold may not possess the same material utility as copper or oil, its value lies in its function as a universally recognized monetary asset.

The Hidden Value of Gold

Despite the belittling of gold’s importance by Greenspan and Bernanke, the US government holds 8,000 metric tons of it at Fort Knox and other locations. The Fed’s gold certificate account, valued at $11 billion on its balance sheet, has not been priced for the market since 1971 when gold cost $42 an ounce. If priced at recent gold values, the government’s gold would be worth over $300 billion. This hidden asset underpins the entire financial system and the Fed’s solvency, despite officials failing to acknowledge its significance.

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