Tag Archives: gold standard

Types of Gold Standards

This blog post is a guest post on BullionStar's Blog by the renowned blogger JP Koning who will be writing about monetary economics, central banking and gold. BullionStar does not endorse or oppose the opinions presented but encourage a healthy debate. 

People often throw out the phrase "gold standard" into conversation, but it's worth keeping in mind that there have been several iterations of the gold standard over the course of history. This article describes each type of gold standard using historical examples for clarity.

1. The Gold Coin Standard, or Specie Standard

-Bimetallic Coin Systems-

Medieval coinage systems were typically bimetallic, relying on both gold and silver. To ensure the realm was well-supplied with coins, the monarch maintained a network of mints. Mints in the medieval times operated very differently than they do now. According to the principles of free coinage, access to these mints was available to anyone. By bringing their stash of raw precious metals to the mint, members of the public could ask the mint master to turn it into a specified number of coins, albeit for a fee.

English gold noble, half noble, quarter noble, silver groat, and silver penny (source)

To ensure that a variety of large and small transactions could be made by the public, the mint typically produced a range of small and large coin denominations. In England's case, by the 1500s it was issuing pennies, farthings (1/4 pennies), groats (4 pennies), testoons (12 pennies), half crowns (30 pennies), gold nobles (100 pennies), and more.

Minting low denomination coins like farthings and pennies out of gold was generally not a feasible option because the resulting coin would be tiny and easily lost. Twinning gold with a large amount of base metals like copper might have resulted in a larger and more manageable low-denomination gold coin, but then it would be susceptible to counterfeiting. As for high denomination silver coins, they would be large and bulky. Thus bimetallism amounted to a sensible sharing of the monetary load by both gold and silver coins.

-Accidental Monometallic Gold Coin Systems-

Bimetallic standards sometimes careened off course and became what are known as monometallic standards, with either gold or silver dominating. Thus emerged the first true gold standards, albeit entirely by accident. The mechanism underlying this muddling into monometallism was rooted in the fixed price between the two metals as enforced by the monarchs' mints.

To illustrate how this fixed price worked, consider that in August 1464 anyone could bring raw silver to the London Mint and have it minted into English pennies that contained 0.72 grams of silver. The mint would also turn raw gold into English nobles which contained 6.69 grams of gold. Since law stipulated that a noble was worth 100 pennies, that meant that the mint effectively valued a fixed amount of gold at 11 times the same amount of silver. (I get this data from John Munro [pdf]).

Gold guinea, 1664, which replaced the British unite coin

When the mint's chosen gold-to-silver ratio diverged too far from the global market ratio of gold-to-silver, then one of the two metals would begin to be ejected from the domestic monetary system. The reason for this is that a divergence effectively meant that the monarch was undervaluing one metal and overvaluing the other, and since no one who owned gold (or silver) coins wanted their property to be less than its true worth, the undervalued metal would be taken off the market.

For instance, if the mint was undervaluing silver, then anyone who purchased £1000 worth of raw silver and brought it to the mint for conversion into coins would get less purchasing power than if they had bought £1000 worth of gold and bought it to the mint. So the flow of silver to the mints would grind to a halt. Furthermore, any high quality silver coin already in circulation would be sent overseas in order to take advantage of the true gold-to-silver ratio. At this point a gold standard had emerged.

England stumbled onto a monometallic gold standard in the 18th century after having operated on a bimetallic basis for centuries. The gold-to-silver ratio used by the mint in the later 1600s and early 1700s undervalued silver and overvalued gold, so England's silver coins were steadily being shipped to the continent, causing silver coin shortages. Isaac Newton, the famous physicist who was appointed Master of the Mint in 1699, counseled the government to bring the ratio in line with the market. But when he finally moved to fix the problem in 1717, he undershot the amount of adjustment necessary, so that silver remained undervalued and the export of silver coins continued. Thus England was pushed onto a gold standard.

-The Hybrid Circulation of Coins and Paper Money-

By the 17th century, banknotes had joined coins in circulation. Paper money was originally convertible into a fixed amount of coins, issuers holding enough reserves in their vaults to ensure that ready convertibility was possible. A banknote is far easier to carry and handle than a coin, and since the public generally trusted the issuers of these notes, gold coins were pushed out of circulation and into bank vaults or non-monetary uses like jewellery. By the 1800s, it was rare to see a gold coin circulating in England.

Even as banknotes came to dominate, the British standard effectively remained a gold coin standard. Since a banknote was convertible into a fixed amount of coin, the note's purchasing power was regulated by the value of the coin itself. If there was any divergence between the two, say notes became more valuable than underlying coins, than arbitrageurs would push them back into line by buying coins for 99p and converting them into £1, earning 1 penny in risk-free profits.

The Bank of England's first 5 pound note, 1793

Substituting out metal with paper resulted in a cheaper payments system. Adam Smith was one of the earlier writers to comment on this, describing gold and silver coins as a highway that "carries to market all the grass and corn of the country." Bank-provided paper money was a more superior sort of thoroughfare, in Smith's words a "waggon-way through the air." The replacement of gold by paper money allowed the nation to convert barren highways - its metallic coinage - into goods pastures and cornfields, thus increasing the annual produce of the country.

2. The Gold Bullion Standard

If gold coins weren't used much in trade, might it be possible to cease minting them altogether yet remain on a version of the gold standard? This was the idea behind the gold bullion standard, first conceived by the famous English economist David Ricardo in early 1816 and eventually adopted in Britain some one hundred years later, in the aftermath of WWI. Under a bullion standard, an issuer of paper money promised to redeem its banknotes not with gold coins, or specie, but for a given amount of raw bullion.

At the same time, the mint ceased to allow free coinage of gold, effectively closing itself to the public. Existing gold coins were called in and demonetized. The mint now focused its resources on providing the government with low denomination token coins for use as small change. The value of token coins wasn't regulated by the metal inside of them. After all, a token coin with the face value of £1 might contain just a few cents worth of silver, copper or nickel. Rather, a £1 token circulated at its face value of £1 because the monetary (or fiscal) authority promised to buy those tokens up at their face value.

The adoption of a gold bullion standard resulted in a reduction in the costs of running the payments system. By pushing gold coins entirely out of circulation and replacing them with a combination of token coins and paper money, gold was conserved and could be put towards better uses. It was one step forward towards Adam Smith's waggon-way through the air.

3. The Gold Exchange Standard

A gold exchange standard takes the principle of gold conservation even further. Where the shift onto a gold bullion standard meant that any institution that issued paper money was now obligated to redeem their notes with raw bullion rather than coins, under a gold exchange standard these same issuers could no longer redeem their notes with raw bullion but were required to offer notes of a second-party issuer that was itself on a gold coin or gold bullion standard.

A number of nations adopted this sort of standard in the 1800s and early 1900s, including the Philippines and India. But perhaps the most famous example was the Bretton Woods system that dominated after WWII up until 1971. Under the Bretton Woods system, the U.S. Treasury promised to redeem its notes directly for gold. Most other nations in turn agreed to redeem their notes with a fixed quantity of U.S. Dollars. So while French Francs and Japanese Yen and Canadian Dollars weren't directly redeemable in gold, they were indirectly convertible.

4. A Partially Convertible, or Limping Gold Bullion Standard

Limping standards originally emerged when bimetallic coin standards were adjusted in such a way that the mints continued to allow free coinage of one of the metals, say gold, but ceased to freely coin the other, say silver. The silver coins were not removed, however, and continued to circulate along with gold coins, the silver coinage "limping on" so to say.

But we are more interested in the limping standard's more modern incarnation, a partially-convertible gold bullion standard. Rather than allowing everyone the ability to redeem paper banknotes for gold, a central bank (or any other issuer) imposed conditions on who could convert their banknotes. In 1934, for instance, the U.S. ceased allowing private individuals and businesses to convert their notes into gold, limiting this feature to foreign governments and other large government-sponsored entities.

Evolution of the promises on a Federal Reserve banknote (source)

Partially-convertible systems are more convenient for issuers to maintain since they reduce the infrastructure costs involved in maintaining universal convertibility. We see this same principle applied to modern-day Exchange Traded Funds (ETFs), for instance. Although ETF units are convertible into an underlying instrument (say the S&P 500 or gold), only a few select authorized participants have permission to invoke this convertibility option. As long as these authorized participants are motivated by profits, the value of the ETF units will never diverge very far from the value of the underlying instruments. If ETF providers were required to allow everyone to redeem their units, they would have to build out and maintain the requisite infrastructure, the resulting costs pushing up fees.

Likewise, partially-convertible gold bullion standards such as the one that the U.S. ran from 1934 to 1971 could, in principal, lever the financial expertise of a few authorized participants to achieve the same fixedness to gold as a regular gold bullion standard or an old-fashioned gold coin standard, but at far less cost to society. Complicating matters in the U.S.'s case was the fact that only foreign governments could convert dollar banknotes into gold, and these governments were not as efficient as profit-minded ETF authorized participants in policing the link between gold and dollars.

In Summary...

There have been a number of different gold standards over the last thousand or so years. Each iteration brought with it a reduced role for the monetary metals, the resulting reduction in storage and handling costs and the diversion of gold to better uses being a net gain to society.

At the same time, even though gold has had a smaller role to play, the purchasing power of the nation's monetary units throughout this evolution continued to be tethered to the yellow metal rather than being dictated by some more arbitrary force. Put differently, from one version of the gold standard to the next, society benefited from the price stability afforded by a link to gold while being liberated from some of the metal's inconvenient physical burdens.

Should we Restore the Gold Standard?

This blog post is a guest post on BullionStar's Blog by the renowned blogger JP Koning who will be writing about monetary economics, central banking and gold. BullionStar does not endorse or oppose the opinions presented but encourage a healthy debate. 

Would it make sense to rebuild an international gold standard like the one we had in the late 1800s? Larry White says the idea has merit, David Glasner believes it isn't worth the risk. Over the years I've followed the back-and-forth between these two blogging economists, each of whom has done an admirable job defending their respective side for and against the gold standard. Let's look at one or two of the most important themes running through the White v Glasner debate.

Like a ruler measures distances, a nation's monetary standard serves as a measuring stick for the value of goods and services. People need to be able to set sticker prices with the unit, calculate profit and loss, negotiate labour contracts, and establish the terms of long-term debts using it. If the measuring stick is faulty, then all these important tasks becomes unnecessarily difficult.

Gold as Unit of Account

Since 1971 our measuring stick has been irredeemable paper currency, or a fiat money standard. Central banks try to ensure that, within the confines of their nation, the general level of domestic consumer prices stays constant, or at least rises at a constant rate of around 2-3%. And while the first decade of the fiat standard was a disaster characterized by high and rising inflation, central bankers in developed nations have generally managed to keep inflation on track for the last thirty or so years.

To re-establish gold as the measuring stick, each nation's unit of account—say the $ or ¥ or £—would have to be redefined as a certain fixed number of ounces of gold. Banknotes and central bank deposits, which are currently inconvertible, would be made convertible into an appropriate amount of gold. It is important that all nations return to the gold standard rather than just one, because one of the big advantages of an international gold standard is that with all currencies pegged to gold, it is much simpler for citizens of one nation to make calculations using another nation's unit. And this makes cross-border trade and investment easier to engage in.


Should banknotes and electronic fiat currency once again be made convertible into gold?

In Favour of the Gold Standard: Larry White

How well have the two standards served as measuring sticks? As the chart below illustrates, year-to-year changes in U.S. consumer prices were quite variable during the classical gold standard era, rising some years and falling the next. The source for this chart is from this paper that White has coauthored with George Selgin and William Lastrapes. The classical gold standard from which the authors draws their data lasted from 1880—when the majority of the world's major nations defined their currency in terms of the gold—to 1914 when the gold standard was dismantled on the eve of World War I. Data shows that the fiat standard that has been in place since 1971 demonstrates more predictable year-to-year price changes. Citizens of developed nations are pretty safe assuming that next year, domestic prices will rise by 2-3%.

Quarterly US inflation rate, 1875 to 2010

However, it is over longer periods of time that gold outperforms as a measuring stick. In the chart below, the authors show that the quarterly price level during the gold standard tended to deviate much less from its six-year average rate than during the fiat era. Because the general level of prices was more predictable under a gold standard, this provided those who needed to construct long-term debt contracts with a degree of certainty about where prices might be in ten or twenty years that is lacking under a fiat standard. White points out that this may be why 100-year bonds were common in the 1800s, but not so much now.

6-year rolling standard deviations of the U.S. quarterly price level

According to White, the main reason for the long-term stability of gold is the tendency for higher prices to encourage gold miners to increase the supply of metal, thus tamping down on the price, and conversely lower prices to encourage them to reduce production, thus buoying prices. In other words, prices under a gold standard were mean reverting. This mean reversion was generated "impersonally", or automatically, by the market, a superior sort of stability compared to that generated by a fiat standard, which depends on the skills and wherewithal of technocrats employed by the central bank.

Against the Gold Standard: David Glasner

David Glasner is skeptical about the gold standard because he doesn't agree that it mean-reverts fast enough. All of the gold ounces that have ever been mined continue to exist in vaults or under mattresses or around necks. Compared to this extant gold stock, the flow of new gold production is tiny. So if there is an increase in people's demand for gold, it is unlikely that new flows will be able to satisfy it, at least not for some period of time. Likewise, reduced gold production on the part of gold miners won't be able to vacuum up enough of the slack should people suddenly want less of the stuff. In either case, the price of gold will have accommodate shifts in demand by rising or falling quite a bit.

One thing that most monetary economists agree on is that fluctuations in the value of the item used as the standard—gold or fiat money—should not interfere with the "real" economy, say by causing unemployment or gluts of unsold goods. While many prices in an economy are incredibly flexible, like the price of stocks or gold or bitcoin, there are also many prices that are sticky, in particular labour. Under a gold standard, if there is a sudden increase in the demand to hoard gold, then there will be pressure on price of gold to rise. The rise in the gold price means that the general level of prices must fall. Goods and services, after all, are priced in terms of gold-backed notes. But with wages and many other prices locked in place, the response on the part of employers will be to adjust by announcing mass layoffs. Rather than cutting the sticker prices of goods, retailers will suffer though gluts of unsold inventory. This is a recession.

Glasner's favorite example of this occurred during the late 1920s. After WWI had ended, most nations attempted to restore the pre-war gold standard with banknotes once again being redeemable with fixed amounts of gold. But then the Bank of France, France's central bank, began to buy up huge quantities of gold in 1926, driving the gold price up. The U.S. Federal Reserve was unwilling to counterbalance what was viewed as insane purchases by the Bank of France, the result being the worst recession on record, the Great Depression.

What Type of Gold Standard?

Given that various commodity standards have been in place for centuries, why did it take till 1929 for a massive monetary mistake to finally occur? White blames this on large government actors, specifically central banks. In the initial international gold standard that ran from 1880-1914, nations such as Canada, Australia, and the U.S. didn't have central banks. Commercial banks in these nations chose to link their privately-issued banknotes to gold, the goal of these competing banks being to to earn profit rather than enact social policies. So earlier versions of the gold standard functioned far more naturally, without the meddling of large actors who refused to abide by the typical rules of a gold standard. It is for this reasons that White prefers that any return to the gold standard be packaged with an end to central banks, thus precluding episodes like the Great Depression from occurring.

David Glasner remains skeptical. According to Glasner, even the classical gold standard that ran from 1880 to 1914 required management, the Bank of England leaning in such a way as to counterbalance large demands for gold from other central banks and thus preventing anything like the Great Depression from occurring. And even if central banks were to be dismantled under a 21st century version of the gold standard so as to preclude an "insane" Bank of France scenario, there remains the problem of "panic buying" of gold by the public—and the resulting gold-driven recession this would cause.

So Where does that Leave us?

As I hope you can see by a quick exploration of the debate between Larry White and David Glasner, restoration of the gold standard is a complicated issue. I'd encourage readers who are interested to dive a bit deeper into the subject by reading David's posts here and Larry's here.

As for myself, White's work on the 1880-1914 gold standard has been helpful in removing many of the preconceptions I had of the gold standard, no doubt passed off to me by commentators who were never very familiar with the actual data. Nevertheless, I tend to agree with Glasner that under a global gold standard (with no central banks) a sudden spike in the public's demand for gold would impose large costs on the global economy. With citizens of the globe being so connected through the internet and free capital markets, these sorts of episodes might be more common nowadays than they were in the 1800s. I'm not sure the benefits of a gold standard, including exchange rate stability, make up for this risk. Given that Western central banks have done a fairly decent job of keeping inflation under control for the last thirty or so years, I'll give them the benefit of the doubt... for now.

Your Weight in Gold

The traditional phrase “worth your weight in gold” has been used since Roman times, and is a well-known saying signifying that someone or something is very valuable, helpful, or to be treasured.

But taken literally, what ‘value’ would a person be worth if they were worth their own weight in gold?

For a given gold price, the answer not surprisingly depends on the person’s weight, so a more suitable and relevant question might be what value would an average person be worth if they were worth their weight in gold?

Since average weight will vary by gender, a practical calculation would be to run two calculations, one for the average weight of a woman, and the other for the average weight of a man.

Looking at average weight data over regions of the world by male and female yields an average weight for a man of 78.5 kgs (173 lbs), and an average weight for a woman of 69 kgs (152 lbs).

Across the world, human weight data shows the regional averages for both genders from heaviest to lightest run as follows: North America, Oceania, Europe, Latin America, Asia, Africa. Taking simple averages of these regions for men and women, the average global weight for a man is 78.5 kgs (173 lbs), while the average weight for a woman is 69 kgs (152 lbs).

Gold Kilobars

At a gold price of US $1350, a world average weight of 78.5 kgs (173 lbs) for a man would mean that the average adult male would weigh approximately 1993 troy ounces, and be valued at approximately US $ 3.4 million. Note that 1 kilo =  32.1507 troy ounces.

32.1507 troy ounces  * 78.5 kgs = 2524 ozs = US $3.40 million

At the same gold price, a world average weight of 69 kgs (152 lbs) for a woman would mean that the average adult female would weigh approximately 2218  troy ounces, and would be valued at approximately US $3 million.

32.1507 troy ounces  * 69 kgs = 2218 ozs = US $2.99 million

Overall, an average adult across the world weighs 2371 ozs, which at a gold price of US $1350 would be valued at US$3.2 million.

Most people will be familiar with the large gold bars that are stored in central bank gold vaults, such as the gold vaults of the Bank of England in London. These ‘Good Delivery’ gold bars are standard bars in the worldwide wholesale gold market, and although they are variable weight bars, each of these gold bars usually weighs in the region of 400 ozs. Assuming one of these gold bars weighs 400 ozs, then the average adult in our global weight calculation would weigh the equivalent of  5.92 good delivery bars. Let’s call it 6 Good Delivery gold bars, which would be a neat pyramid of 3 * 2 * 1 gold bars.

An average adult weighs the same as 6 large central bank gold bars

Similarly, when measured in terms of gold kilobars, the average adult from our calculation would weigh the equivalent of 74 gold kilobars.

Gold's High Density

Density refers to the amount of mass (weight) in a given volume. Gold has a very high density, 19.3 g/cm3, which is higher than most other metals. As an example, a cubic centimetre of gold will weigh 19.3 grams. Gold’s density is also 19 times higher than water, which is why gold panning works, since the gold will sink to the bottom of the pan and separate from other materials.

Gold's high density also explains why even a 1 ounce gold bar or 1 ounce gold coin will feel heavy when held in the hand, especially for people holding one of these gold bars or gold coin for the first time. It also explains why trying to lift up a 400 oz gold bar, especially with one hand, is a lot more challenging than it first looks.

Gold’s high density also means that a significant amount of gold can be stored in a small area. And because a small amount of gold is valuable, this also means that a very high value holding of gold can be stored in a small area.

This can be referred to as gold’s value dense property, i.e. a small quantity has a high value. This also means that gold can be hidden easily. And that a small amount of gold worth a significant amount can be carried easily, i.e. gold is portable.

If measured in gold kilobars, an average adult would weigh the same as 74 gold kilobars.

Gold's high density makes it difficult to counterfeit, since few other metals can be substituted for gold as their densities are lower. One exception is the metal tungsten, which has a density of about 19.3 g/cm3, similar to gold. While tungsten is sometimes associated with gold bar forgeries, nowadays there are various tests and measurement apparatuses which can determine that a counterfeit bar contains tungsten and not gold.

In comparison to gold, silver has a density of 10.5, which explains why silver is bulkier and takes up more room to store. As the silver price is about 80 times less than the gold price, it also means that a high value holding of silver will require substantially more room to store than a gold holding of the same value. This also explains why silver storage fees in a vault are higher than gold storage fees.

The Gold Standard

Apart from the phrase “your weight in gold”, there are many other well-known idioms associated with gold which also convey gold’s high value and the esteem with which societies and civilizations have held gold in throughout history.

For example, as well as describing an actual gold standard where gold-backed paper currencies in many parts of the world up to the 20th century, the phrase “gold standard” is used metaphorically describe a standard of excellence by which other things are measured.

“Like gold dust” is a popular idiom signifying that something is very rare and of high value, and which is difficult to find because of its rarity value. This expression is derived directly from the fact that gold too is difficult to find, is rare and is of high value.

If a business or enterprise is referred to as “a gold mine”, it is because that business generates substantial profits or cash flow for the owners. Similarly, if someone is “sitting on a gold mine”, it means that they have land or property which is worth a considerable amount.

The terms ‘golden handshake’ and ‘golden parachute’ are now used widely in business to refer to generous departure terms when employees or executives leave a position of employment.

A “gold rush” is often synonymous with the frenzied pursuit of an investment opportunity or new investment sector, such as a gold rush on Wall Street, or the dot-com gold rush. Finally, to “strike gold’ is to find success or wealth through a deliberate endeavor or sometimes through luck.

Whatever the expression, the one thing that these well-known phrases have in common is that they allude to gold's high value and rarity, and are immediately accepted and understood when used in the English language.

Trump and Gold

It was an event-filled and turbulent evening last night as the results for the 45th US presidential election rolled in, signalling that the majority of the American electorate had voted for Republican candidate Donald Trump. Trump received over 270 of the 538 electoral college votes needed to secure a majority. Trump will now be inaugurated as US President on Friday January 20, 2017.

Media and Polls eat Humble Pie

This, the 58th US presidential election, will no doubt go down in history as one of the most unusual, divisive and wrongly predicted US presidential elections of all time. The official surveys of the expected outcome were proven to be way off the mark, and in fact the entire US polling industry may have to reassess its methodologies and enter a period of self-reflection. The mainstream media machine, particularly but not exclusively in the US, was also shown up throughout this election campaign to be glaringly slanted and in favor of the Democratic candidate Hillary Clinton at the expense of Trump, and a large amount of shock, back-peddling and embarrassment seems to have hit that section of the media today, in a 2017 version of 'Dewey defeats Truman'.

The media and survey driven, but shockingly wrong, consensus of an assured Clinton victory, which was relentlessly pitched over the last few months, also seems to have been priced into the financial markets, which is arguably why the actual outcome of a Trump victory caused acute volatility and large moves across the markets last night and into today.

Market Volatility

US stock market index futures all fell sharply during trading in US evening hours last night as the prospects of a trump victory began to crystallize. S&P 500 futures and Nasdaq 100 futures both went limit down in trading, each losing about 5%, and Dow equity index futures at one stage was 800 points lower. Asian market equities were also weaker, and the US Dollar weakening against most major currencies, and the Mexican Peso also plummeting.

The markets had a very Brexit feel to them, in a similar fashion to how the markets had reacted overnight between late Thursday June 23rd, the day the Brexit EU referendum was held in the UK, and early morning Friday June 24th, when it became clear that the referendum results pointed to a majority of voters wanted the UK to leave the European Union. In both these events, Brexit and a Trump win, financial market uncertainty has been a big factor.

wh

Florida and Ohio

Results from the battleground states of Florida, Ohio, and to a lesser extent North Carolina were decisive to Trump’s election and to the market’s moves. Florida, with 29 electoral votes, and the 3rd highest population by state at just over 20 million people, was called to Trump late on Tuesday night before 11pm. Ohio, with 18 electoral seats and 7th largest state population of 11.6 million people went to Trump at about 10:20pm. North Carolina, with 15 electoral seats and a 10 million population, was called for Trump just after 11pm NYT. Within the space of an hour, Trump had won the 3 key states of Florida, Ohio and North Carolina, which between then have 62 electoral college seats. By just after 1:30am, Pennsylvania was called to Trump, and following that Wisconsin. A trump majority in Iowa also helped. The rapidity of these results coming in also had a resonance with the Brexit results back in June.

Previously, the states of Florida, Ohio, Iowa, Pennsylvania, Wisconsin, and Michigan, had all majority voted for Obama on both occasions when he had been elected. This is why these particular state results going to Trump were a) critical for Trump and b) caused the volatile market reactions due to the markets' perceptions that a Trump presidency will create more unknowns and greater uncertainty.

Precious metals prices, as would be expected, moved higher on the back of the market uncertainty and the Trump gains. Gold’s low in US Dollars was about $1270 at 8pm New York time (NYT), then it made a $50 ascent to a high of $1336 just after midnight NYT, an up move of 5.2%. See BullionStar gold chart for one day move. Silver in US Dollars moved up from $18.40 at about 8pm NYT to $19.02, an up-move of up 3.37%. Platinum also had a sizable up move, at one stage rising $20 from $1000 to $1020. These moves in precious metals prices were also reminiscent of similar moves on the morning of the Brexit results.

Trump and a Gold Standard

Beyond these short-term benefits to the gold price and the prices of other precious metals from a Trump victory, there are some other longer-term benefits to gold that a Donald trump presidency might create.

These longer term potential benefits to gold stem from Trump's affinity for the use of a gold standard as part of the US monetary system. A gold standard, to define the term generally, is a monetary system that employs gold as a monetary unit, and links the economy's currency to that monetary unit of gold. When used by a number of countries, each country's currency can then be expressed in terms of gold, i.e. the exchange rates between the currencies are defined in terms of gold.

Donald Trump is known to be sympathetic to the concept of a gold standard, and even attracted to the prospect of implementing a gold standard as a way of maintaining the stability and value of the US Dollar. The first of Trump's recent references to a gold standard came in a 2015 interview with WMUR-TV, New Hampshire, in a segment called ‘Conversation with the Candidate’, published on March 31, 2015, in which Trump commented on the gold standard in response to an audience question:

Question: “Can you envision a scenario that this country ever goes back to a gold standard?”

Trump: “In some ways, I like the gold standard and there is something very nice about it but you have to go back at the right time... We used to have a very solid country because it was based on a gold standard for it. We do not have that anymore. There is something very nice about the concept of that. It would be very hard to do at this point and one of the problems is we do not have the gold. Other places have the gold."

The transcript of this interview can be read in an archived page of the WTAE-TV Pittsburgh website. See ‘web extra’ section. WTAE is a sister channel of WMUR.

It's slightly odd that Trump thinks the US doesn't have the gold, or maybe he knows something about Fort Knox and the US Treasury gold reserves that has not been made public.

Following his March 2015 comments, Trump again addressed the gold standard in November 2015 in a short video interview with GQ magazine when he said:

“Bringing back the gold standard would be very hard to do, but boy would it be wonderful. We'd have a standard on which to base our money."

You can see the short GQ video interview with Trump on visiting this page.

tt-ny

Some of Trump's economic advisers also have notable views on gold, and the possible utilization of gold within the US currency system. In an interview with Forbes magazine in August this year, Dr. Judy Shelton, part of Trump's economic advisory team, was asked on her view of a gold backed monetary system:

Forbes Question: "You’ve written before about going back to some sort of gold-based monetary system. Is that something the U.S. could do unilaterally, or would we need to convene other nations and get them on board?"

Shelton: "In terms of gold being involved [in the system], some people may think of that as a throwback, but I see it as a sophisticated, forward-looking approach because gold is neutral and it’s universal.

It’s a well-accepted monetary surrogate that transcends borders and time. If you look at the foreign reserves of the most important countries, they keep them mostly in gold. I don’t want to read too much into it, but it proves that gold is not some barbarous relic.”

Shelton also referenced a Bretton Woods style conference:

"I’m not opposed to a new Bretton Woods conference, and if it takes place at Mar-a-Lago, I’m fine with that."

Bretton Woods being the 1944 conference in New Hampshire at which the attendee countries planned the introduction of a gold backed system of fixed exchange rates, where the value of  the US Dollar was linked to gold and other participating currencies were linked to the Dollar. Mar-a-Lago is a hotel and club in palm Beach, Florida, owned by Trump.

John Paulson, the founder and head of the well-known and successful hedge fund company Paulson & Co Inc, is also an economic advisor to Trump. Paulson is known, among other things, for his fund's investments in gold, and for example, Paulson & Co is currently the 5th largest institutional investor the SPDR Gold Trust (GLD). The appointment of Paulson to a position on Trump's team could also arguably bolster Trump's position on gold in the monetary system.

As an aside, in the WMUR-TV interview in March 2015, Donald Trump also expressed a view on auditing the Federal Reserve, a view that it will be interesting to see if he still holds during his Presidency. In another answer to a question from the audience, Trump agreed that the Fed should be audited:

Question: Let's go back to our audience now coming from Bob. What is your question? ...[Bob]:"My question is about Federal Reserve. What if any changes would you make to Federal Reserve and do you think they should be audited on a regular basis?"

Trump: "Audited, absolutely. I really think you can have it or not have it. A lot of people like it and a lot of conservative people like it. They think there is an adjustment with interest rates and other things. I'm not a fan. I'm not a big fan. Audit, 100%."

Keynes, Greenspan and Bernanke

Any time the gold standard is mentioned, such as when Trump mentioned it on the occasions back in 2015, there are invariably sections of the financial media which wheel out the old misquote by the economist John Maynard Keynes, and state that Keynes said that gold is a barbarous relic. Even Shelton seems to have used the old misquote.

However, Keynes never said that gold was a barbarous relic. Keynes actually wrote the words “the gold standard is already a barbarous relic”, in chapter 4 of his 1924 book “A tract on Monetary Reform”, when specifically discussing whether Britain should return to a gold standard. Britain returned to a gold standard in 1925, against the advice of Keynes. The quote is at the bottom of page 172 of Keynes book “A tract on Monetary Reform”, (1923, this edition Published 1924), chapter 4, “Alternative aims in Monetary Policy”.

Arguably, Keynes was referring to the move after World War I by some countries to return to a gold standard (the inter-war gold standard), and even if he was talking about the classic gold standard (which ran from 1821 to 1914), Keynes just had a personal view that the gold standard was too constraining for what he saw as a "modern" economic system. But what Keynes was essentially advocating at that time, in other language, was a debasement of currency. Fast forward nearly 100 years and its obvious now that fiat currencies' purchasing power has been heavily debased vis-a-vis the gold standard period.

Contemporary endorsements and appreciations for a gold standard are not actually the far out radical ideas that some might claim them to be and are not exclusive to Trump and his advisors. The concept of a gold standard is actually discussed by serious and mainstream monetary economists and even to an extent endorsed by them. In June this year, in an interview with Bloomberg in the aftermath of the UK’s Brexit results, Alan Greenspan, former Fed chairman had this to say about the gold standard:

“Now if we went back on the gold standard and we adhered to the actual structure of the gold standard as it exists let’s say, prior to 1913, we’d be fine. Remember that the period 1870 to 1913 was one of the most aggressive periods economically that we’ve had in the U.S., and that was a golden period of the gold standard.”

And in March 2004 in a speech 'Money, Gold, and the Great Depression', even ex Federal Reserve chairman, Ben Bernanke, who always seemed to give a somewhat grudging partial endorsement to gold, had this to say:

"The gold standard appeared to be highly successful from about 1870 to the beginning of World War I in 1914. During the so-called "classical" gold standard period, international trade and capital flows expanded markedly, and central banks experienced relatively few problems ensuring that their currencies retained their legal value. The gold standard was suspended during World War I, however, because of disruptions to trade and international capital flows and because countries needed more financial flexibility to finance their war efforts.

With Trump soon at the helm and in the White House, it's not beyond the bounds of possibility that Trump and his advisors may explore the utilization of gold within the US monetary system over the next 4 years. And who knows, they might even bring Greenspan and Bernanke in as consultants, but perhaps only if Trump does not audit the Fed!