Gold is similar to the Matrix in that it isn't just one thing. It is many things, depending upon context.
In the context of US debt, which is officially twenty trillion, it is irrelevant because we all have full faith and confidence in the fact that the United States is not a dead beat nation.
Let us do some basic arithmetic.
Twenty trillion debt divided by three hundred and forty million people is.............
Sixty thousand each. Assuming a mummy and daddy with two children, their household share of the debt is a cool quarter million.
Let us assume this family have no intention of repaying all that debt over their lifetime. A nation of such people is called America. So, what next?
Eventually, human beings will do the arithmetic and rightly lose full faith and confidence in the ability of the USA to repay its debt. What next? Well, America will remind us all of its huge army and its even larger treasure chest. US debt will be backed by military power projecting strength and 8,300 tonnes of gold.
Pick your own initial conditions for the pricing of gold under these conditions. Will the U.S. state the value of its gold at 43 dollars per ounce? Not likely.
Here the assumptions are no faith and confidence in the US dollar. This would have major financial repercussions. All the US could do is back every dollar with gold. The world's largest army would be on full alert. Anybody gonna argue? Crisis over, no confidence in the dollar restored as each dollar is now a claim against physical gold.
That readers is the value of gold. in extremis, gold restores confidence in the financial system. Should we ever not believe that the average American family isn't good for a quarter of a million dollar debt then gold saves the day.
Panic over, don't worry.
That is why gold is considered by some to be a monetary metal. It is why central banks posses it.
Under these conditions, how much gold would back each of the twenty trillion dollars of debt? The entire United States military poised ready to obliterate any country who denies them their exceptionalism.
Let us do the arithmetic.
8,300 tons is 8,300,000 kg is 8,300,000,000g is 8,300,000,000,000mg
Thus the amount of gold backing each dollar of US govt debt is 0.415mg
Should this evercome to pass then it would be sensible to exchange a few dollars for gold today. The current price of the U.S. dollar is just over 23mg
That would be a fifty fold increase.
In the real world we also have interest rates. These would no longer be zero or negative. Assuming a sudden spike upwards then financial asset prices would smash just as hard downwards. The value of bonds, which is what government debt is denominated in, also crashes.
Thus the twenty trillion of debt crashes too. For example, a recently issued thirty year bond at a 0.25% coupon is worth far less should interest rates spike to 15%. Under these circumstances only a five fold increase in gold price could be sufficient to restore confidence in the financial system.
Basically, gold is money and everything else is just credit. As little as two percent of your net worth in physical gold could prove to your grandchildren that you understood the world, at least a little.
Timing is the major problem here. How do I know when everyone else will lose confidence in paper currencies and want gold?
I haven't mentioned silver. Central banks don't have silver they have gold. This article was about global trade and confidence in the dollar as having any value, other than tradition. As a last resort, central banks have gold to restore confidence and not silver. I might write about silver later. Potentially, silver could and should easily out perform gold. If gold increases five fold, silver 'should' increase 25 fold. However, it probably won't. (I have just swapped all of my silver for gold over at bullion vault. I hope to be proven wrong, in my lifetime.)
This article was written on 20th August 2016
This article is well worth a read too