Infestation! The Gold Bugs are Multiplying

For the moment, the stock market is not concerned with the inflationary effects of $5 trillion worth of direct and indirect stimulus keeping the US and global economy afloat, and why should it be? That seems like more of a “later” problem. If the economy doesn’t manage to produce the goods and services to soak it all up, and a twenty dollar UBER ride ends up costing fifty dollars, well… we’ll deal with that when it happens. For now, the nicely diversified half-equities, half fixed-income savings portfolio that was meant to be raided to pay for healthcare costs in the average American wage earner’s retirement isn’t looking like the dead money it was last week. Hell, the market is trending up!

Lay off the Gold Bugs, they’ve been WELL trolled.

The massive and unprecedented money printing undertaken to save the economy through the facilities of the debt and equities markets has turned the grumbles of a large and growing section of the alt financial press into screaming howls. This faction has warned of the perilous danger that artificial money has been posing to the economy since… well… as long as anyone can remember. And this latest episode had all the makings of an “I-told-you-so!” for the ages. Having it forestalled by even more invented money is kind of like warning some kid that he ought to drive more carefully, only to have him crash a Ferrari that he bought with the money from an insurance settlement into their nice, sensible American sedan, then immediately file another claim. It’s a deep offense to their sense of order and natural financial justice… but that’s a quaint notion, anyhow. When was capitalism ever supposed to be fair?

As fun as they are to troll, the newsletter crowd have a point, mathematically speaking. Money with an infinite supply, being distributed by a bank with a habit of going back to the well all of the time, will eventually drive up the equivalent value of money that has a finite supply.

“If you LOOK at HISTORY…”

This dynamic featured prominently in the narrative of the original massive jump in unemployment that came with a stock market crash. In 1933, with investors driving up the gold price, as they looked for some stability against a shaky US Dollar, President Franklin D. Roosevelt made the private ownership of gold illegal. Americans were required to sell their gold to the Federal Reserve at the newly set price of $35/ ounce because the government holding all the legal gold meant there was no competing money, and the US Government could issue all the legal tender it wanted. A brute force move, sure, but there was a depression on. They didn’t get points for subtlety. The following years brought the tremendous, government-funded output of the New Deal and the war effort, and kicked off the greatest period of growth and prosperity that the world has ever seen.

The Fed eventually fostered an economy so strong that it made for a dollar so strong that it could dispense with the gold hoard all together, because the “full faith and credit of the US government” was good enough to keep the dollar afloat. Economists and bankers started calling gold a “barbarous relic” all the time, just because it was fun to make Ron Paul and Peter Schiff types foam at the mouth.

Alllllllllllll the money!

The larger gold bug point is that the Fed cares about the actual economy to the extent that the financial keptokracy tasked with holding it together can continue to hold it together. Nobody has ever tried backing a currency with shares of an airline or a hedge fund, or their debt for that matter, because that wouldn’t work. So let’s count up the gold ounces. (click images to enlarge)

All told, between the Fed and the US Mint, we’re looking at 261.4 million ounces. Hitchhiker’s Guide to the Galaxy fans may be delighted to learn that the government values all of that gold at $42/oz today, but let’s give them the spot price for it. $440.8 billion.

That’s a big number but, even if we throw in the US Mint’s gold, it’s a tiny fraction of the Fed’s total assets which, as we mentioned, have seen some growth lately.

But the government doesn’t have to back up its own money with gold. The (now outdated) concept is that the legal tender it issues ought to be redeemable for gold. In (notional) practice, there doesn’t have to be enough to back every dollar, just the ones owned by people who want to get cute. Since the government gold is 7.3% of the Fed’s total assets (at the spot price), that seems like a good starting point. Most of the nuts who would try to head down to the mint with their dollars and demand a swap for coins are pre-occupied with cryptocurrencies anyhow. Let’s say a gold reserve equivalent to 7.3% of the total money supply would be enough to back the dollar.

The total money supply (M3 as tracked by the St. Louis Federal Reserve) was $15.4 trillion in January 2020, and the Fed printed $1.8 trillion since then, so let’s make it $17.2 trillion. 7.3% of that is $1.2 trillion. That’s 2.86x more gold than the government has, and could you imagine what would happen to the gold ask if the Fed started buying it? The average daily gold volume on the LME is around 700,000 ounces. Our notional, currency-solidifying Fed needs 488 million ounces to top it all up.

It would be a lot more pragmatic for the government to just re-value the $42 ounces in its reserves to something more… contemporary. To make the value of those resource ounces equivalent to 7.3% of the total money supply, that number would be $4,838/ ounce… but that’s just for the money printed so far.

Franco Nevada’s Pierre Lassonde recently made a call for $20,000/oz gold, based on supply disruptions and the pace of money creation, but we suspect that he stole the figure from OG Newsletter writer Doug Casey, because we’ve been stealing his act for longer than Lassonde has. We’re not going to make fun of that price to avoid tempting fate. Casey built his empire by knowing his audience.

Information for this briefing was found via the provided links and the Federal Reserve Bank. The author has no securities or affiliations related to this organization. Not a recommendation to buy or sell. Always do additional research and consult a professional before purchasing a security. The author holds no licenses.