Trump’s newest economic adviser is a goldbug.
Economist Judy Shelton has been a longtime supporter of the return to the gold standard.
In August 2016, Shelton was interviewed on CNN, saying, “I think we need another Bretton Woods. Or at least we need to be thinking in terms of a neutral reference point – a global unit of account. I mean something like a gold standard even, updated to reflect a digital world and fast-moving financial flows.”
And last week, Shelton told CNBC, “Money is meant to serve as a reliable measure. It’s really the key to free market capitalism. You have to send signals about prices by having clarity. And money’s supposed to be that unit of account that provides it. It’s supposed to be a dependable store of value. It’s not suppose to be just another government policy instrument to try to engineer outcomes.”
Trump is nominating Shelton to fill the empty seat on the Federal Reserve Board. And goldbugs couldn’t be happier.
The return of a Bretton Woods-style gold standard, where the U.S. dollar is pegged to the value of gold, is the ultimate ends of the goldbug philosophy, at least for American goldbugs. But is it a good idea?
Many people are very surprised to learn that even though I’m a gold investor and advocate for gold ownership, I don’t support the return of a Bretton Woods-style gold standard.
I’ll admit that in the very early days of my gold career, the idea of a gold standard was very appealing. But after nearly two decades of studying the gold and monetary markets, it’s pretty clear to me now that bringing the gold standard back is not a great idea. And there are very obvious reasons for that.
First, let’s consider personal gold ownership.
During the Bretton Woods system, which lasted between 1944 and 1971, it was illegal for U.S. citizens to own physical gold bullion. It was legal to own gold jewelry and collectible gold coins. But it was not legal to possess gold bullion like Krugerrands and Canadian Maple Leafs. And the penalty for breaking the law was harsh.
(Note: The American Gold Eagle, the official U.S. gold bullion coin today, wasn’t released by the Mint until 1986. So AGEs didn’t even exist during Bretton Woods.)
Under FDR’s Executive Order 6102, which was in effect between 1933 and 1975, possession of gold bullion carried a punishment of up to 10 years in prison and a $250,000 fine.
Let me say that again: You could go to prison for 10 years for owning a piece of metal! There are murderers who get lesser sentences.
But while that punishment might seem a bit harsh (and the truth is I’ve never found a legal case where someone actually went to prison for a decade over gold ownership), there was a good reason to keep gold bullion out of the hands of the public: to avoid manipulation of the dollar’s value by private individuals and organizations.
See, pegging the USD to gold creates a direct relationship between the two. And someone (or more realistically some group of people) with enough resources could own enough gold to affect supply. That in turn would affect the value of the USD.
So a new return of a Bretton Woods-style gold standard would also very likely bring the return of a new Executive Order 6102, where it would be illegal for Americans to own gold bullion again.
In other words, a goldbug advocating for the return of the gold standard is also advocating to make gold illegal again (MGIA).
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Yet there are still much bigger implications.
See, the United States can restrict gold ownership of its own citizens. But it can do nothing to stop the rest of the 7 billion other people on the planet from owning gold. And the fact is, right now the U.S. only controls a fraction of the world’s gold reserves.
According to the World Gold Council, gold reserves held by the world’s central banks total nearly 34,000 metric tonnes. The Fed currently holds just over 8,100 tonnes.
So by bringing back a Bretton Woods-style gold standard, the United States would be opening the door to allow foreign nations to manipulate the value of the dollar.
We can’t have that.
Just imagine what would happen if China, Iran, or Russia were able to directly manipulate the value of the USD more than they can now. Would you trust them not to?
At the end of the day, the gold standard may be a solid monetary policy in a different world. But not this one.
I believe economists like Shelton actually know all this. And advocating for the return of a gold standard is not a realistic proposition. Instead, it’s just a means to a personal end. In other words, Shelton and like-minded economists are just using the gold standard ideal to get themselves a better job. For Shelton, it worked.
But there’s good news for goldbugs: You don’t need the gold standard. Private investors can put themselves on a personal gold standard by simply owning the physical metal.
Don’t rely on the government to protect the value of your assets. Rely on yourself.
Until next time,
Luke Burgess
As an editor at Energy and Capital, Luke’s analysis and market research reach hundreds of thousands of investors every day. Luke is also a contributing editor of Angel Publishing’s Bull and Bust Report newsletter. There, he helps investors in leveraging the future supply-demand imbalance that he believes could be key to a cyclical upswing in the hard asset markets. For more on Luke, go to his editor’s page.
