by Brian Bloom, Beyond Neanderthal
There are those who have been arguing vociferously for some years now that the world will be better off under a gold standard.
These people may or may not be correct, but we need to understand the implications of what a gold standard will bring with it.
Some years ago, the Bank Credit Analyst published a chart of the actual gold price relative to the theoretical gold price as derived from the USA’s “Net Liquid Liabilities”.
Theoretically, the BCA argued, if all the liquid assets of the sovereign USA – excluding gold bullion – were sold and the proceeds applied to pay off all the liquid sovereign liabilities, then – because there would be a shortfall – this net number would be the “Net Liquid Liabilities”. For the USA to remain a solvent entity, they argued, the price of gold per ounce would need to be the net liquid liability number divided by the number of ounces of gold held in the US gold reserves.
(It should be remembered that a US Dollar Bill is a promissory note issued by the US Federal Reserve. It is therefore a liquid liability)
For a period leading up to the late 1970s, the BCA tracked the theoretical price of gold relative to the actual price and found a tight correlation. That’s when the world still believed in a gold standard and that’s also when the US Fed (and other Central Banks) began to interfere in the gold markets with the objective of deliberately obfuscating/severing this relationship.
So let’s take a leaf out of the BCA’s book. Just for the hell of it, let’s assume that the USA’s liquid assets today equal its liquid liabilities excluding US Dollars in circulation. It would follow, therefore, that the price of gold would need to be the number of dollars in world currency reserves divided by the number of ounces of gold in the official US bullion reserves. (This assumes that the gold is still there. No verification audits have been done for decades.)
Okay, it’s a simple calculation:
Step 1: Quantifying the US’s Gold Reserves