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“Money is the standard according to which available goods are distributed among a population.”

~ Alfred Lansburgh, The Money Revelation

An astute reader asked an important question this week:

“If the dollar collapses and another money or currency replaces it, how in the world will anyone know how many units of that new money or currency it will take to buy an ounce of gold?”

Yesterday, we talked a bit about the real value of money – its purchasing power.

What we really want to know is not what we can buy, but how much.

Well, today is part deux to answer that question.

Now, what we want to know is how a currency gets valued, let’s say, in a gold-backed system.

First, when a currency is backed by gold, there is a fixed exchange rate.

For example, if the U.S. dollar were backed by gold, the government might say that 1 ounce of gold is equal to 500 dollars.

So, the dollars value would be fixed at that rate.

The more gold your central bank owns, the stronger your currency becomes because you can distribute more paper money.

Second, when a currency is backed by gold, there is typically more stability.

The amount of dollars is a fixed ratio of gold to paper.

So, a central bank cannot simply decide to change the amount of dollars without the amount of gold reserves changing too.

And that leads us to my next point.

Third, when a currency is backed by gold, prices are based on the supply and demand of gold.

Let’s say the amount of gold increases, well, that means you can now buy more stuff with your dollars – purchasing power increases.

It’s the opposite if the amount of gold decreases. It will cost you more dollars to buy that brick of butter, and carton of eggs than it did before.

Generally though, the supply and demand of gold remains stable being monitored by a central bank, or government.

But, there are also some concerns in a gold-backed system…

Because there’s a limited amount of gold in the world, it could be hard to grow your country’s economy because your country needs more gold.

So, if countries compete with one another then there is most likely an inclination to ask for gold whenever possible.

A lack of gold basically becomes a threat to the value of a currency.

Something nations need to watch out for…

And there you have it.

When the system resets, and quite possibly it will be reset to some kind of gold-backed system, you will gain two important privileges.

1. Your gold will maintain its purchasing power.
2. You will most likely be able to purchase any currency you like.

It’s up to you.

In a gold-backed system, if you own gold, you own what the bank needs most.

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