The above image is from 2020. I explain what.

Gold Is Back

Times of London writer Mehreen Khan explains Why Gold Prices Keep Going Up and Up.

The shiny metal is one of the best-performing assets in the world this year, rising by 16 per cent to $2,497 per ounce, having already hit record highs in May and July. Despite being seen as simply a haven in inflationary times, gold has managed to deliver the best inflation-adjusted returns of any key asset this year, worth a juicy 20.8 per cent, according to figures from Bank of America. Investors buying US stocks will have made real returns of about 16 per cent and of 14 per cent or so in London-listed equities so far this year.

It’s easy to be sniffy about “gold bugs”, those advocates for the precious metal often caricatured as apocalyptic anti-inflationary disbelievers in the modern monetary system. I admit I’ve often fallen into the camp of gold scepticism over the past decade, particularly when gold mania descends into nostalgia for the Gold Standard or the moral panic over hyper-inflation after the financial crisis.

Yet the merit of buying gold in the 2020s is about more than simply as a lustrous store of value when people are worried about inflation eroding the purchasing power of the money in their bank accounts. As I’ve written before, gold has become the go-to hedge for large parts of the world’s central banking community, who have become increasingly worried about the potential expropriation of their assets in a US-led financial system where the dollar is king.

“[Gold] remains our preferred hedge against geopolitical and financial risks, with additional support from imminent Fed rate cuts and emerging market central bank buying,” Goldman told its clients in an investment note last week.

That was written on September 10, so it does not reflect the election surge for Trump.

The Mises Wire referred to that clip today. Mises says Gold Is Back And So Is Judy Shelton

A recent piece in The Times (of London) sums up the moment.

All of which has led to much talk about sound money, cryptocurrencies, and even the feasibility of a new gold standard, as is attested by the latest title from former Trump administration economic adviser and longtime sound money advocate Judy Shelton—Good as Gold: How to Unleash the Power of Sound Money—currently a best-seller on Amazon.

An inveterate sound money champion, Shelton argues that the present moment is especially propitious, especially on the international level. The fact that gold-buying by central banks has reached a near-frenzy “testifies to good prospects for the serious consideration of a new proposal,” she says.

And she has one, of course: a well-articulated plan to reaffirm gold convertibility for the average American for the first time since the days of the Classical Gold Standard (1815-1914); albeit beginning exclusively through the ownership of gold-linked US Treasury bonds. To Shelton, the right of dollar-to-gold convertibility—her end goal for the entire US monetary system—is essential: it wouldn’t just signify fiscal and monetary rectitude; it “provides the ultimate simple rule for regulating the money supply in accordance with individual rights and free-market principles,” one of the book’s key arguments.

Her proposal calls for a new issuance of Treasury zero-coupon securities—dubbed Treasury Trust Bonds—offering lower interest rates than conventional Treasuries (thus reducing current deficits), but with the distinguishing feature that they can be redeemed at maturity either at their face value in dollars or at a pre-specified equivalent in gold—at the buyer’s discretion.

In other words, should monetary policy continue on its current off-the-rails path, and the purchasing power of the dollar decline significantly, it could result in a significant loss of US government gold. If not, and the United States straightens out its finances, most of the bonds would be likely redeemed in dollars. In essence, they would offer a “trust-but-verify provision,” as Shelton calls it, staking the nation’s gold holdings on a new resolve to demonstrate fiscal and monetary rectitude. “All that officials would need to do to make the issuance a success is to surpass expectations,” she explains. If they do, the bonds will have led the way “for the United States to issue a dollar-denominated financial instrument that is, literally, as good as gold.”

Acknowledging that her proposal appears modest in comparison with the “impressive gold-standard proposal” that came out of the US Gold Commission during the Reagan years, Shelton argues that by successfully establishing this type of “beachhead for sound money” and “bulwark for fiscal and monetary integrity,” substantial monetary reform here and abroad would likely follow, perhaps even resulting in a new, gold-based international monetary system.

Describing her economic views as “closer to the Austrian School’s than others,” despite her long-time association with supply-side advocates and theory, Shelton agrees with Austrians that the fatal flaw in Bretton Woods (1945-1971) as well as myriad other rule-based proposals is that they ultimately rely on the “discretionary inclinations of technocrat authorities.” Indeed, she acknowledges that the classical gold standard of the late nineteenth century was “much better” than the watered-down, gold-exchange standard of Bretton Woods (in which individuals were denied direct convertibility) as a result of the fact that “it gave individuals, not the government, the power to control the money supply.”

Moreover, the new book makes it clear that 1) central planning doesn’t and has never worked, whether in the old Soviet Union or modern central banking policy; and, therefore, that 2) the Federal Reserve’s “displacement of free-market outcomes may one day breed the same sort of cynicism that caused the Soviet approach to collapse.”

The bottom line for Shelton is that “the highest level of performance to which a central bank could aspire would be to match the economic interactions and results that would likely occur under a gold standard,” an argument her book makes by surveying the results of previous monetary systems. Alternatively, she adds, alluding to Hayek’s best-known book, “substituting the perspicacity of designated monetary authorities for the shared acumen of hundreds of millions of people carrying out voluntary transactions to facilitate their daily needs and future dreams is akin to selecting the path to serfdom.”

In short, while Shelton’s new plan may represent yet another less-than-ideal monetary reform, it would certainly mark a positive step in the unambiguous direction of sound money; and possibly with some real teeth, as she outlines in Good as Gold. 

With the new book, Shelton has doubled-down on everything that got her labeled as a member of the “crank right-wing fringe” and denizen of the “gold-bug circuit” by mainstream writers and analysts in 2020. And her Treasury Trust Bond plan—and greater vision for sound money—will have succeeded, she says, if it leads the nation toward a future in which “payment in future dollars is deemed literally as good as gold.”

“That,” she says, “would be historic.” It certainly would be.

Theory vs Practice

I disagree with Mises in practice but not theory. My point is we are not going from point A to point Z without some first steps.

We can label her proposal less than ideal, as Mises does. But if the “ideal” cannot and will not be done, then from my practical standpoint, the allegedly ideal way is not ideal.

Ideal must have a chance or we keep pissing in the wind.

January 19, 2020: Trump Nominates Gold Advocate Judy Shelton for the Fed

Judy Shelton is an American economic advisor to President Donald Trump. She is known for her advocacy for a return to the gold standard and for her criticisms of the Federal Reserve.

A Gold Standard and Free Trade

May 12, 2019: Judy Shelton, Trump’s Next Fed Choice, Favors a Gold Standard and Free Trade

That’s an unbeatable combination.

Attack Dogs Blast Shelton

July 22, 2020 WSJ: In a stunningly ignorant, yet hardly surprising op-ed, Steven Rattner says God Help Us if Judy Shelton Joins the Fed.

“Why do we need a central bank?” Ms. Shelton asked in a Wall Street Journal essay in 2009. She wants monetary policy set by the price of gold, a long-abandoned approach that would be akin to a Supreme Court justice embracing the Code of Hammurabi.

November 15, 2020: Controversial Gold Advocate Judy Shelton Will Soon Be On the Fed

Senator Lisa Murkowski (R-Alaska) will now back Shelton giving the candidate 51 votes for the appointment.  

Oops – What happened?

One Republican Senator backed down. That’s OK because Pence would cast the tie-breaking vote if the Senate deadlocked 50-50.

But a Republican Senator got Covid, did not show up for the vote, and Trump did not try again.

We now have a chance again.

Balance of Trade

(Click on image to enlarge)

Trump proposes fixing the trade deficit via tariffs.

It’s economic lunacy.

The way to fix the trade deficit is to address the root cause of it all.

When Nixon ended gold redeemability, countries could run fiscal deficits at will. And the curse of the reserve currency is that the US lost control of trade.

Under a gold standard, fiscal deficits and trade deficits were self correcting. Now they aren’t.

Three New Trade Deficit Charts Will Have Trump Howling

The advance trade data on goods imports and exports took a huge turn for the worse in September.

(Click on image to enlarge)

Goods balance of trade plus advance data from Census Department, chart by Mish

Goods Imports and Exports

(Click on image to enlarge)

For discussion, please see Three New Trade Deficit Charts Will Have Trump Howling

Tariffs cannot and will not fix this. The fundamental problem is lack of an enforcement mechanism that a gold standard provided.

So Simple

• Run deficits and you lose your gold.
• Run huge surpluses like China, the currency soars, and your exports become less competitive

Tariffs are a tax on consumers. They are a piss poor enforcement mechanism.

Judy Shelton is correct. We need a way to get back towards a gold standard and free trade.

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