I recently came across a presentation made on May 20th to the US Senate Committee on Homeland Security and Governmental Affairs by Dr. Benn Steil, a Senior Fellow and Director of International Economics at the Council on Foreign Relations in New York, entitled "Financial Speculation in Commodity Markets" (pdf). Dr. Steil also gave a speech the week before at the New York Hard Assets Investment Conference entitled "Is the Dollar Doomed?" (text and audio).
One of my favorite quotes from his Senate presentation:
â€œWhereas the prices of oil and wheat measured in dollars have soared over the course of this decade, they have, on the other hand, been remarkably stable when measured in terms of gold — gold having been the foundation of the worldâ€™s monetary system until 1971. It is, therefore, reasonable to conclude not that we are a experiencing a commodities bubble, but, rather, the end of what might usefully be termed a â€˜currency bubble.â€™â€
And from the Hard Asset talk, this wonderful idea:
So how could gold make a revival as a sort of international money? Well, we don't actually need a government run gold standard anymore. There are already private gold banks. They've been growing for some time. Their growth has roughly charted the decline of the dollar. People buy digital shares in gold. Gold is held in vaults by these banks, and you buy digital claims on them, just like when you buy a stock today you don't have a physical certificate. You have a digital representation of that stock.
If we all owned digital shares in gold, and we were able to move money from our accounts between us, and we were able to walk around with smart cards carrying representations of this digital gold, we'd be able to travel around the world, and to transact with one another. Think about it. You would go into a cafÃ© in Sao Paolo, and you would order your cappuccino, and you would pay with a smart card that would debit your account for some flake of gold. And since people have always had confidence in gold as a long-term store of value, there's no reason why it couldn't play that role.
Dr. Steil also comments on why gold is a better monetary choice than a basket of currencies or commodities:
The problem with a basket is I think it's too abstract for people to connect with as a long-term standard of value. In other words, a basket is probably going to have to be run by some sort of institution, and people will probably over time lose faith in the institution.
The reason why I suggest that digital gold may have more attraction for people is because a system based on one commodity with unique monetary properties like gold does not have to be run by an institution. You can have a competitive market developing around gold as an international monetary standard. So that's the reason I think gold would probably make a better money than a commodity basket that would have to be managed by some large institution.
He points out that while the US Dollar may not be doomed in the immediate future, the dilemma described in 1960 by economist Robert Triffin remains unsolved today: if a national currency operates as the international currency, this currency must be supplied to the world by running either large balance of payment deficits, or large current account deficits. But when we do that, people eventually lose confidence in this currency because it can be printed without limit.
So far the US has pushed its deficits higher than many economists of the 1980s thought possible – past 3%, then 5% and recently 7%. But at some point, people will say "enough is enough. We don't trust your management of the dollar any more." And as Dr. Steil says, "that's a very dangerous situation to be in."
These are quite remarkable discussions of the US Dollar, gold, Federal Reserve policy and the future of money. I strongly recommend that you read through them, study the included charts and think about the implications for your investments.