A Return to the Gold Standard
I’ve been thinking about gold a lot this last week, and I ended up making my first investment in it just yesterday. A few folks within the US government have been thinking about it too, with a new bill proposed recently that would return the US Dollar to the gold standard that it abandoned in 1971. Trump was a big fan of this idea but never managed to do anything about it during his tumultuous term, and now it seems, there is a minority interest to try to make this happen.
But what is the gold standard anyway? For several thousand years, humanity has relied on gold as a universal currency, something that was valued no matter where on Earth you wanted to trade. One of its most important characteristics is that it’s relatively stable in value. There’s a popular adage about how, throughout human history, an ounce of gold has always been enough to buy a full suit of formal clothing for the average rich person, but maybe a more modern illustration is that an ounce of gold has been roughly equivalent to the price of a barrel of crude oil for 70+ years. In other words, gold has proven to be a good store of value over a long period of time, and it’s no accident that Bitcoin designed its own issuance scheme to try to replicate gold’s.
As our financial instruments became more sophisticated we began to create paper bills that represented gold, which made transacting with varying amounts a lot less cumbersome. Paper was easier to transport, and much easier to create different denominations for. China was the first country to implement a paper currency in the 13th century, and most of Europe followed 400 years after. The actual gold that the paper represented was kept in banks and vaults and, in theory, you could redeem that gold in exchange for handing over the appropriate amount of paper. In other words, your paper money was always backed by a chunk of gold; the government couldn’t just print more paper money unless they first bought the equivalent amount of gold to back it.
This was the case all the way until 1971, when Nixon officially took the US Dollar off of the gold standard. Dollars could now “float” in value, and there would be no limit to the number of dollars that could be issued. Since then, the USD circulating supply has grown from $1 trillion to over $20 trillion, with about $15 trillion being issued in just the last 5 years. And now, it seems there’s at least one US senator who’s trying to find support for a return to the gold standard, in direct response to the startling inflation of the past two years. In theory this would restabilize the USD, but there are many economists how disagree that this would have the intended effect.
Although the chances that the USD would ever go back to a gold standard are quite small, it’s a fascinating thought experiment to consider. What would actually happen, assuming the United States announced that they were going to re-peg? Well, your first problem is that the US only holds 8,300 tons of gold, which equates to less than $500 billion. In order to re-peg, the US government would have to acquire 10x that much gold, and that’s just to cover all the paper dollars already in circulation … about $5.5 trillion. Of course, the market is not going to ignore a whale call like that, and it’s likely that the gold price would instantly respond. So either the US government secretly buys 80,000 tons of gold, or the gold price goes up 10x … or some combination of these two situations. None of this would happen in a vacuum, and the global markets would probably be set ablaze by the renewed desire for the precious metal. And of course, it’s unlikely that the US would be alone in restructuring its currency around gold; many other countries would probably follow suit.
As outlandish as all this sounds, there are at least a few countries who have been quietly stockpiling gold over the last decade. Europe has supposedly been preparing for this since the 70s. In Asia, Japan, Indonesia, and Malaysia have quietly grown their gold reserves by 10% over the last decade, with China doubling their holdings and South Korea increasing their gold position by a whopping 500%. Sadly, the Philippines is on the opposite side of this bet, decreasing our reserves since 2020 by about 20%. Last year, the Bank of International Settlements in Switzerland (think of them as the Central Bank of central banks) upgraded the risk status of gold from Tier III (very risky) to Tier I (zero-risk), signalling a massive change in the way central banks around the world are expected to protect their capital. So whether or not the gold standard actually returns, there are definitely some recent attempts to amass more of it.
How does a crypto person actually buy gold, if they wanted to diversify their portfolio? It’s not legal for Filipino citizens to hold physical gold without a permit, which is why there’s still a pretty healthy black market for the stuff in Binondo. I dislike the notion of keeping gold in a safe as it feels antithetical to the crypto ethos, but thankfully there are digital solutions out there. The two biggest ones that I’ve looked into are XAUT (Tether Gold, from the makers of USDT) and PAXG (Paxos Gold). Both of them peg their token price to 1 troy ounce of gold (about $1,600 right now) and have reasonable market caps of over $400 million. Holding 1 token in either of these cryptos entitles the bearer to 1 ounce of gold, which can actually be redeemed for the real thing if you’re living in the appropriate continent. Neither of them directly hold the physical gold that their customers own though; that challenge is outsourced to traditional financial institutions. (Paxos secures their customers’ gold with Brink’s in London.) And yes, in case you’re wondering, you can buy fractions of a token, as both XAUT and PAXG are divisible up to 18 decimal places.
After some research, I went with PAXG for my first crypto gold purchase, but I suggest checking out the rest of the competition as well (there’s at least 10 of them). This isn’t the perfect solution of course. The most obvious pitfall is that you are trusting these institutions and their partners to actually maintain their gold reserves on your behalf. (That’s pretty contrary to the crypto ethos too.) At the moment though, this is an acceptable compromise, especially since the size of my investment is relatively small. I’m happy to just gain price exposure to gold without the inconvenience of upgrading my home security, but your personal mileage and risk appetite may vary.
See you next week, cryptofam!
My mama said “never put all your eggs in one basket”. Smart woman. But one can put 2 eggs in one brief. Happy weekend!
Always a good read Luis, thank you for sharing. Mamas are always right! Happy weekend!