Best of the Week
Most Popular
1.Crude Oil Price Trend Forecast 2016 Update - Nadeem_Walayat
2.Will Deutsche Bank Crash The Global Stock Market? - Clif_Droke
3.Gold Price In Excess Of $8000 While US Dollar Collapses - Hubert_Moolman
4.BrExit UK Economic Collapse Evaporates, GDP Forecasts for 2016 and 2017 - Nadeem_Walayat
5.Gold Stocks Massive Price Correction - Zeal_LLC
6.Stock Market Predicts Donald Trump Victory - Austin_Galt
7.Next Financial Crisis Will be Far Worse than 2008/09 - Chris_Vermeulen
8.The Gold To Housing Ratio As A Valuation Indicator - Dan_Amerman
9.GDXJ Gold Stocks - A Diamond in the Rough - Rambus_Chartology
10.Gold Boom! End Game Nears As Central Banks Buying Up Gold Mining Companies! - Jeff_Berwick
Last 7 days
BEA Revises Q2 2016 US GDP Growth Upward to 1.42% - 29th Sept 16
Could the OPEC deal set stage for the Next Stock Market Risk Rally? - 29th Sept 16
Why Trump Lost, Hillary Won the 1st U.S. Presidential Debate - 29th Sept 16
Is a Dollar Crash Imminent After the Senate Overrides Obama Veto on Saudi 9/11 Bill? - 29th Sept 16
2017: Gold and Silver's Year of "Public Recognition" - 29th Sept 16
Did Trump Win the 1st US Presidential Election Debate? - There's Something Happening Here... - 29th Sept 16
FED Goes from ZIRP to NIRP! - 29th Sept 16 - Chris_Vermeulen
Here’s Why You Should Be in Cash Right Now - 28th Sept 16
The Fed Put a 50% Tax on Your Retirement Plan - 28th Sept 16
Massive Chinese Debt And Why They Are On A Gold Buying Binge! - 28th Sept 16
Stocks Commodities and FX Markets Waiting Technically While Fundamental Data Neutral Poised - 28th Sept 16
This Commodity Has Perked Up its Investors' Portfolios - 27th Sept 16
Charting the Continuing Gold Market Correction - 27th Sept 16
Stock Market Crash and Recession Indicator Warning: Extreme Danger Ahead - 27th Sept 16
Financial Markets and FX Setups 27th Sept - 27th Sept 16
Crude Oil, Forex and Stock Market Trend Forecasts - 27th Sept 16
Why There is Trump - 27th Sept 16
Save Up to 70% in Shopping Expenses for Daily Items - 27th Sept 16
Gold’s Moving Averages and Long-Term Outlook - 26th Sept 16
September Stock Market - The Not So Silent Demise of Deutsche Bank - 26th Sept 16
SPX sell signal confirmed - 26th Sept 16
SPX is testing the next level of support - 26th Sept 16
Outrageously Entertaining US Presidential Campaign Final Stages - What Happens Next? - 26th Sept 16
BoJ, FOMC and Where To Now? - 26th Sept 16
Stock Market New All Time Highs Next - 26th Sept 16
Why Trump Will Win US General Election 2016 Prediction Forecast - 26th Sept 16
Martial Law Rolls Out Across the US As Jubilee Nears - 26th Sept 16
Stock Market More Correction Likely - 25th Sept 16
US Presidential Election Forecast 2016 - Trump Riding BrExit Wave into the White House - 25th Sept 16
US Economy GDP Growth Estimates in Free-Fall: FRBNY Nowcast 2.26% Q3, 1.22% Q4 - 24th Sept 16
Gold and Gold Stocks Corrective Action Continues Despite Dovish Federal Reserve - 24th Sept 16
Global Bonds: Why Our Analyst Says Things Just Got "Monumental" - 24th Sept 16
Where Did All the Money Go? - 23rd Sept 16
Pension Shortfalls Could Be 4X To 7X Greater Than Reported - 23rd Sept 16
Gold Unleashed by the Fed - 23rd Sept 16
Gold around U.S Presidential Elections - 23rd Sept 16
Here’s Why Eastern Europe Is Doomed - 23rd Sept 16
Nasdaq NDX 100 Big Cap Tech Breakout ? - 23rd Sept 16
The Implications of the Italian Banking Crisis Could Be Disastrous - 22nd Sept 16
TwinLakes Theme Park Summer Super 6 FREE Return Entry for Real? - 21st Sept 16
Has the Silver Bullet Run Out of Fire Power? - 21st Sept 16
Frack Sand: The Unsung Hero Of The OPEC Oil War - 21st Sept 16
What’s Happening With Gold? - 21st Sept 16

Free Instant Analysis

Free Instant Technical Analysis


Market Oracle FREE Newsletter

The Power of the Wave Principle

Gold: The Next Global Reserve Currency

Commodities / Gold and Silver 2012 Jun 21, 2012 - 03:32 AM GMT

By: Barry_Elias

Commodities

Best Financial Markets Analysis ArticleGold is on a path to become the next global reserve currency.

A macroscopic perspective of our global economy suggests the world’s financial crisis was caused by an inordinate accumulation of debt relative to GDP.


However, the excess debt relative to income was the result of fiat currency regimes. These regimes are based on the faith and credit of governing institutions, not physical capital reserves, and permit an infinite amount of credit and undercapitalized debt formation.

Well capitalized debt formation is predicated on a stable currency regime that cannot be easily manipulated, one that is partially backed by tangible capital reserves.

Global macroeconomic environment remains highly overleveraged, where total debt (private and public) relative to GDP is still unacceptably high. Future economic prosperity requires further debt reduction.

A sustainable level of total debt/GDP is roughly 150% – 200%. During the US depression, this figure reached 260%. By 2008, it was over 350%.

According to the Bank for International Settlements, total debt/GDP in the advanced economies grew from 167% in 1980 to 314% today. Further debt reduction is essential to improve the global economy.

Debt accumulation also hindered long term investment. Both severely undermined the economic multiplier, or monetary velocity. Monetary velocity is the number of transactions per unit of currency over a given time period, where GDP equals Money Supply multiplied by Monetary Velocity. Given a stable money supply, income rises as the monetary velocity rises.

From 1980 through 2008, monetary velocity in the US fell over 50% and investment as a percentage of GDP dropped 32%. This level of investment is roughly half the global average of 24% and is a major impediment to long term economic prosperity.

Healthy economies produce a monetary velocity greater than 1.5. Today, this figure is below 1 for the entire world. Debt reduction and increases in investment are needed for global economic recovery.

Debt reduction and an increase in long term investment require a stable medium of exchange backed by tangible assets, such as gold.

Gold possess unique attributes that mitigate geoeconomic and geopolitical uncertainties. Therefore, it tends to preserve purchase power parity and wealth over long periods of time and across geographical locations.

Attributes of gold include the following:

1. Gold production is a proxy for general economic activity in terms of resourceallocation and input productivity (i.e., the cost of labor, capital and raw materials per unit of output). The cost structure for gold production more accurately reflects that of other essential commodities, thereby preserving purchase power parity more readily.

2. Gold is a physical product that cannot be manipulated easily, since the marginal cost of production per ounce ranges between $500 and $1,000.

3. Gold is highly durable and reusable, such that the total supply continuously increases.

4. Gold possesses economic diversity: this includes investment, both industrial and financial, and consumption (i.e., 10% industrial, 40% financial, 50% consumption).

5. Gold serves as a historic medium of exchange.

6. Annual production of gold increases total supply by approximately 2% per annum.

Some believe the supply of gold may be inadequate to support future economic activity. This may not be the case for the following reasons:

1. According to the World Gold Council, known supplies will maintain this rate for the next 25-50 years

2. Future technological innovations may increase gold supplies.

3. Should future supplies wane, lower capital reserves provide a better stabilizing force than fiat currencies.

4. Given a constant supply, price appreciation will protect purchase power parity.

If additional capital reserves are needed, other tangible assets with similar properties can be incorporated..

At this time, gold seems to be the most effective candidate based on its economic diversification. Silver would be a likely addition in the future.

The demand for gold has been increasing significantly. Currently, there are significant public and private financial resources available to satisfy this increase in gold demand. These resources include sovereign currency reserves of nearly $12 trillion and private financial assets of $200 trillion. Investment in gold represents only 0.2% (2/10ths of 1%) of private financial assets and 10% of sovereign currency reserves.

Future portfolio allocations that provide greater weight in gold seem very likely. Recently, many governments have made large gold acquisitions, especially China.

The global market value of gold is approximately $8.5 trillion and the global narrow money supply totals approximately $26 trillion.

A stable currency regime using gold as a reserve asset can be achieved if the total value of gold approximates the total value of the narrow money supply. This implies a three-fold increase in the value of gold, from $8.5 trillion to $26 trillion. Therefore, I anticipate a three-fold increase in the unit price of gold in the future. Deteriorating global economic conditions, including the Eurozone and elsewhere, place greater pressure on achieving this equilibrium more rapidly.

A decade or two is a plausible and realistic time frame for this to occur. During this time, I expect the price of gold to reach $4,000 per ounce.

The lack of confidence in undercapitalized fiat currencies is accelerating at a rapid pace. Stable, long term economic prosperity is predicated on a different global reserve currency.

In my view, gold represents the most likely candidate as the next reserve currency.

By Barry Elias

http://eliaseconomics.wordpress.com

Barry Elias is an economic policy analyst and journalist.
He serves as an economic consultant to Dick Morris, former political adviser to President Bill Clinton and was acknowledged by Mr. Morris in his four most recent books: Screwed ! (2012); Revolt ! (2011); 2010: Take Back America — A Battle Plan (2010); and Catastrophe (2009).
He served as a policy strategist to Herman Cain during his 2012 Republican presidential campaign.
Mr. Elias, a member of the Newsmax Financial Brain Trust, provides weekly commentary to Newsmax Media’s Moneynews.com.
He collaborated on education policy with S.P. Kothari, Deputy Dean of the MIT Sloan School of Management, and he has been in discussions with Dr. James Heckman, Nobel Laureate in Economics, to collaborate on a future book release.
Mr. Elias graduated Phi Beta Kappa from the State University of New York at Binghamton with a degree in Economics.
He currently resides in Manhattan with his wife and son.

© 2012 Copyright Barry Elias - All Rights Reserved
Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.


© 2005-2016 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

Catching a Falling Financial Knife