One of the biggest problems with our current monetary system is that we use the dollars we earn to not only buy things and pay our bills, but also as a savings vehicle, whether those savings are for a rainy day account, our kids’ college fund, or long-term retirement.
Why is this a problem? Because when a single medium is used as both store of value and a medium of exchange — like the US dollar, or any other currency — it leads to a natural conflict between debtors and savers. This is especially true when the chief debtor is not only incapable of controlling its spending, but also in charge of its currency’s printing press, with the ability to devalue that currency at will.
Unfortunately, that describes virtually every government on the planet at the moment.
“Freegold” is a philosophy that eliminates this conflict. In fact, freegold has a large following among many people who realize the importance of gold as a wealth asset. To the uninitiated, freegold may appear to be nothing more than a fancy term for the gold standard. It’s not.
The freegold perspective calls for gold to be used as a reserve by central banks. However, unlike the gold standard, in the freegold paradigm, those same central banks will not back their currencies with the yellow metal. Instead, they keep it as an asset and, in the event their currency were to ever come under attack, a portion of their gold reserves can be sold at a significantly higher price to defend the currency, thereby staving off high inflation. Right now, that price is roughly estimated to be between $10,000 and $80,000 per ounce – depending on what percentage of American gold reserves would be used to back the US dollar. For those who are interested, please refer to my previous discussion of the math behind $10,000 gold.
Of course, this resulting price appreciation of the yellow metal would be extremely favorable to not only those who kept their long-term savings in gold, but also to the central banks since they own gold too.
Needless to say, in our current dollar-based international monetary system, gold is the enemy of fiat paper — and that green funny money is the life blood of the world’s central banks. But as I’ve mentioned many times before, this system is in its death throes. Sometime in the not-too-distant future, the current system is going to fail — unless it’s mercifully preempted by the powers-that-be first.
Either way, there are those who insist that after the dollar finally dies, central bankers will adopt freegold — and that will once again permit all savers, regardless of how rich or poor they are, to save in an asset that has a built in anti-inflation mechanism: gold. I believe that also holds true for silver — although that’s blasphemy to die-hard freegold followers.
In the freegold paradigm, it’s not necessary for any central bank to declare how much gold they have. As long as they can bring the required amount of yellow metal to the market that’s required to defend their currency in a financial crisis, they can keep their currency stable.
Freegold proponents believe the European Central Bank (ECB) was set up with gold on its balance sheet to prepare for such an event. The Euro Zone currently has 10,800 tons of gold; even at current prices it’s their most valuable asset. After all, once the current US dollar finally implodes, the value of gold will be the only surviving item on the asset side of the ECB’s balance sheet!
Meanwhile, in the US, the new dollar that rises from the ashes would be backed by 8133 tons of gold — assuming it’s all still there in Fort Knox, of course — and the Fed could print all the currency required for the US to function internally.
As long as international trade balanced then no gold would be needed to settle with other countries. If the US imported more than it exported, then it would either have to settle the difference from its gold stores or allow the new dollar’s purchasing power to weaken sharply over time by simply printing more currency. But because the US dollar will have lost its reserve currency status, neither of those options would be palatable — which is exactly why I believe the US will once again become a manufacturing powerhouse after the current system mercifully ends.
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