Amid Global Economic Concerns, World Returns to Gold

Dr. Makhdoomi states when people loose faith in a government, the solution is precious metals.

Despite the outwards appearance of stability, the global economy runs on an inflationary system that confines it to an endless cycle of crashes and reboots. And, according to Greater Kashmir's Dr. Makhdoomi, the world's economic woes can be traced to the abandonment of the gold standard, albeit much earlier than the Nixon Shock in 1971.

Two and a half millennia ago, the government of Athens used a sound economic system with a set currency value based on physical gold writes Greater Kashmir. Yet wartime expenses drove the government to inflate its bullion reserves by minting coins of a lesser purity. With the addition of copper, 1,000 gold coins became 2,000 and the government had enough leeway to fund its ventures, even at the cost of currency stability.

As simple as it might seem, the very same method of funds creation is used today by governments around the world at a much larger scale. As Makhdoomi explains, any spending done by a modern government is done in the red, as no sovereign country operates without a budget deficit. When a central bank needs more money, the solution is to simply print new currency and worry about the inflationary consequences later. According to the article, the problem is exacerbated by the issuing of government bonds, which create more money out of thin air.

Makhdoomi points out that, when given enough false assurances, the people can and will lose faith in a government. When they do, he says the solution is always to rush back to precious metals as a way of preventing wealth erosion amid increasingly questionable central banking practices.

Consumers have come to equate money with currency, even though the latter has no intrinsic value and is merely a government's promise. According to the article, the price movement of gold in dollar terms is a perfect example of this, as an ounce of metal went from $40 in 1971, when President Nixon moved away from the gold standard, to over $1,200 today. The jump in value illustrates how much money has been printed since then in a baseless free-floating currency system.

Makhdoomi, however, believes today's gold prices might still be far lower than they should. Some pundits, such as monetary historian Mike Maloney, believe that an economic crash is closer than most think. When things go awry, Maloney expects gold and other precious metals to come under revaluation with a rapid price jump to $5,000 an ounce.

Both Makhdoomi and Maloney agree that the next major crash will be accompanied by a wealth transfer. Depending on whether one invested in gold or kept their faith in currencies, this could either translate to massive profits or a risk of losing everything.

Why Iran Should Go For Gold

Forbes contributor Steve Hanke sees gold as an optimal solution for Iran's economic problems.

As Iran toys with the idea of a change in currency, Forbes contributor Steve Hanke refers to the slated reforms as nothing more than "a great illusion". According to the bill passed by Hassan Rouhani's government last December, Iran's national currency would be changed from the rial to the toman. This would also require a reduction of Iran's unit of account, since one toman equals ten rials.

Hanke states this is merely another cog in the engine of Iran's economic dysfunction, a problem that has persisted since the Islamic Revolution of 1979. Since then, the rial has officially lost 99.8% of its value as the country continues to struggle with high inflation. Although official figures place the annual inflation rate at 9.6%, Hanke estimates it closer to 20%.

The article clearly shows that something needs to change with Iran's economic system. Adopting a foreign currency such as the U.S. dollar or the euro would be one way to fix the currency issues, but Hanke points out the solution is politically unacceptable.

And while it might seem that there is no easy fix to Iran's economic problems, Hanke believes that the optimal solution is simple and unjustly overlooked: a return to the gold standard.

The article states that the reintroduction of gold as currency has been a talking point for some time now – going back as far as 1997, Nobelist Robert Mundell predicted that the yellow metal would return to its role in the international monetary system in the 21st century. Hanke notes that, since President Nixon abolished the gold standard in August of 1971, many have described the international monetary regime as a chaotic non-system.

Out of the various methods of implementation, Hanke sees gold-based currency boards as the most prudent choice – currency boards have been implemented by over 70 countries and have generally contributed to the fiscal discipline, price stability and growth rates in related countries.

The gold currency unit issued by this board would have to be fully backed by gold and fully convertible to gold at a fixed rate on demand, rendering it immune to manipulation. Hanke outlines a proposition that includes the creation of a Swiss-based Iranian board whose purpose is to issue coins and denominations while maintaining enough bullion to allow convertibility.

The proposed board would be unable to increase liabilities without appropriate backing by gold or foreign exchange notes the article, and it would also be independent from the financial obligations of Iran's government.

As Hanke explains, a gold-backed solution is elegant enough to be accepted by the Iranian government without appearing as a concession. Whether such a system is adopted remains to be seen, but there is little question that it would be more effective than the inconsequential reforms suggested by Hassan's government.

The Dollar or Gold: What's the Best Form of Money?

We all accept the fact that the U.S. Dollar is currency. But is gold a better alternative?

A recent Forbes column from Keith Weiner touches on what money really is contrary to what the popular belief might be, and how using gold as opposed to the dollar when assessing value would benefit everyone. Weiner, a long-time advocate of the gold standard, reminds readers that a large reason why the dollar is used as a medium of exchange as opposed to gold is because the government taxes the precious metal.

Weiner points out that the dollar is considered money because the government imposes it as such. Further, the government hinders the circulation of gold as a currency by treating it as a commodity (as opposed to currency), which thus subjects it to taxation.

Weiner strongly disagrees with such a view, insisting that gold is the actual money and that "the dollar may circulate, but it's not money. It's just a small slice of the government's debt. It's an I.O.U., a promise to pay, though most have long forgotten what the government once paid — gold."

He further argues that, ultimately, the "government can't change the laws of economics, such as transforming its paper into money." Weiner also believes that re-introducing gold into commerce would improve the free markets and, overall, have a positive impact on the economy.

Weiner concludes by noting that the dollar can't be an appropriate measure of value as its own value is on a constant decline, saying that a "falling unit of measure doesn't work." According to Weiner, there needs to exist a better way to gauge value than merely using whatever is currently the accepted medium of exchange, especially if said medium is an imposed one, stating that "gold is, by far, the best measure of value. Nothing else comes close, certainly not the dollar."

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