The U.S. will default on this debt by inflation (it’s the American way). China realizes this and is acquiring gold as a hedge against inflation in its dollar-denominated assets....James Rickards

Gold is the pile of poker chips in the next global crisis

Author James Rickards maintains that gold remains the real underpinning of the international monetary system. Governments may disparage it, he says, yet many of them have held on to gold — and China and Russia have been acquiring more. 

Countries around the world are acquiring gold at an accelerated rate in order to diversify their reserve positions. This trend, combined with the huge reserves held by the U.S., Eurozone and the IMF amount to a shadow gold standard. 

The best way to evaluate this shadow gold standard among various countries is to use the ratio of gold to the gross domestic product, (GDP). This Gold-to-GDP ratio can easily be calculated using official figures and compared across countries to see where real gold power resides. 

The big winners—the real center of gold power in the world—are the 19 nations that make up the Eurozone and issue the euro. Their gold as a percentage of GDP is over 4%. The United States’ ratio is about 2.7%. Interestingly, Russia’s ratio is also about 2.7%. Russia only has one-eighth the amount of gold the U.S. has, but their economy is only one-eighth the size of the U.S. economy, so the ratio is comparable. However, Russia is one of those nations acquiring more gold and seems set on passing the U.S. and matching the Eurozone. Japan and the U.K. are major economies but their gold ratio is anemic; about 0.7%.

In any monetary reset, countries will come together and sit around the table. One can think of that meeting as a poker game. When you sit down at the poker table, you want a big pile of chips. Gold functions like a pile of poker chips in this context. This doesn’t mean that the world automatically goes to a gold standard. It does mean that one’s voice at the table is going to be a function of the size of its gold hoard. 

In this scenario, Germany will speak for Europe, so the new system will be based on a U.S.-German-Russian-Chinese monetary condominium administered by the IMF. These major gold powers are already preparing for this outcome.

DYI