In today’s issue:

• Might Trump place the US back on the gold standard?
• If so, how could it be done?
• What would be the impact on financial markets?

In 1981, the rock band Jefferson Starship released a hit song, “Find Your Way Back”. Here are the opening lyrics:

You know it’s been a long, long road
Since I packed up and left on my own
And I carry a heavy load
Just trying to get back to her heart

By coincidence, it was in 1981 that future Federal Reserve chairman Alan Greenspan published an op-ed in the Wall Street Journal advocating going back to the gold standard. He also made a specific suggestion for how this could be done.

Yesterday, I wrote about a possible revaluation of the US gold stock. But I also raised the prospect that it could be but the first step towards an official US remonetisation of gold and return to some form of gold standard.

Trump has made occasional, favourable comments about gold. In a 2015 interview with GQ magazine, he said that “Bringing back the gold standard would be very hard to do, but boy, would it be wonderful. We’d have a standard on which to base our money.”

In his first term, President Trump nominated Judy Shelton, a known proponent of returning the US to some form of gold standard, to the Federal Reserve Board. Her nomination failed, but Trump now has a stronger mandate and control of Congress. Might he push harder this term to find a way back to gold?

Can Trump go it alone?

Let’s speculate for the moment that he will. The first question to ask is, could he simply do it by Executive Order (EO)?

Yes, he could. President Nixon “temporarily” suspended the convertibility of dollars into gold by EO in 1971. Trump could reverse that.

There are certain laws, including treaties, that Congress has passed or ratified since, that would need to be either amended or abrogated. But Trump could act first by EO and then pressure Congress to sort out the formalities later.

Nor does Trump need the Federal Reserve to approve. The US Treasury has an Exchange Stabilization Fund (ESF) facility with the necessary authority to convert dollars into gold, or vice-versa.

As it happens, in 2023 Representative Alex Mooney of West Virginia introduced a bill to the House that would require the president to re-peg the dollar to gold, restore convertibility and rescind any existing laws that would interfere. Trump could kill two birds with one stone by helping to advance that bill through the relevant Congressional committees.

Regardless of precisely how Trump might proceed, the simple fact is that there is no constitutional obstacle to the restoration of gold convertibility. Indeed, the opposite is the case: were any of Trump’s executive efforts to restore a gold standard to be challenged in some way by the courts, the case would eventually go to the Supreme Court.

Given that the Constitution only ever refers to gold and silver as legal money, and that the original intent of the founders was unambiguously for the US to have a specie-based monetary system, it is hard to believe that the Supreme Court would not find in Trump’s favour.

So, how would it be done?

Greenspan’s way back to gold

Alan Greenspan’s 1981 suggestion was to restore convertibility only gradually, starting with the federal debt stock. Each new Treasury issue would be gold-backed. Over a period of years, the entire debt stock would be comprised of gold-backed Treasuries.

As the Federal Reserve purchases Treasuries as it creates dollars, all outstanding dollars in circulation would eventually become exclusively gold-backed. (The same would not be true of all bank deposits, as banks are only fractionally reserved.)

Such a gradual re-implementation of a gold standard would be less disruptive than trying to restore full convertibility all at once. Another approach would be to announce the restoration of full convertibility, but at a future date that would give the financial markets time to prepare. Say a year or two, perhaps.

Introducing the euro in 1999 was a far more complicated affair. In certain respects, it remains so. Member countries issue debt that is not fully fungible with that of other members.

Members also pay different rates of interest. The European Central Bank (ECB) intervenes from time to time to prevent those rates from diverging to undesirable levels. (It has been argued at the German Federal Constitutional Court that this violates the ECB Charter and the Maastricht Treaty, and I happen to agree.)

By comparison, restoring dollar-gold convertibility would be a relatively straightforward affair. But what impact would it have on financial markets?

How will markets react to US gold remonetisation?

First, consider the relationship between the dollar and gold. If the Treasury sets a fixed dollar-to-gold price and permits convertibility, any perception by the market that the dollar is overvalued would quickly result in the depletion of America’s gold reserves. If undervalued, then it will offer gold for dollars, adding to the US gold stock.

Given that the US currently runs a large, chronic trade deficit with the rest of the world, the dollar would appear overvalued. Trump seems to agree, as one purpose of his proposed tariffs is to achieve fairer terms of trade. A weaker dollar, other factors equal, would help to close the trade deficit.

Hence, at the current price, there would likely be a drain on the US gold stock. The way to stop that would be for US interest rates to rise versus the rest of the world, making dollar deposits more attractive.

That, however, would risk pushing the US into recession, perhaps a deep one. I doubt that’s what Trump would want to achieve by restoring convertibility.

More likely, in my opinion, is that the Treasury would use the ESF to target a gold price that implies a weaker dollar versus foreign currencies, thereby improving the terms of trade.

Some countries might resist currency strength. Others might welcome it. But on balance this would push the dollar lower overall.

That would be inflationary, at least up to a point. But eventually an equilibrium of sorts could be reached.

In my book, The Golden Revolution, Revisited, I apply a Nash Equilibrium, Game Theory analysis to international monetary relations. I conclude that, if the US is willing to be a first mover to return to a gold standard, all major trading partners will eventually follow along.

However, they will only do so at a gold price substantially higher than that of today. The monetary Nash Equilibrium price would need to be high enough to make current national debts serviceable. Today, those debts are enormous relative to national incomes.

Gold (and inflation) likely to soar

So, there will need to be a large, international gold revaluation. By my calculations, the gold price would need to rise by 5-7X from here.

That would most likely correspond to a general global price inflation that would devalue debts in real terms. It would effectively resemble a synchronised, worldwide devaluation – a kind of global debt “reset”, if you will.

You don’t want to be holding those debts in your portfolio when that inflationary wave rolls through. Instead, you’ll want to hold assets capable of preserving their real purchasing power.

That would be gold itself. But also, other precious metals and real assets. And the shares of those companies owning and producing those assets will hold their real value too. We’re talking energy, mining, materials, basic manufactures, chemicals, agriculture, infrastructure and the like.

This is where corporate pricing power is the strongest. These industries may be basic and low margin, but their costs can be pushed through to their consumers. That’s not true of luxury goods or next-generation tech.

These industries also tend to be mature and highly cash generative. Many pay generous dividends that tend to keep up with inflation over time.

So, will Trump find the way back to gold? And if so, will it look anything like as described above? If you think it might, then you should adjust your portfolio accordingly.

Until next time,

John Butler
Investment Director, Fortune & Freedom

The Real Heroes

Bill Bonner, writing from Baltimore, Maryland

We wonder how many federal employees complied with the DOGE demand?

Midnight on Monday night was the deadline. CBS News:

DOGE’s Elon Musk says federal employees must document their work or resign; some agencies push back

Federal workers received an email on Saturday instructing them to document five things they accomplished in the past week, and Elon Musk said those who don’t reply would risk losing their jobs.

The email from the Office of Personnel Management, or OPM, had the subject line, “What did you do last week?” It instructed recipients to reply with five examples of what they got done last week, excluding any classified information, and asked workers to include their supervisor in their response.

They either presented some evidence to show that they were gainfully employed… or else… the President explained:

‘If you don’t answer, like, you’re sort of semi-fired or you’re fired, because a lot of people aren’t answering because they don’t even exist.’

The DOGE assault troops believe they can ferret out ‘waste’ and ‘corruption’ and save trillions of dollars. But they may be firing the wrong people.

The problem with government spending is not the form; it’s the substance. It’s not that the money is spent inefficiently; it’s that it is spent at all. And for many programs, the phantom employee, who doesn’t do anything, is the best of the lot. He does no harm… never complains, and never needs an expensive triple by-pass.

Imagine the emails DOGE might have gotten from the feds who were enforcing, say, Prohibition.

“I put in a very productive week,” one might have replied. “I destroyed three stills, arrested 49 moonshiners, and broke 1,450 bottles of whiskey.”

Or…

“I went to a speakeasy to study the illegal distribution of alcohol. I had a drink, just to verify that they were really serving demon rum. Then, I went home.”

Who shoulda been fired?

Imagine that they put the DOGE test to Iraq warfighters… or to the grunts in the war against drugs… or anti-poverty bureaucrats or DEI honchos?

The malingerers were the real heroes…they were the ones who did the least damage. The last thing we would want is a group of earnest federales diligently and energetically pursuing their malignant policies.

And the best way to deal with them is to cut their budgets and eliminate their programs. Anything less than that is mere window-dressing.

So back to our line of thought from last week. We’ll come right to the point, before we forget it:

Wages, GDP, sales and profits should never get too far out of line – one with another. There is no reason for stocks to spin out of orbit either. Chickens cannot be separated from eggs and corporations cannot be de-connected from the value of the output they produce. If they get too pricey, they can be expected to fall. If they get too cheap, the best bet is that they will rise.

And overall… compared to the value of the ‘stuff’ in our lives… stocks should not increase by a single penny… not even in 100 years. (More on this counter-intuitive assertion next time.)

How could that be?

Stocks rose 366 times since 1925. But against what? Of course, the answer is against the dollar. And therein hangs a tale. It is a tale with a twist. And a spin. The funny money distorted the whole system… as we will see. Not just prices, but sales, profits, and GDP too.

In dollar terms, the S&P 500 gained 2.7% in January after a 23% boost in 2024. The economy in which these remarkable gains were recorded, however, only grew 2.8% for all of 2024.

Shouldna… oughtna… done that.

Same eggs. Why would the chickens be so much more valuable? As we will see, they are not really more ‘valuable’ at all. They have just been bid up in the speculative frenzy of what my colleague Tom Dyson calls the ‘greatest financial experiment in history’.

That experiment will sooner or later be shown to be a failure. Worldwide, there may be $100 – $150 trillion worth of barren chickens… asset values with no corresponding real output. And as this becomes more obvious, over the next 10… 20… or 100 years, the real return on US investment assets may be negative.

Stay tuned.

Regards,

Bill Bonner
Contributing Editor, Fortune & Freedom

For more from Bill Bonner, visit www.bonnerprivateresearch.com