More on the "Sound Money Indicator"

Freemarket Gold and Money Report (04/13/2009)
"I received many emails regarding the new Sound Money Indicator (SMI) that I presented in the last letter, and all of them are loaded with good ideas and suggestions.

I would like to do some more work and thinking about the SMI, but there are some points from one email that I want to share with you now. They are particularly relevant and timely in view of the recently concluded G-20 meeting in London.

Interestingly, in the lead up to the G20, the benefits of the gold standard were considered, particularly that it imposed discipline on the money-creation process. This jab was no doubt pointed at the United States, but the other G20 countries shouldn't be throwing stones. All the world's fiat currencies are being debased due to the absence of any external discipline on the money-creation process as there was under the classical gold standard.

In any case, after the G-20 concluded, an interesting article by Gillian Tett mentioning gold appeared in London's Financial Times. Here's what she said:
"For the moment all this muttering about gold is simply wild speculation. Even if Western leaders suddenly were to decide they wished to turn back the clock, the logistics of embracing a new gold standard would be mindboggling. UBS, for example, calculates that the U.S. reserves of gold are so small, relative to its monetary base, that a price above $6,000 an ounce would be needed to reintroduce a gold standard. To implement that standard in Japan, China and the U.S., the price would be more than $9,000."
Here's where the SMI comes in. It basically confirms that indeed, these price levels would be needed to return to gold. The analysis of the SMI in the last letter (with gold then at $952) concluded that the quality of the dollar is only 11.5% of the dollar in January 1934. It was also 11.5% of the dollar in January 1945. So we can calculate gold's price today to determine the same parity at these previous times. The calculation is:

1 / 11.5% * $952 = $8,278

This price indicates that the conclusions mentioned in the FT were not unreasonable."

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