Likely Scenarios that Will Force the Fed to Tie the Dollar to Gold

From Dan Amoss of the Daily Reckoning, originally published in September 2012:



"For years, I’ve expected that at the end of all this central bank printing, we’ll see the end — not a reversal — of quantitative easing programs and a re-pegging of the US dollar to gold at much higher gold prices. A new gold standard would allow the Fed and other central banks to save face after the following sequence of events:

1. Central banks inflate their balance sheets and buy up many of the bonds governments issue to fund soaring budget deficits 2. Once the largest suppliers of scarce products realize they’re exchanging products for infinitely diluted paper money, they start demanding more and more money in exchange for sending their scarce products to the marketplace 3. Consumer prices start rising 4. Calls for monetary tightening (reduction of central bank balance sheets and interest rate hikes) grow louder 5. These central banks won’t be able to slash money supplies without crashing government bond markets and stock markets. They talk about tightening, but don’t tighten 6. As central banks lose credibility, gold launches on a final, near-vertical stage of its bull market 7. In response to inflation expectations running wild, governments and central banks draw up plans to re-peg currencies to gold in order to avoid having to drain trillions worth of cash from the banking system."

In the face of imminent hyperinflation, Dan Amoss postulates that the Fed will back the dollar with gold at some significantly higher price in order to avoid a complete collapse of the dollar. It is reassuring that the Fed can do this, but will it? Another scenario is that some large and important country, such as Germany or China, will back its currency with gold and cause demand for the dollar as the preferred means of international settlement to fall. This will cause prices to rise in the US as overseas dollars start to flow back into the only economy where they must be accepted for all debts public and private. Then the Fed will follow-the-leader of this major country and tie the dollar to gold.