For the majority of the past century, the U.S. has been on the gold standard, which ensured that our currency was backed by physical gold. But that changed in 1971 when President Nixon announced the end of the gold standard in order to deal with hyperinflation and the exorbitant costs of the Vietnam war among other things. Ever since, the value of the U.S. dollar has been on a slippery slope, as this move opened the doors for new generations of Fed members to print money at will: see Ben Bernanke [for more commodity news and analysis subscribe to our free newsletter].
A number of analysts and investors feel that printing money is doing nothing but digging ourselves further into a hole, but there does not seem to be an easy solution in sight, at least for now. The results of this year’s election could have a dramatic impact on the future of the U.S. dollar, as the Republican party has begun initial drafting and planning for potentially installing a gold standard commission, giving investors a reason to consider (or reconsider) their vote for candidate Mitt Romney.
The call for the gold standard commission could be a major opportunity for investors everywhere. First and foremost, the price of gold would skyrocket if the possibility of some kind of tie between the greenback and gold was restored, as investors would flock to the safe haven metal. But it would also bring some other issues into the forefront, like all of the conspiracy theories that the U.S. does not hold nearly the gold that it claims it does, or that many of our vaults are nothing but phonies. Though the potential move may be tough in the short run, many feel that its long term effects could save the economy [see also Three Reasons Why Gold Is Overvalued].
Regardless of where you fall on the political spectrum, the idea of returning a connection between gold and the dollar is a potentially significant development. The likelihood of this ever coming to fruition is hard to say at this point, as it certainly would not be the first time that a politician made an empty promise. But that does not mean that investors cannot prepare themselves. If the Republican party wins the election, adding to your gold collection could be a potentially lucrative play. Although it should be noted that Romney has been adamant about wanting to replace Ben Bernanke, which would no longer afford gold its hefty spikes each time a new quantitative easing program is announced.
Ways to Play
For those looking to make a play on the potential of another gold standard, we offer several options below.
- SPDR Gold Trust (GLD): The world’s largest commodity ETF will certainly be a great way for investors to make a play on this metal. GLD’s physically-backed exposure makes it a candidate for a long-term hold, but its active options market and high liquidity also allow it to be used as a trading instrument.
- Market Vectors TR Gold Miners (GDX): This fund will offer exposure to the biggest global names in gold mining, allowing investors to make an equity play on the yellow commodity. Note that mining companies often carry high betas, making GDX a slightly more volatile option.
- 3x Long Gold ETN (UGLD): For all of you gold bugs out there, here is a chance to put your money where your mouth is. This fund features a 300% leverage on standard gold futures. Note, it is not for the faint of heart and was designed for active traders who can stomach hefty volatility.
So what do you all think, is some form of the gold standard actually a possibility, or just another political pipedream?
Disclosure: No positions at time of writing.