Personal Finance

Would Donald Trump Really Put America Back on the Gold Standard?

Gold Ingot With Hundred Dollar Bill Getty
Gold Ingot With Hundred Dollar Bill Getty

Image source: Getty Images.

Why the gold standard?

Trump may not be alone in his interest in returning the U.S. to the gold standard. Some of Trump's biggest campaign rivals, including Ted Cruz, Mike Huckabee, and Ben Carson, have all implied some degree of support for the gold standard, with Cruz being the clear top supporter among these three.

Select data might also suggest more than limited support for the gold standard among the American public. According to a 2015 poll from Gallup, 39% of respondents approved of the gold standard in the U.S., compared to just 15% who disapproved. Yes, that does mean 46% of respondents were undecided, but it nonetheless demonstrates pretty strong favorability toward the gold standard based on those who gave a definitive response.

The appeal of the gold standard rests with those consumers who are growing weary of a ballooning federal deficit levels and nearly $20 trillion in national debt. With the need to have gold on hand to exchange for dollars on an as-needed basis, the Federal Reserve's ability to print money would be restrained, limiting the amount of debt that could be issued annually. Some pundits believe that the gold standard could be America's ticket to getting out of debt, or, at worst, balancing its federal budget.

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Image source: Getty Images.

The gold standard probably isn't a good idea

Unfortunately, the idea of returning to the gold standard is probably a long-shot, even if Trump and a few high-profile politicians have offered their support. Most economists tend to agree that leaving the gold standard and moving to a lighter version of the gold standard in 1933 was a big reason why the U.S. emerged from the Great Depression, and many feel that heading back to the gold standard now would be a mistake.

And while supporters would suggests that the gold standard would rein in the irresponsible behavior of the Fed, the downside of reinstituting the gold standard is that it would also tie the Fed's hands in terms of offering fiscal stimulus to get the U.S. out of recession. Given the hardships U.S. financial institutions faced in 2008-2009, it's plausible that far more may not have survived had the U.S. still been on the gold standard. By a similar token, it would have been practically impossible for the Fed to have introduced three quantitative easing programs if we were operating according to the gold standard.

In addition to constraining what the Fed can and can't do, tying the U.S. to gold would mean accepting the wild swings that are sometimes inherent in the lustrous yellow metal. For example, between 2011 and early 2016, the price of gold on a per-ounce basis fell by 45%. Also, the gold market tends to stay in bull and bear markets for an extended period of time (a decade or longer), meaning recessions would be particularly hard for the U.S. economy to overcome if gold's per ounce price was also low.

As much as the Fed's strategy may cause investors to scratch their heads at times, the ability to influence the economy through monetary policy is simply too important to relinquish.

Gold Bars On Dark Background Getty

While we're probably not going to see a large rally in the price of gold anytime soon based on a return to the gold standard, gold itself has plenty of reasons it could head higher.

Image source: Getty Images.

Gold has plenty of reasons it could head higher

Trump himself is a good reason for investors to consider gold. Trump has no prior political or military experience, and it's always possible that his trade policies could get the U.S. into a trade war, or that his tax reforms won't work out as planned. Any aspect of Trump's reforms that fail to live up to expectations could be a catalyst for gold.

Additionally, even with the Federal Reserve raising the federal funds rate in December by 25 basis points, interest rates and yields on interest-bearing assets remain absurdly low. Low yields on bonds, CDs, and savings accounts discourage investors from purchasing interest-bearing assets because they could wind up losing real money to inflation. Instead, investors are still leaning toward gold, which may offer a higher return.

Supply and demand is a final reason why gold could be a worthwhile holding for investors' portfolios. Mining companies substantively cut their costs since gold fell from $1,900 an ounce, meaning supply has been constrained as well. Growing demand coupled with constrained supply growth is usually a good recipe for long-term price growth.

My suggestion: forget the gold standard and focus on the real drivers of gold prices .

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