Gold Equilibrium

Why the U.S. could return to a gold standard at $1300/oz without risk of inflation or deflation

There are two prices of gold.  There is the market spot price of gold (POG) and an optimum POG which represents the price level.  On an established gold standard, spot and optimum converge in equilibrium.  They are the same price.  Since the price level represented by the optimum POG is stable at the unchanging spot POG, there is no inflation or deflation.

Economist Alan Reynolds made the defining point on inflation:

“All inflations, everywhere, are preceded by a rise in the price of gold in that country’s currency.”

The only way to understand inflation or deflation is to understand the relationship between the spot and optimum POG.  The spot POG is the inverse of the value of the dollar that the market is discounting at any moment.  The Fed controls the value of the dollar by its maintenance of the supply of base money relative to demand.  The Fed knows the supply of base money down to the penny, but the only way to measure demand is against a monetary standard of reference.  Gold is the monetary standard of reference.  By maintaining the dollar at a fixed price of gold, a change in the price of gold references demand relative to supply.  The Fed then needs only to adjust the supply of base money to maintain the fixed price.  At a fixed price of gold, base money supply and demand are in equilibrium, and inflation and deflation are eliminated.  Base money supply adjustment to maintain dollar parity with gold defines a gold standard.  Gold standards have worked unerringly for three centuries when operated correctly.  On a gold standard, the value of gold and the dollar is the same.  The dollar is as good as gold.   

Maturity of the debt structure, or duration of debt

While the spot POG reflects the value of the dollar, the optimum POG reflects the price level.  The price level adjusts in time to an economy’s debt structure.  In an economy with a mature debt structure, the adjustment takes a long time to unfold.  The maturity of the debt structure is also termed the “duration of debt.”  The longer a currency remains stable in value, the longer its debt structure maturity.   A gold standard eliminates inflation and deflation which reduces the necessity for added risk premia.  Interest rates are naturally low and stable.  A century of stable prices allowed Great Britain to issue Consol Bonds of unlimited maturity at the height of its gold standard.

In his excellent book on Weimar hyperinflation, When Money Dies, Adam Fergusson recounts how at the height of Germany’s hyperinflation, the price of lunch could change between the time one ordered and the time one received their food.  In that extreme case of hyperinflation, the duration of debt was minutes.  During the monetary stability of Bretton Woods, the duration of debt was around 25 years.  Today, 48 years of fiat chaos has reduced the duration of debt to an estimated 10 years.  The duration of debt is the average term of all public and private debt.

What this means is that If the average maturity of the debt structure, public and private, is 10 years and the price of gold doubles next week, it takes 10 years for the optimum POG to adjust to the doubled spot POG.  Of course, this only occurs if the spot POG stabilizes and maintains the doubled price over the next 10 years.  On our fiat system, the spot POG is constantly changing, and the optimum POG is constantly adjusting to the ever-changing spot POG.  Greenspan stabilized the spot POG around $350, and optimum converged with spot at $350.  This adjustment took well over a decade to occur.  Greenspan’s maintenance of the POG around $350 is now known as the Great Moderation.  Economists cannot explain it because they ignore gold.  The price level adjustment to $350/oz reflected a 10 times increase in the price level over the Bretton Woods $35/oz equilibrium–less productivity and technological improvements. 

The maturity of the debt structure (duration of debt) will continue to decrease with continued dollar devaluation.  If it takes 10 years for the optimum POG to adjust to a new stabilized spot POG, then the 10 yma of gold is a proxy for the duration of debt.  The gold 10 yma depicts the relationship between the optimum and spot POG and has accurately predicted the POG since July 2015. 

 Spot and optimum reached equilibrium in July 2015, and spot has tracked the optimum POG (duration of debt) since.  The reason for this is a default of Fed monetary policy due to ER and IOR that maintains an inadvertent equilibrium between the supply and demand for base money.  One could call it the Yellen gold standard, but the Fed ignores gold.  The “Yellen gold standard” occurred absent any known Fed policy that referenced gold.

I defined the relationship by the Kendall Rule, and it has accurately predicted the spot POG since July 2015.

“As long as excess reserves persist, with IOR, in amounts necessary to facilitate Federal Reserve control of the price of interest, the trend for the minimum price of gold is determinative by its average price over the duration of debt.”

The charted relationship between spot and optimum informs us that spot and optimum POG have obtained equilibrium in value.  Debtors and creditors are in balance with gold at $1300.  The U.S. could return to a gold standard at $1300 and not have to worry about an inflationary or deflationary adjustment.  Gold standards provided the monetary foundation for the British and U.S. empires.  Sustained high rates of economic growth occurred under gold standards.  A gold standard, combined with a growth-oriented fiscal policy of low taxes, will end fiat chaos and return the U.S. to historically high growth rates.  The U.S. is now at an optimum monetary position to return to stable money based on gold and right not only the listing U.S. economy but also the global financial system. 


  1. D Peracch

    Great blog. Wish I understood some of the concepts a little better.

    To what degree should the Fed’s decrease in the IOR impact the price of gold? Is this something that can be calculated in terms of the optimum price?


    1. Michael Kendall (Post author)

      Ceteris paribus, a decrease in IOR–which will cause a corresponding decrease in FFR since the Fed under its unconventional QE distorted policy can’t raise the FFR without increasing IOR and the ONRRP rate–will result in the POG rising back toward equilibrium with the optimum POG. A decrease in IOR incentivizes depository institutions to hold less IOR which increases base money supply relative to demand.

      But all things are not equal when it comes to analyzing the relationship between base money supply and demand–which determines the POG. Global financial stress, geopolitical tension, fiscal policy, taxes, regulation, trade issues, Fed guidance on future policy, and anything that impacts economic growth will affect the relationship between base money supply and demand. The POG will signal the change.


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