Gresham’s law is playing out right now

Article by Cal Nogov on Feb. 24, 2016


If you’re not familiar with the economic law called Gresham’s law, it basically says bad money drives good money out of circulation.  What that means is if people are willing to accept bad money for their goods and services, good money will remain in people’s possession instead of being used.

For instance.  Imagine if gold (good money) was the standard money used in a society and one day people started accepting sea shells (bad money) as money.  Well hell.  I’m going to use sea shells if people are going to accept it.  That way I’ll conserve my gold for the day sea shells are no longer acceptable.

This happened in the U.S. about 50 years ago.  Not with sea shells, but close enough in my view.  In 1965 the U.S. government stopped minting coins out of silver (good money) and began making them out of copper and nickel (bad money).  They went from being made out of precious metal to base metal.   Base metal is common and inexpensive opposed to precious metal which is rare and expensive.

It didn’t happen right away, but the pre-1965 coins began disappearing.  People where keeping them in favor of using the cheaper metal coins.  They locked the silver coins away and used new coins because people accepted them because the government said it was the law to accept them.  It took a while for all the silver to go out of circulation.  I remember I would still occasionally find a silver coin in circulation back in the 1980’s, but I haven’t seen a silver coin in circulation for at least 20 years now.

Today those silver coins are worth about 10 times their face value and rising.  People who understood Gresham’s law or just recognized the value of silver over the new base metal coins, put the coins away for safe keeping.

It’s happening again, but this time it’s the gold.

The U.S., and with it the entire world, hasn’t been on the gold standard since 1971.  Although the U.S. hasn’t been on a technical gold standard, it’s been on a de facto one.  You couldn’t take your dollars (or other currencies) to the treasury directly and redeem them for gold, but you could get gold on the open market at the comex or from a precious metals dealer.

With the central banks of the world printing fiat currency (bad money) like crazy, people are starting to take possession of their gold (good money) and hiding it away.  The physical gold available to take possession of at the comex is dwindling rapidly.  Soon, but I don’t know how long, it will be nearly impossible to actually get physical gold.

The dwindling gold available for delivery at the comex tells me two things.  The price of gold is inaccurate.  Less and less people are willing to part with their gold at today’s prices.  The bad money (the fiat currency) is getting worse because the good money (gold) is being driven out of circulation.  Gresham’s law in action.

I’ll leave you with a few charts to see what you think.