Click here to register!

2017
2016
2015
2014
2013
2012
02/29/2012
02/22/2012
02/15/2012
02/08/2012
02/01/2012
01/25/2012
01/18/2012
01/11/2012
01/04/2012
2011
12/21/2011
12/14/2011
12/07/2011
11/30/2011
11/23/2011
11/16/2011
11/09/2011
11/02/2011
10/26/2011
10/19/2011
10/12/2011
10/05/2011
09/28/2011
09/21/2011
09/14/2011
09/07/2011
08/31/2011
08/24/2011
08/17/2011
08/10/2011
08/03/2011
07/27/2011
07/20/2011
07/13/2011
07/06/2011
06/29/2011
06/22/2011
06/15/2011
06/08/2011
06/01/2011
05/25/2011
05/18/2011
05/11/2011
05/04/2011
04/27/2011
04/20/2011
04/13/2011
04/06/2011
03/30/2011
03/23/2011
03/16/2011
03/09/2011
03/02/2011
02/23/2011
02/09/2011
02/02/2011
01/26/2011
01/19/2011
01/12/2011
01/05/2011
2010
12/29/2010
12/22/2010
12/15/2010
12/08/2010
12/01/2010
11/24/2010
11/17/2010
11/10/2010
11/03/2010
10/27/2010
10/20/2010
10/13/2010
10/06/2010
09/29/2010
09/22/2010
09/15/2010
09/08/2010
09/02/2010
08/25/2010

The Bullion Report

RSS

Adjust Text Size: AAA

RSS Feed RSS


November 10, 2010 in 'The Bullion Report'

Standard DebateStandard Debate

11-10-10

Standard Debate


News reports for gold found extra fodder this week as the World Bank chief alluded to the potential for a return to the gold standard. Always a hot topic for debate among economists, the gold standard talk has been eagerly revived lately. The Fed’s latest move in quantitative easing and the reaction on the global scene has not been kind to the US dollar. Now is as good a time as any to examine what all the fuss is about.

 
Past performance is not indicative of future results.
***chart courtesy Gecko Software’s Track n’ Trade Pro

The idea of a gold standard is pretty straightforward. It implies that the monetary system is fixed to a specific amount of gold. In the past, this meant that many national currencies which participated in the gold standard had notes which could be converted into gold. This was accomplished via agreements from those nations to fix their money to a set amount of gold. This kind of monetary system wasn’t limited to gold. The US had a bimetallic standard for a while under which there was a fixed amount of gold and silver linked to the dollar. Officially, the US was on a gold standard at the start of the 20th century, after passage of the Gold Standard Act. In 1946, Bretton-Woods changed things, and established a system of fixed exchange rates.  Nowadays, almost every country is on a fiat money system and no major currency has a gold standard.

So what is the big deal? Advocates for a return to a gold standard suggest that the basic nature of gold is best for a money system. They feel that commodity money prevents distortions.  A currency on a gold standard is supported by a specific weight of gold. Gold is a tangible item, not just paper. Therefore, in order to create more money, a central bank would have to have additional gold. This could serve to prevent a bank from changing policies and issuing additional paper money with no intrinsic value. They see International exchange as difficult with floating exchange rates. How can someone smoothly conduct international trade when the prices change so frequently in volatile times?

The other side of the equation suggests that a gold standard is not that easy in reality. To the people who think it is a ridiculous idea, the flow of gold between nations wasn’t able to offer the balance of payments people had hoped for. It didn’t prevent financial disasters before, why would it now? Gold prices are seen as extremely volatile, making the price point for a gold peg difficult. The lure of gold has historically led to a “cashing in” of currencies for gold when the gold price gains enough ground. Issues about inflation, interest rates, and the feasibility of economic stimulation under a gold standard all come under the microscope. 

It is easy to see why Robert Zoellick, president of the World Bank, sparked such interest this week. Sure, the US and the Fed have also come under fire ahead of and during the G20 summit. China and Germany specifically had affiliated persons who actively spoke out against the devaluation of the dollar under this latest round of easing. It seems only natural then, that people would read into Zoellick’s comments. In reality, the World Bank president was suggesting other ways that the international economic system could work. His thoughts on gold read more like a footnote in a comprehensive list to a “package approach” for G20 countries to open up growth and reform and cooperation. Somewhere towards the end of his list, he offers a vague suggestion that gold be a part of a monetary system for this package. It wasn’t exactly a vehicle for a beginning movement towards a gold standard revival.

Summary

It is unlikely that the World Bank president intended his Financial Times piece to press the gold standard button, but it has obviously brought the idea to the forefront this week. Is a return to a gold standard feasible? Many economists might hope so, as some feel that this would put the brakes on manipulation of money supplies. Despite the fierce debates for one side or  the other, gold has managed to meander to fresh price highs. Regardless of a firm commitment to a course that would change the monetary system, gold still packs allure. The US dollar is being treated like a monetary pariah. Analysts will likely see this as a sign that central banks could pick up the pace on their gold acquisitions. Many western economies already hold a large percentage of their reserve assets as gold. Nations like China and India may have room to add some more, as their gold assets are a smaller overall percentage. This would mean higher bank demand with or without a return to a gold standard of some kind.

For your FREE gold trading kit, call us.

If a man could make gold, he would incur a double danger, first, from his own avarice, and secondly from the avarice of other men. The first would make him a slave, or the second a prisoner; for princes and potentates would think a goldmaker a very convenient member of their exchequer.-CHARLES CALEB COLTON, Lacon


Disclaimer: The prices of precious metals and physical commodities are unpredictable and volatile. There is a substantial degree of a risk of loss in all trading. Past performance is not indicative of future results.