Gold back on centre stage of the world financial system
It hasn’t got much press or attention, but while campaigning in New Hampshire Republican presidential campaigner Ted Cruz raised the issue of the gold standard. “I think we should look at getting towards rules-based money supply, ideally tied to gold, so you have stability,” he said.
It says something about the “success” of the Federal Reserve’s monetary policies that gold, as of Monday, has risen 22% from the time U.S. interest rates were hiked in December. Since the beginning of the year, the gain in the gold price, again as of Monday, has been 13%. While Goldman Sachs is sticking by its prediction that the yellow metal will be back to $US1,000/oz by December (against $1,192/oz in Wednesday trade in Asia), the mining industry is buying the “gold is back” story. Here in Australia exploration by the gold companies is still proceeding at a high level of activity. And we read that the Haile mine, near Kershaw, South Carolina, is to be re-opened – after being closed for 74 years (it was shut, like all other U.S. gold mines, on the order of Franklin D. Roosevelt as he did not consider gold important to the war effort).
In January the People’s Bank of China bought another 16 tonnes of gold. China last year consumed 986 tonnes of gold, or just under a third of world mine output.
The worsening global economic outlook – collapsing prices for commodities, negative interest rates in Japan and elsewhere, the stock market panic now occurring in Japan and Europe – will focus more attention on gold. Once more it shows how, in stressed times, gold marches to its own drummer.
And, inevitably, there will be a resurgence of talk about a gold standard to restore some discipline to the financial system (in other words, stopping, or slowing down, the money printing presses). The subject certainly keeps coming up in America, especially in the Republican Party. There was earnest discussion within the Reagan administration; indeed, today I found a news story from 1981 quoting then Vice-President George H.W. Bush saying a new gold standard should be studied. The subject also figured at the 2012 Republican convention.
But let’s just hold the phone here. We are not talking about the straightjacket-type gold standard reintroduced in 1925 and then abolished in 1931 which has made the term “gold standard” a pejorative one. No, when people talk of a gold standard they are discussing something far less rigid, but always with the intention of ending the failed policy of just printing ever more paper money or creating billions by ledger entry. One proposal is as simple as making it possible (as it long was) for people to take a sum of paper money into a bank and being able to exchange it for physical gold.
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And, lest it be thought that this gold standard idea is just for the financial fringe dwellers, Bloomberg Intelligence recently argued that China might consider some domestic form of the standard to bring its currency under control. In 2010 World Bank boss Robert Zoellick wrote an article in The Financial Times of London suggesting a return of the gold standard, albeit as a hybrid including major currencies and commodities, to provide a stable measure of worth of paper money. The World Bank president was talking about a new-style Bretton Woods system, using gold as a reference point of market expectations as to inflation, deflation and currency values. He was certainly not calling for a return to the gold standard as it had been applied until the 1930s. This article released the genie: what had thus far been a subject only on those way-out gold websites was suddenly something you could discuss in polite company.
Indeed, even John Maynard Keynes was not entirely opposed to it. The famed economist who once described the gold standard (not gold, as is often thought) as a “barbarous relic” would, after its abolition, devise a replacement system that bears some similarity to what Zoellick was talking about.
The end of the gold standard tarnished the concept of using the metal as a means of regulating money supply. But there are those who argue it needed changing, not abolishing.
Winston Churchill’s return to the gold standard in 1925 was doomed to failure because it set the value of the pound at its pre-war gold price but inflation in the 1914-18 period was not factored in. It was the cost of the Vietnam war (and the need to print money) that forced Richard Nixon to cut the last link, the commitment by the United States Treasury to pay other central banks $35 for each ounce of gold.
By 2010, few were suggesting a return to the Churchillian-style rigour of the gold standard; what many were suggesting, however, was some form of standard that would constrain governments and central banks inflating their way out of trouble and causing immense damage to personal savings.
And you certainly could make a plausible case that something needs to be done as central banks scramble to contain what seems to be a runaway train. No wonder legendary bear Marc Faber, author of the Gloom, Boom & Doom Report, told CNBC recently that the world must have been “crazy” to give so much power to central bankers.
But, in the short term, it seems reports of the death of gold (so popular just a few months ago) seem, as Mark Twain would say, to have been greatly exaggerated.
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