Possible Future Gold Standard
On the issue of a gold standard, you have opinions all over the map. It’s impossible. It’s inevitable. Who knows? One thing is for certain, the role of gold is increasing and the role of the US dollar (and likely the Euro) is decreasing. The Euro & Dollar – essentially the two pillars of the current global financial system – are unraveling as the West finds itself in too much debt. The third pillar, the Japanese yen… same deal.
Earlier this week, Ron Paul asked Ben Bernanke (video here) why central banks own gold? The reality is exactly what Paul was hinting at: gold is money. So why do central banks own gold? Because it is an insurance policy against the unraveling of the financial system. They hold gold for exactly times like today.
The fact that central banks own (and continue to buy) gold is one of the main reasons for my extremely bullish thesis on gold (even at current high levels). I’ve read fascinating research on the global financial system and the role that gold plays. Essentially, even though gold is de-linked from the currencies, it’s still a major player in the background. Market forces will still dominate the landscape even if politicians and central bankers think they can hold these market forces at bay (and for short periods of time, it seems like they can).
Eventually, market forces will require currencies to be “backed by gold” again even if it’s not a strict “gold standard.” What do I mean by this? At some point, foreign nations like China will force a revaluation of the dollar against gold. It will essentially rebalance the dollar vs gold value to the market determined level. This is basically what is happening today. Your dollars buy less gold than it did a few years ago. This is going to continue to be a piece-by-piece, slow moving process as countries like China hold massive reserves of dollars and they don’t want to disrupt the market too much.
The following article has some good information on the gold standard and its future:
Step by step, the world is edging towards a revived Gold Standard as it becomes clearer that Japan and the West have reached debt saturation. World Bank chief Robert Zoellick said it was time to “consider employing gold as an international reference point.” The Swiss parliament is to hold hearings on a parallel “Gold Franc”. Utah has recognised gold as legal tender for tax payments.
A new Gold Standard would probably be based on a variant of the ‘Bancor’ proposed by Keynes in the late 1940s. This was a basket of 30 commodities intended to be less deflationary than pure gold, which had compounded in the Great Depression. The idea was revived by China’s central bank chief Zhou Xiaochuan two years ago as a way of curbing the “credit-based” excess.
Mr Bernanke himself was grilled by Congress this week on the role of gold. Why do people by gold? “As protection against of what we call tail risks: really, really bad outcomes,” he replied.