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Possible Future Gold Standard

15 July 2011 16 Comments

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.

 

16 Comments »

  • Chris Yates said:

    Amazing what the price of gold is right now. Breaking records.

    – Chris Yates

  • ross said:

    I sill feel like gold has room to increase in value. People are still worried about the economy, our debts, and inflation. Im not going to buy now, but i don't feel like its a bubble that is going to pop.

  • currencywidget said:

    Fantastic explanation! That certainly made things very clear and only further solidifies my support for Ron Paul as this all makes a lot of sense.

  • jeweller said:

    gold price will come down with in month

  • Monex fraud said:

    ………….It used to be that the term international liquidity meant the relative amount of resources available to a nations monetary authorities that could be used to settle a balance of payments deficit…In the days of the gold standard this would mean access to gold that could be used to redeem a nations currency held by foreigners. ..After Breton Woods and the advent of the dollar-gold exchange standard liquidity came to mean access to dollars either held as reserves or as credit lines or the .Tags …………..

  • recession said:

    Foreign nations might indeed ask a revaluation of currencies taking gold as a reference point. Having gold is a safety net for anybody and I am considering investing in gold. But I have no idea what's better, investing into ETFs or physical gold

    ETFs can be you traded like funds or stocks. Their pros would be a fast trading and low premium over the actual gold value. But you must pay attention at the quality of the management and the fees. For the physical gold: you pay a premium (usually $50-70 over spot with 1 ounce coins). But when you sell it, you also get the premium back (partly) Pros: You hold the physical and you know it's 100% there, in any type of meltdown. Government doesn't need to know you have them or you sold them (purchases under $10,000 or sales up to 25 ounces don't have to be reported) and you could consider capital gains tax. If you buy from BBB A rated dealers you can be sure it's genuine. Drawbacks: you need a safe place (safe at home or safe deposit $100-300/year), shipping cost when buying online ($30-50). If you believe there may be a serious market crash (exchanges may be down and ETFs not tradeable), this is the better option.

  • CalvinContreras said:

    The advocacy in favor of or against a gold standard is often intense (especially in certain circles in the United States and the United Kingdom) specifics on the mechanics and policy implications of implementing such a system are often lacking.

  • Warren Buffett said:

    Currencies can be classified as either floating currencies or fixed currencies based on their exchange rate regime.

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