Several leading world countries, like China and Russia, have said they would favor the inclusion of gold bullion in the basket-weighting of a new regional or world currency based on Special Drawing Rights issued by the International Monetary Fund. With the uncertainty affecting foreign exchanges and exchange rates, such a move could add increased credibility to the currency system. However, with Bankers so resistant to gold, its inclusion in the S.D.R. may be premature? If not, we would then expect to see central bankers remove their dislike of gold completely and let it find its own level.
Russia has been buying up gold for the last two years slowly but surely and intends to raise the gold content of its reserves to 10%. By doing so it adds action to intention on gold as part of their monetary system. The silent but difficult to ignore presence of gold in so many central bank vaults tells us that the return of gold in support of currencies may well be possible now.
Moreover, these musings about a gold standard are currently cropping up in all manner of unlikely places. One European bond analyst recently said, “The logical conclusion of where we will end up eventually is with some type of gold standard.” He argues that future inflation will almost inevitably cause a future collapse in government bonds.
Half a world away in the Middle East, some sovereign wealth funds now say that they are stocking up enthusiastically on food and gold, due to similar reasoning.
Meanwhile, in New York a (still) formidable American hedge fund recently circulated private research that echoes similar reasoning. Most notably, this hedge fund points out that since the world abandoned the gold standard on August 15, 1971 credit creation has spiraled completely out of control.
Earlier in his career, Alan Greenspan wrote an essay on the importance of the gold standard. Mr Greenspan wrote: “Under a gold standard, the amount of credit that an economy can support is determined by the economy’s tangible assets . . . [but] in the absence of the gold standard … there is no safe store of value,” Greenspan wrote back then, pointing out that without a gold standard in place, there is little to prevent governments indulging in wild credit creation. “Deficit spending is simply a scheme for the confiscation of wealth. Gold stands in the way of this insidious process. It stands as a protector of property rights.”
Of course, for the moment all this muttering about gold is simply wild speculation. Even if Western leaders suddenly were to decide they wished to turn back the clock, the logistics of embracing a new gold standard would be mind-boggling. UBS, for example, calculates that the US reserves of gold are so small, relative to its monetary base, that a price above $6,000 an ounce would be needed to reintroduce a gold standard. To implement that standard in Japan, China and the US, the price would be more than $9,000. Moreover, right now few western governments have any motive to even entertain the debate, given that inflation may soon seem the least bad way to tackle the current overhang of debt.
Given that, shell-shocked investors are increasingly reluctant to rule anything out, as they stare at such uncharted waters. So while I would not bet today on a gold standard returning any time soon, I would also not bet that the debate dies away. Nor would I bet that the gold price crashes too far from its current price, while so much fear continues to stalk the world.