Written by Jared Levy, Editor, Smart Investing Daily
Tuesday, 09 November 2010 11:52
World Bank President Robert Zoellick, a former member of the U.S. Treasury, made his case for bringing back the gold standard. This statement in the Financial Times comes just ahead of the G20 meeting in South Korea. Mr. Zoellick said, “the system should also consider employing gold as an international reference point of market expectations about inflation, deflation and future currency values.”
Gold could again become the standard in his eyes… but is this realistic?
As much as I don’t believe the“gold specie” standard will return and now is not the best time to implement such an extreme measure, the simple looming possibility of some standard or ‘pegging’ of major global currency to gold could support gold prices at least on some level.
Mr. Zoellicks remarks were met with debate, confusion, and doubt according to the Financial Times but some experts believe it does have some merits, at least on some level.
Gold is a Standard of Sorts
Gold is currently used and understood by many around the world as a “global currency” of sorts. That’s because it has one price that everyone can mark to a specific amount of the precious metal. Just about anyone you ask around the world knows at least roughly what gold is worth. Of course, depending on what currency your earnings and savings are in, you may have a favorable or unfavorable advantage being that gold is denominated in U.S. dollars.
Gold prices do reflect inflationary or deflationary pressures in the U.S. economy… both because it is traded in U.S. dollars and that the U.S. currently has the world’s largest reserves of gold (8,133 tonnes or 72.1%). Also, remember that the U.S. dollar is the predominant global reserve currency, comprising of over 62% of foreign exchange reserves in 2009.
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Gold as “THE” Global Currency
The question is, do the largest countries in the world really want to reference and mark their currency to a commodity that is so extremely volatile? Gold has more than doubled its value in less than two years and the GLD ETF has had average monthly fluctuations of over 6% over the past year.
Moving to a gold standard would put everyone on the same playing field with the same rules so to speak. It could also prevent hyperinflation or deflation. With those advantages, there are a bevy of issues that would accompany the world going to a “gold specie” or a complete 100% global gold standard. Meaning any currency in circulation would have to be backed by its value in gold. The most obvious issue is there is simply not enough gold to cover current global currency inventories (at current gold prices, of course).
Look at the United States, for example. The number of money in circulation, bank accounts, savings accounts, money markets, CD’s, etc. is currently about 8.7 trillion dollars according to the Federal Reserve Bank. This would mean that in order for us to back all of our currency with gold, we would need 193,284 tonnes of gold at $1400 an ounce just for U.S. currency.
And to date, there has been roughly 142,000 metric tonnes of gold mined from the earth since the beginning of time.
That leaves us with two options…
Option 1: We need to find a ton more gold (pun intended) if a full gold standard were to come to fruition
Option 2: The price of gold would have to increase substantially… and I’m not talking 20% or even 100%. It would have to be an astronomical rise in price to back the world’s major currencies making recent highs look like a joke.
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The G20 summit will be sure to offer up a few ideas on “fixing'”some of the world’s currency issues. But I don’t believe that a 100% gold standard will come to fruition in the near term.
But, the simple looming possibility of at least some standard or “pegging” of major global currency to gold will support gold prices at least on some level.
The currency system is in need of repair and like it or not, gold is something we can all relate to and has been an object of beauty and value since it was first discovered. With quantitative easing driving our once almighty dollar further into the ground, as it stands now it’s probably not a bad idea to remain long of gold, albeit cautiously.
Just to be clear, my co-editor Sara Nunnally and I don’t jump on bandwagons and gold is no exception. We both have been recommending gold investments when it was more than $200 cheaper. But if the wind keeps at our backs like it has, there is no reason to jump ship just yet. Stay long gold into the G20.
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World Bank President Robert Zoellick, a former member of the U.S. Treasury, made his case for bringing back the gold standard. This statement in the Financial Times comes just ahead of the G20 meeting in South Korea. Mr. Zoellick said, “the system should also consider employing gold as an international reference point of market expectations about inflation, deflation and future currency values.”
