Gold's Ascent Mirrors Declining of Confidence in the Global Monetary System

Friday, July 29, 2011

By Anthony Rowley

Tokyo- (PanOrient News) Gold has been making headlines recently by rising to a record price (in nominal or non-inflation-adjusted terms) of US$1,600 or almost £1,000 an ounce. But the real story is in the groundswell of calls being made - and not just by a 'lunatic fringe' - for the global monetary system to revert to some form of gold standard.

Unlike his successor Ben Bernanke, who seems ready to go on printing dollars right to the bitter end, former US Federal Reserve chairman Alan Greenspan has spoken in favour of sort of gold standard, as has World Bank president Robert Zoellick as well as Nobel economic laureate Robert Mundell to name but three.

The surging gold price reflects not so much a sudden craze by investors - from central banks to proverbial 'widows and orphans' - to hold precious metals, rather than paper money or bank balances, but a growing loss of confidence in the US dollar and the euro. In other words, currencies are going down rather than gold going up.

Surges in the gold price have happened before, many times, but what is different this time is the pervasive fear that gold's ascent does not mirror a temporary depreciation of one or other major currency but something much more fundamental - an accelerating decline of confidence in the global monetary system.

The system is widely perceived to be without an 'anchor', which it has in fact been since 1971 when then-US president Richard Nixon broke the formal link between the US dollar and gold, thereby taking other major currencies off the gold standard too since their parities had until then been tied to gold via the US dollar.

Those defending Nixon's move argued that it was absurd to tie the quantity of money to gold, silver or any other precious metal whose supply is finite - highly deflationary, they said. Perhaps, but is it not equally absurd that the Fed should be able to print unlimited quantities of money - highly inflationary on a global basis?

This current situation is producing some unlikely candidates as 'haven currencies' - not least the Japanese yen which ought by rights to be depreciating now (reflecting Japan's diminished fortunes) but is instead appreciating. China's Yuan is a more logical haven currency but it is not freely available.

But where are the G-20 and the International Monetary Fund (IMF) now, just when one would expect (or hope at least) that either or both of them would be convening some sort of global gathering to debate where the international monetary system should go from here?

Perhaps the major powers are just too busy trying to save their own skins - and their currencies. Key figures in the US administration are locked in mortal struggle with their political opponents over how to fix the national debt problem that is strangling the US economy.

In Europe, members of the euro zone are engaged in similar internecine warfare over who should take what share of the burden of national debt in peripheral economies of the continent. Japan has its own preoccupations. China looks on inscrutably at what is happening on the global monetary scene.

The one person who might be expected to be issuing calls to action - newly appointed IMF managing director Christine Lagarde who as former French finance minister expressed strong interest in reform of the international monetary system - is silent on the issue, at least for the moment.

Others are not, however, and the problem is that there appears to be no one with sufficient international institutional stature to focus the debate and to coordinate sporadic reform efforts into some sort of global design. John Maynard Keynes, where are you now when we need you most?

Do we need a gold standard, or do we need some form of globally accepted fiat currency such as the commodity basket-linked 'bancor' which Keynes originally proposed (but which became diluted into IMF Special Drawing Rights or SDRs), or do we need a system based on a small basket of key currencies?

Bancor was intended to be a basket of 30 commodities designed to be less deflationary than gold alone, which had compounded in the Great Depression. This idea was revived by China's central bank head Zhou Xiaochuan two years ago as a way of curbing 'credit-based' excess in the global monetary system.

Debate on reversion to some form of gold standard or 'anchor' for monetary systems is strongest in the US, which is not surprising given the profligate manner in which Mr. Bernanke's Fed has been printing US dollars as though there were no tomorrow (which there may not be for the dollar).

In Utah, Governor Gary Herbert has signed into law the 'Utah Sound Money Act', which declares gold and silver to be legal tender and eliminates state capital gains taxes on gold and silver coins used as currency. Iowa and South Carolina are considering similar legislation.

Tea Party members are in full support and it would be tempting to quote W B Yeats and say that 'the best lack all conviction while the worst are full of passionate intensity' on gold were it not for the fact that a few authoritative figures are also on side with the idea of restoring a monetary role to the metal.

Mr. Zoellick, for example, has suggested that it is time to 'consider employing gold as an international reference point', while Mr. Mundell has urged European nations to consider making the euro a gold-backed currency.

This would no doubt go down well with China, Russia, Brazil, India and Middle East oil exporters who reportedly have diversified their US$7 trillion of their aggregate foreign exchange reserves into Euros over the past decade in order to reduce dollar exposure.

Central banks around the world, meanwhile, became net buyers of gold against last year, after two decades as a steady source of supply to the market. The IMF sold 200 tonnes of gold to the Reserve Bank of India last year, 10 tonnes to Sri Lanka, 10 tonnes to Bangladesh and two tonnes to Mauritius.

One great and frequently overlooked irony in all this is that the country which appears to have most to lose from reversion to a gold standard - the US which has profited enormously by being able to print vast quantities of the world's leading reserve and transaction currency, the dollar - also happens to be the world's biggest official holder of gold.

US holdings total 8,133 tonnes - vastly larger than those of any other single country or of the IMF. So, if does go on to break through US$2,000 an ounce and finally breaches US$5,000, with corresponding surges against other currencies, then the US will be very rich.

Some have suggested Washington's strategy is to debauch the dollar and then propose its massive formal devaluation against gold, whereupon the US would be able to pay off its debts with a fraction of its gold holdings while still remaining the world's richest power. If so, reform of the international monetary system will have to wait a while.

The Swiss parliament, meanwhile, is reportedly considering issuance of 'gold' francs in parallel with ordinary Swiss francs. The price of these could be allowed to go through the roof without imposing massive stress on the domestic economy through appreciation of the regular franc and the country would net a nice profit. Very Swiss.

Anthony Rowley is a long-standing expert on East Asian economic and financial affairs, resident in Tokyo

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