By Louis Golino for CoinWeek ……
Traditionally the notion of some new kind of gold standard is an idea that has appealed mainly to conservatives concerned about having a sound currency that does not lose its value over time to inflation.
It was not long ago that any discussion of a new gold standard was considered kooky by most economists, and that is still largely the case, as seen, for example, in the views of prominent economist Nouriel Roubini, who famously predicted 2008 economic crisis. Mr. Roubini, who is also known as Dr. Doom for his pessimistic perspective, strongly opposes any notion of a new gold-backed currency.
But as the global economic crisis becomes more intractable, and virtually every other asset class except gold has declined in value in the last five years, gold has emerged as more than anything an alternative to the world’s leading currencies.
Increasingly even some mainstream economic and financial experts are starting to wonder if gold might have some kind of role to play in stabilizing the global financial system.
As James Rickards of Tangent Capital explains in his book, Currency Wars, economists and central bankers have not traditionally taken gold seriously. That has started to change, especially with respect to central bankers, particularly if one watches what they do rather than paying too much attention what they say. They may dismiss gold publicly, but they have been quietly amassing hoards of it at the same time.
Two important trends underlie the renewed interest in gold all over the world, and they may provide the eventual underpinnings of some kind of gold-backed reserve currency.
The first key trend is that, as Peter Schiff, CEO of Euro Pacific Precious Metals, wrote recently on www.goldseek.com, “The return of gold is unmistakably the product of a strategic, not merely a tactical, shift in global banking policy.” In particular, central banks around the world stopped selling gold years ago, and they have been buying up large amounts of it in recent years, especially in the developing world.
Ironically, as Mr. Schiff explains, Western governments in the U.S. and Europe have a larger share of their financial reserves in gold than anyone else. The central banks of the U.S. and Europe have respectively 75 and 64 percent of their assets in gold, while emerging market banks have only 20%, but they are playing catch-up.
One of the drivers of higher gold prices in the future will be the continuing desire of central bankers in the developing world to diversify their assets by increasing their gold reserves.
The trend towards gold accumulation by central banks in the developing world is an especially noteworthy development. Those banks increasingly are seeking to diversity their assets away from the U.S. dollar and the more they grow economically, the more gold they are expected to acquire. They already account for about 60% of global demand for gold.
The other important development is the reclassification of gold as a tier 1, or non-risk asset, for banks, which is very bullish for gold and could help lay the groundwork for an eventual gold-backed reserve currency.
The trends discussed above are helping to give gold a large role in the global monetary system, and in the monetary policies of countries all over the world.
There is definitely no guarantee of new gold price records, or a precious metal-backed currency, or of the systemic financial collapse many people seem to feel is all but certain to occur.
And while it is true the U.S. dollar is likely to lose purchasing power over the coming years, it may be quite a while before the dollar loses its reserve currency status. When it does, it is unlikely to be replaced by the yen, which is not yet widely used enough, or the euro, which is far too weak. It is more likely to be replaced by some kind of new reserve currency that is backed by gold or gold and silver.
A new global reserve currency based on gold could help produce the global monetary stability the world urgently needs, but it will probably take a decade or longer to be implemented.
At the moment according to Barry Elias in a June 21 piece in Market Oracle (www.marketoracle.com), the global gold market is approximately $8.5 trillion, and the global money supply is $26 trillion. That means that gold would need to increase threefold to about $4800 an ounce over the coming years in order to have a stable global monetary regime backed by the yellow metal that would be designed to protect purchasing power and keep a lid on inflation.
Some people seem to confuse a new gold standard with a gold-backed reserve currency. They are related, but are not the same. A new gold standard may not be workable or likely because there is probably not enough gold to use it as currency, depending on how it is valued. And there are questions about how the money supply would be contracted or expanded when that is necessary. For those reasons I remain skeptical of a new gold standard.
But given the major moves in the last couple years by central banks to shore up their gold reserves, and the change in banking regulations that gives commercial banks a lot of incentive to own more gold, we can already see the groundwork for a gold reserve currency. Just don’t expect it to happen overnight.
Louis Golino is a coin collector and numismatic writer, whose articles on coins have appeared in Coin World, Numismatic News, and a number of different coin web sites. His column for CoinWeek, “The Coin Analyst,” covers U.S. and world coins and precious metals. He collects U.S. and European coins and is a member of the ANA, PCGS, NGC, and CAC. He has also worked for the U.S. Library of Congress and has been a syndicated columnist and news analyst on international affairs for a wide variety of newspapers and web sites.
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Backing currency in gold now would be disastrous, in my opinion. First, gold is at or near its historical peak- so we would be buying in at peak. Second, there isn’t enough gold in the world to grow economies of the size of the ones we have now.
Gold is far from its peak because we have lots more money creation coming… Sooner or later the sovereign debt and currency crisis will be here… Even with the watered down CPI by the BLS ur being offered a negative interest rate on buying 10 year bonds and yet people still buy them… Bonds are the bubble… Getting paid back in paper that buys less then the paper they gave is the same as defaulting…
There isn’t enough gold is the biggest lie out there.What the price of gold is determines if there is enough or not.Right now the price of gold would have to be roughly $5000 an ounce to match the physical supply of paper.This can be done by decree in one day.
A partial backing of fiat currencies by gold would more readily preserve purchase power parity (PPP) over time and across geographic locations. If the growth in supply falls, price appreciation would preserve PPP. In addition, other commodities, such as silver, could provide backing to accommodate adequate reserve levels.
Mr. Golino: I think you are on to something. Thank you for this thoughful opinion. If you have not done so, I recommend reading “The Golden Revolution” by Johm Butler, John Wiley & Sons, Hoboken, N.J., 2012. HR
Thanks very much, Mr. Roy. I have heard about the Butler book and plan to check it out. Thanks for the recommendation.
I think the bank gold buying is going on because 1. Banks too, may fear a global financial collapse and seek insurance. 2. They now ‘get it’ & KNOW what gold has done in the last 12 years and assume there is nothing to stop that trend short of manipulation, which, has probably been put into place just for central bank buying, for now. Therefore they buy gold and probably silver too because they can, at these prices and understand the meaning of Fiat. I also feel there is an inevitabile future role for gold in stabilizing global fiat.
Thanks to everyone for their input. As I tried to explain, there is a difference between a gold standard in which the currency is not only backed by gold but is also convertible to gold, as existed in the US before 1933, and a gold-backed global reserve currency, which is an idea that is still being developed as a way to use gold reserves to add some stability to the monetary system. It is not yet clear quite how it would work.
Thank you for an informative post. I believe in the value of gold. Gold is real money. Paper money is paper. I think that we are entering some turbulent times. I am encouraging all my friends to buy gold. I buy my bullion at http://www.cherishedgold.com . This site caters to the small investor. You will be please with their service.
Roubini didnt predict this! Many others did, he just rode the wave of giants. Celente, Schiff, and Jim Rogers are just a few! Roubini was a proponent of fiat currency for the longest time.
What if we were to make a Gold and Silver standard? How much would the values have to rise if we were to back the money produced with both?
Great comments by all. There are so many voices out there that it is often hard to cut through them to the REAL bottom line. So, that said, here is my voice after more than a decade and a half of research, observation and critical thinking… 1. Gold is not limited (or monetary metals if you want to expand the supply to include the other reasonable precious metals… and even gems if need be) because, a. as Ed indicated, the “fiat currency” price of gold is simply increased to account for the volume of inflated currency supply (meaning the exchange rate between, the FED’s “dollars” (or whatever nations fiat currency) and the people’s “gold” expands to compensate for whatever measure of worthlessness the FED decides to take their “dollars” to. NOTE: Smart people have already begun exchanging as much of their fiat currency for monetary metal (and other real commodities and assets) as possible to assure they maintain and even expand their acquisition power as the fiat currencies of the earth tank, and b. modern technology can either use electronic bytes to give us access to fractions of our personal reserves of monetary metal (like our bank accounts and bank card give us access to fractions of our personal reserves of our fiat currency today, or technology can be used to create coin or plastic or paper mediums as carriers for the smallest laser cut quantity of monetary metal we need to facilitate cold hard cash in whatever denominations we desire 2. the people of earth are on the edge of the greatest wake-up call and education by experience they have ever been through… when it comes to the “money game” or “how money works.” I believe such will ultimately move us to monetary policy closer to Star Trek, where there is no more money used, but this will happen in stages. The first stage will be the stabilization of the acquisition power of money… by the citizens of the world understanding and keeping a certain volume of monetary metal in their possession (that means never spending it and never letting it go). This alone will assure we never see monetary metal appear to fluctuate in value as it has in the past. It hasn’t really fluctuated, it just seems like it has because we have been fooled into thinking fiat currency is money, and we have compared monetary metal against fiat currency. When you compare monetary metal against other REAL things… wheat, oil, etc. you find there is no inflation, only the illusion of inflation the fiat currency makers create by conditioning society to think the fiat currency makers paper or electronic bytes “debt laden” product is money. It never has been and never will be money. It is currency. Pseudo-money. Counterfeit money designed to rape and pillage the real wealth of nations and the world over time. Smart people the world over will then hold their gold (etc) and use it as collateral against the acquisition of assets (things that multiply acquisition power) first, and other essentials and desired thing second. This begins with leaving behind the old school notion that the earth is limited. The earth is never limited. Resourses, technology, creativity and providence always have and always will assure the earth is abundant, spacious, offers enough and to spare. The earth is not fragile. Humanity is not fragile… we all do have a deeply important stewardship to do the best we can with the wealth of life and resources we have been given for the short time we are here. P.S. Some will say that the fiat currency makers are going to take over the world and completely control the money supply. I used to believe this was a possibility. Today I do not believe it is possible. I believe the real power of earth is in the people. The only hope the fiat currency makers have is in keeping the people ignorant. The problem is that it is impossible to keep the people ignorant long enough for them to succeed. The very nature of their game eventually exposes their game by collapsing the usefulness of their “fake” currency. When this happens, people get educated real fast and buy real money precious metals… or if they are too late for that, they just go to work (probably amid heavy revolution) to do what we have done for thousands of years, and start rebuilding basic farming and manufacturing and economic infrastructure. This time around we also have the ability to give the whole word a complete education all at once via this little technology called the web and the taste we have all had for our small global community and family… and whatever it evolves into as we move forward. Have fun and enjoy the ride… and for heavens sake… start acquiring monetary metals and other assets NOW :). Pass it on!
Charlie… the real value in dollars that gold and silver would have to rise to if we stopped the fiat printing presses today… to compensate for all the natural and debt inflation of the currency supply and devaluation of the acquisition power of the fiat currencies is… GOLD: $20,000 per oz and SILVER: $2-3,000 per oz. Check out Mike Maloney’s wonderful outline of such here… http://www.youtube.com/watch?v=tj2s6vzErqY