Anti-Gold Fever

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"Somebody mentioned gold, and the swords are drawn again."

Name-calling has taken the place of diplomacy at the G20. The German Finance Minister called the U.S. Federal Reserve's US$600B stimulus "clueless," while Bank of Canada Governor Mark Carney says he has "absolute confidence" in the program.

Somebody mentioned gold, and the swords are drawn again. Not a chance, said Carney. A good idea, said Robert Skidelsky, a leading Keynesian. Meanwhile, the man who started the gold rush, the World Bank's Robert Zoellick, says he didn't propose a full return to a gold standard. His objective was to point out that the gold price is sending a message that policy fundamentals within the G20 are rotten. With gold at US$1,400/oz., the message can't be ignored.

Certainly, there will be no clear outcome on currency reform and global trade imbalances, the main lightning rod for conflict. However, the sudden appearance of gold as an issue, unwelcome by central bankers, has somewhat helped galvanize and renew an important ideological battle. There will surely be no reference to gold in any final communiqué. But as the price of gold soars, it draws attention to the failures and weaknesses of the world's fiat currencies.

Outside of the global investment community, official policy circles would prefer to talk about rebalancing world trade, finding ways to manipulate currencies or new money-printing techniques. Then along came Zoellick, former U.S. trade rep and now head of the World Bank, who dropped the gold bomb in an op-ed in the Financial Times.

Overall, the sudden attention paid to a new gold standard is likely to fade. The prospect for some new gold standard is zero. As a result, the future of the world monetary system—even under some new super sovereign reserve—seems destined to ease quantitatively toward a new structure where inflationary paper continues to trump gold.

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