A Return to the Gold Standard or Gold Behind Currencies, Part 4
Source: Julian Phillips, Gold Forecaster (4/19/12)
"Gold is money when nothing else is, particularly at the government level. If a national currency collapses, the gold in the nation's central bank does not."
Today we have a set of circumstances that are totally different to those times. All currencies are in a "dirty float" that sees exchange rates moving relatively freely, being the subject of market forces including manipulation by their own governments. The days of revaluation and devaluation are things of the past. No amount of systemic change will see the reimposition of fixed exchange rates. Any new monetary system or adjustment to the present system will have to accept this reality.
There is neither the political will nor competence—due to the variety of national interests—for a overhaul of the global monetary system as the monetary will of most nations is just not there, nor will it be.
So any adjustment of the global or partial global monetary systems will have to accept the interests of those nations that are part of that system. Any partial reformation will have to be pragmatic and useful. No theory or ideal system will make any headway. In short, any adjustments will have to be supportive of what we have now in the developed world, or in the interests of the different emerging world nations in their new monetary system.
Gold Still Used
Despite the overshadowing of the last 40 years, what remains true is that gold is acceptable to all nations as collateral even between bitter enemies. It remains a common denominator of every nation. All accept that gold is an important reserve asset. The very fact that "the worse it gets, the more relevant gold is in the money world" is inescapable. The euphoria of the 40-year experiment with paper, based on trust in governments alone, is failing. It's at the stage where it is being forced on an unwilling world, a world that is fully aware of its failings and manipulation.
The over-indebtedness of governments has mauled that trust. Governments need gold as an element to restore that trust even as the value of currencies is reflected in the floating price of gold, so gold will enable trust in currencies to be retained for a period when monetary discipline and the price of gold reflects central bank behavior in gold/currency exchange rates. At least the exchange rate will reflect a truer value with gold measuring it. In addition, the value of gold in international dealings will reflect the value of the nation exchanging it as well as the nation receiving the exchange.
Currencies Priced in Gold
To clarify that last statement a little further: Imagine a nation with a currency that is treated as dubious to other countries. The central banks asked to help it will not look at the price of gold in the local currency; instead, they will look at the number of ounces that nation has to provide as collateral for the lender's money. The bank will base its loan to the struggling nation on the price of gold in his currency. As the times decay, suspicion will attend many more currencies. We can even see a time when the dollar price of gold will only be acceptable to those they are lending. If the time should come when the U.S. needs to use its gold as collateral for a loan in the yuan, for example, it will be the yuan price of gold that will form the basis of the loan/swap, not the price of gold in the dollar. There could even come a time when the price of gold in any particular currency will be seen as a farce and disregarded. It will then be the number of ounces of gold any particular nation has to put up as collateral that will count.
Gold will eventually become the anchor for a monetary system, acting as a stabilizer and support.
How Will Gold Fit into a New Monetary System?
If gold were retained as part of the monetary system and its value "floated" against a currency's value at a much higher price (five figures in the U.S. dollar or more), alongside other pieces of updated financial engineering, then an effective way of using gold in the monetary systems would return to the system. In a financial world that is failing, a measure of value to do that job is needed simply to give the system a semblance of credibility.
Developed world central bankers are fully aware of its future usefulness in times of need because gold has never left the vaults of the developed world central banks; they only just reduced slightly. Why? To quote the Washington and subsequent central bank gold agreements, "Gold remains an important reserve asset."
Gold is money when nothing else is, particularly at the government level. If a national currency collapses, the gold in the nation's central bank does not. It is then that the nation has access to internationally acceptable money and can use it to facilitate and cheapen financial transactions the world over.
Future Gold Supply Found Predominantly in the Emerging World
One of today's most alarming realities is that the BRICS nations, plus Australia (whose main trading partner is China), are the world's main suppliers of newly mined gold. It does not take a major leap of the imagination to see them fence this off from nations and direct it to their own reserves. The immediate effect would be that the supply of gold to the open market would spiral down rapidly sending the price of gold to heights never dreamed of, heights that would enable gold to relate more closely to the money supply of the different nations. Any emerging nation's monetary system, which is separate from the current developed world system, would gain a credibility that would add power, control and wealth that would force it to the top of the wealth, league-of-nations in the foreseeable future.
Most importantly, it would bring back to the monetary system the concept of a "measure of value" so sorely needed now. How long will this take? That's not as relevant to the fact that it is on its way, and the price of gold will continue to rise as it gets nearer.
(The fifth and final part of the series will look at how gold is being used in intergovernment/central bank dealings today and in the recent past as a pattern of how it will be used in the future.)
Julian Phillips, Gold Forecaster
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