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Gold Standards, the World Bank, and Fiscal Responsibility

Commodities / Gold and Silver 2010 Nov 15, 2010 - 05:20 PM GMT

By: Midas_Letter

Commodities

Best Financial Markets Analysis ArticleSince World Bank president Robert Zoellick put forth the idea for a new global currency that was influenced by the price of gold, the global media has pounced on his remarks, and completely misconstrued them to report that he was advocating for a ‘return to the gold standard’.


First of all, (and I do apologize Mr. Zoellick if I myself misinterpret some of your statements inadvertently), what was most noteworthy about his statement was not so much that the new monetary instrument would be linked to gold, but that we need a new currency. He’s openly advocating for the replacement of the U.S. dollar as the official instrument of trade for the world, which is, in reality, the first meaningful step in repairing the global financial system and returning to a state of economic health. Small wonder it was the U.S. mainstream financial outlets that dominated the assault on Zoellick.

So forget for a moment your preconceptions about a gold standard, and focus on the fact that the world bank has, with these remarks, given a giant boost to the long-time yearnings of lesser nations to take that well abused advantage away from the nation that has demonstrated in no uncertain terms its inability to responsibly administer a global monetary unit.

Then focus on his remarks, and you’ll notice that not once does he mention a gold standard, but states simply that a new global currency should be influenced by the price fluctuations of gold.

“Gold is now being viewed as an alternative monetary asset. This is not the same as a gold standard,” said Mr. Zoellick. “Gold has become a reference point because holders of money see weak or uncertain growth prospects in all currencies other than the renminbi, and the renminbi is not free for exchange.

“So, in relative terms, gold is appealing to people who ask where should I put my money. It is a hedge against uncertainty.”

To reiterate, there is no suggestion that there is a return to ‘the’ gold standard, or even ‘a’ gold standard. He is simply suggesting that, in view of increasing numbers of investors and capital pool managers turning to gold in preference of cash as a store of value, its status as such, and its barometric price influence by interest rates, need to be incorporated into a monetary standard that seeks to be holistic in its configuration.

This is a far cry from the last “gold standard”, which was governed by the Bretton Woods Agreement, the chief features of which were an obligation for each country to adopt a monetary policy that maintained the exchange rate of its currency within a fixed value—plus or minus one percent—in terms of gold and the ability of the IMF to bridge temporary imbalances of payments..

This came to an end in 1971 after the weak U.S. dollar saw nations dumping dollars in favour of gold, and taking it out of the United States.

The gold standard is a monetary system in which the standard economic unit of account is a fixed weight of gold. There are distinct kinds of gold standard. First, the gold specie standard is a system in which the monetary unit is associated with circulating gold coins, or with the unit of value defined in terms of one particular circulating gold coin in conjunction with subsidiary coinage made from a lesser valuable metal.

Similarly, the gold exchange standard typically involves the circulation of only coins made of silver or other metals, but where the authorities guarantee a fixed exchange rate with another country that is on the gold standard. This creates a de facto gold standard, in that the value of the silver coins has a fixed external value in terms of gold that is independent of the inherent silver value. Finally, the gold bullion standard is a system in which gold coins do not circulate, but in which the authorities have agreed to sell gold bullion on demand at a fixed price in exchange for the circulating currency.

These standards, as described are not workable, because they limit, by definition, the amount of money any nation can issue based on its gold holdings.

What Zoellick proposes is simply that the gold price be incorporated as a reference point in determining the values of any hybrid monetary unit which he feels must be a result of the current wholesale devaluation contest underway among Japan, China, England, and the United States.

That there is a day of reckoning coming for these nations and by extension, all who conduct business in these currencies, is without doubt. The only deniers of such an inevitability are the banks and governments conducting this completely irresponsible and, in full knowledge of that fact, criminal perpetrators of the increasingly useless funds.

A new reserve currency, as Zoellick correctly points out, would need to address the requirements of an ever-expanding capital base seeking a finite number of projects in which to invest, while providing an equitable and stable rate of exchange between national currencies and the global reserve currency.

In the ensuing chapters of what is now a great international competition for the world’s resources, which are finite, the motivation to devalue currencies means that bigger numbers are paid for resources, and in the period between the over supply of such dollars, yen, yuan and pounds sterling, the vendors of such projects are fooled into thinking they’ve done a good business. Most of them, especially in oil, gold and silver, will have been better off letting their assets appreciate in the ground.

An equitable, uniform and stable global reserve currency runs contrary to the interests of these most powerful nations, who would then be forced to pay a fair price, in real dollars, that hopefully, will be measured in some part by the price of gold.

Its not a gold standard that’s proposed, nor one that is needed, beyond the standard it already embodies in casting the various currencies against which is it measured in the light of a correct valuation.

Unfortunately, Zoellick, and people like him, who have a firm grasp on economics and responsible fiscal policy, are unlikely to prevail against the politicized financial mismanagement that characterizes the guilty governments. And until the understanding of the simplicity governing economics – namely, supply and demand – is correctly taught in post secondary institutions, there is little hope that future leadership will possess either the political will or intellectual capacity to deliver rational policy.

Gold will continue to measure the profligacy inherent in the leading reserve and trade currencies as the standard against which all other currencies, past, present and future have, are and will be assessed.

James West is the publisher of the highly influential and widely respected Midas Letter at midasletter.com. MidasLetter specializes in identifying emerging companies in gold and silver exploration at the beginning of their share price appreication curves, and regularly delivers 10 baggers (stocks that increase in value by at least a factor of 10) to his premium subscribers. Subscribe at http://www.midasletter.com/subscribe.php.

© 2010 Copyright Midas Letter - All Rights Reserved

Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

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