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For the first time in over 30 years, talk of a return
to the gold standard has become part of mainstream politics in the United
States. Part of the official Republican policy adopted it at the recent
Republican Convention and called for the commission to look at reestablishing
the link between gold and the U.S. dollar. No doubt that plank was added to
soothe supporters of Texas Congressman Ron Paul.
However, gold
bugs holding gold bullion or even those holding gold ETFs such as the SPDR
Gold Shares (NYSE: GLD) shouldn't hold their breath in anticipation of
the gold standard returning. There was a similar commission - the Gold
Commission - set up in 1981 by President Ronald Reagan. After a lot of
'commissioning', the decision was made to go with the status quo of using
fiat Federal Reserve dollars.
Any
commission set up under the current president would likely come to the same
conclusion. There are simply too many practical obstacles to return to a
full-fledged gold standard. Even pro-gold advocates including the World Gold
Council and the Gold Anti-Trust Action Committee (GATA) don't see a gold
standard returning.
The key
problem would be at what price of gold would the United
States peg its currency. Great Britain returned to the gold standard
in 1925, after going off it in 1914, at the 1914 peg price. This was a
mistake made by Winston Churchill (he called it the biggest he ever made)
since it basically ignored the vast inflation in the British pound in those
intervening years. The result was a vast overvaluation of the pound and
deflation and high unemployment soon followed.
What price
would a new Gold Commission set as the "correct" price of the U.S.
dollar versus gold? $1,000? $2,000? $5,000? The answer is that there is no
"correct" price. Whatever price is set will eventually be tested by
the financial markets and fail much as the pegged currencies system failed.
So there will be no return to the gold standard.
But that does
not mean there will not be a 'back-door' gold standard. The move to such as a
system is already underway as central banks all over the world are rebuilding
their stockpiles of gold. After two decades of heavy selling, central banks
became net buyers of gold in 2010 and the momentum has built since. Gold will
likely end up being used as 'good' collateral by global central banks, as
opposed to the shaky collateral sovereign bonds are turning into.
Central bank
purchases, led by the emerging markets, are on track this year to hit a
record high according to the World Gold Council. China alone in 2011 bought
around 490 tons of gold. Other countries including Russia, Turkey and South
Korea have added gold to their official holdings in recent months. This
buying showed up as central bank purchases in the second quarter of 2012 were
more than double the level reported a year earlier at 157.5 metric tons. If
the buying continues at current levels, central banks gold purchases would
total around 500 tons this year, easily surpassing last year's 458 tons.
The bottom
line for investors from the global central banks' buying of gold? The gold
standard is working its way back into the international monetary system
through the back door. This should, in the long-term, put a floor under gold
and help maintain it on its steady upward path.
Just last
week we started to see gold bullion, silver bullion and gold miner share
prices start to breakout to the upside of a 12 month consolidation pattern.
This could be the start of the next major rally in precious metals as future
uncertainty fears continue to rise. The large bullish technical pattern we
see on the gold chart points to much higher prices over the coming 24 months.
But keep in mind this is a monthly chart and it could still take months to
truly breakout to new highs and start another rally.
Chris Vermeulen
Editor, the
Gold and Oil Guy
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