Gold Market Discussion : Standard Debate

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It's time for us to be back with Gold market. How was your investment? I hope that you have been doing well. Back to the topic today: "Standard Debate", let's discuss with The Bullion Report!

Standard Debate

News reports for gold found extra fodder this week as the World Bank chief alluded to the potential for a return to the gold standard. Always a hot topic for debate among economists, the gold standard talk has been eagerly revived lately. The Fed’s latest move in quantitative easing and the reaction on the global scene has not been kind to the US dollar. Now is as good a time as any to examine what all the fuss is about.

The idea of a gold standard is pretty straightforward. It implies that the monetary system is fixed to a specific amount of gold. In the past, this meant that many national currencies which participated in the gold standard had notes which could be converted into gold. This was accomplished via agreements from those nations to fix their money to a set amount of gold. This kind of monetary system wasn’t limited to gold. The US had a bimetallic standard for a while under which there was a fixed amount of gold and silver linked to the dollar. Officially, the US was on a gold standard at the start of the 20th century, after passage of the Gold Standard Act. In 1946, Bretton-Woods changed things, and established a system of fixed exchange rates. Nowadays, almost every country is on a fiat money system and no major currency has a gold standard.

So what is the big deal? Advocates for a return to a gold standard suggest that the basic nature of gold is best for a money system. They feel that commodity money prevents distortions. A currency on a gold standard is supported by a specific weight of gold. Gold is a tangible item, not just paper. Therefore, in order to create more money, a central bank would have to have additional gold. This could serve to prevent a bank from changing policies and issuing additional paper money with no intrinsic value. They see International exchange as difficult with floating exchange rates. How can someone smoothly conduct international trade when the prices change so frequently in volatile times?

The other side of the equation suggests that a gold standard is not that easy in reality. To the people who think it is a ridiculous idea, the flow of gold between nations wasn’t able to offer the balance of payments people had hoped for. It didn’t prevent financial disasters before, why would it now? Gold prices are seen as extremely volatile, making the price point for a gold peg difficult. The lure of gold has historically led to a “cashing in” of currencies for gold when the gold price gains enough ground. Issues about inflation, interest rates, and the feasibility of economic stimulation under a gold standard all come under the microscope.

It is easy to see why Robert Zoellick, president of the World Bank, sparked such interest this week. Sure, the US and the Fed have also come under fire ahead of and during the G20 summit. China and Germany specifically had affiliated persons who actively spoke out against the devaluation of the dollar under this latest round of easing. It seems only natural then, that people would read into Zoellick’s comments. In reality, the World Bank president was suggesting other ways that the international economic system could work. His thoughts on gold read more like a footnote in a comprehensive list to a “package approach” for G20 countries to open up growth and reform and cooperation. Somewhere towards the end of his list, he offers a vague suggestion that gold be a part of a monetary system for this package. It wasn’t exactly a vehicle for a beginning movement towards a gold standard revival.


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