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Is a Gold Standard Afoot?

Whether or not a gold standard is declared by governments, the need for financial stability as provided by gold ensures its reemergence as medium of exchange, no longer being considered a mere commodity among many.

Published: 29-01-2013 00:00

Is a Gold Standard Afoot?

What has come before

It may not be intentional, but central banks are purveyors of things to come for gold. It was reported in the GFMS Gold Survey 2012 that central bank buying is at a record high, at a level not seen since 1964. In 1964, to recall, gold was pegged at a mere US$35/ounce in accordance with the Bretton-Woods Agreement of the 1940s. But even before 1964, central banks had already begun expanding their money supply levels in a way that did not correspond to the supply of gold held in vaults.

In 1965, then-French president Charles de Gaulle warned of what was to come. It may have seen like a failed prediction at the time, but in fact it just took 40 years for his words to really manifest. Even before the present crises, there has been the inflation crisis of the 1970s, where gold’s value rose twentyfold, and recessions such as in Japan in the late 1980s and the dot-com bubble bursting in the US in 2000. All these have shown that no wealth was being generated from all the monetary expansion going on.

Just a ‘tradition’?

Today, even without central banks declaring their support for gold, the increased buying speaks for itself. But could this seeking out of gold be mere ‘tradition’ as alleged by US Federal Reserve Chairman Ben Bernanke? Or is it being learned by more and more people that paper can only serve as money to the extent that it represents market-determined media of exchange?

Indeed, gold and silver emerged as forms of money as commerce developed. It is on this basis that governments had ever upheld a gold standard, which in the 20th century was replaced by a less sustainable fiat regime.

In fact, paper currencies don’t last more than 40 years on average, which spells trouble for those holding on the US Dollar or Euro, or any currency really, as a store of wealth.

Precious metals rising

If there is any hope for the international financial system, it will have to be through an implicit, if not explicit, upholding of gold as money, where certificates, more commonly known as ‘cash’ or ‘bills,’ are backed by a valuable asset in the bank.

It remains to be seen whether a 100% gold-backed system can be attained, but to the degree that this is achieved, the better the chance for economies to grow once more. What’s more, the embrace of gold as money will mean that those who already hold gold will see large gains, both nominal and real, as demand for the yellow metal rises.

Precious metals do not rise exclusive to one another. With gold, silver is poised to rise as well, if not rise further relative to gold.