Return of the Gold Standard as world order unravels By Ambrose Evans-Pritchard
| 9:28PM BST 14 Jul 2011
As the twin pillars of international monetary system threaten
to come tumbling down in unison, gold has reclaimed its
ancient status as the anchor of stability. The spot price
surged to an all-time high of $1,594 an ounce in London,
lifting silver to $39 in its train.
On
one side of the Atlantic, the eurozone debt crisis has spread
to the countries that may be too big to save - Spain and
Italy - though RBS thinks a €3.5 trillion rescue fund
would ensure survival of Europe's currency union.
On the other side, the recovery has sputtered out and the
printing presses are being oiled again. Brinkmanship between
the Congress and the White House over the US debt ceiling
has compelled Moody's to warn of a "very small but
rising risk" that the world's paramount power may default
within two weeks. "The unthinkable is now thinkable,"
said Ross Norman, director of thebulliondesk.com.
Fed chair Ben Bernanke confessed to Congress that growth
has failed to gain traction. "Deflationary risks might
re-emerge, implying a need for additional policy support,"
he said.
The bar to QE3 - yet more bond purchases - is even lower
than markets had thought. The new intake of hard-money men
on the voting committee has not shifted Fed thinking, despite
global anger at dollar debasement under QE2.
Fuelling the blaze, the emerging powers of Asia are almost
all running uber-loose monetary policies. Most have negative
real interest rates that push citizens out of bank accounts
and into gold, or property. China is an arch-inflater. Prices
are rising at 6.4pc, yet the one-year deposit rate is just
3.5pc. India's central bank is far behind the curve.
"It is very scary: the flight to gold is accelerating
at a faster and faster speed," said Peter Hambro, chairman
of Britain's biggest pure gold listing Petropavlovsk.
"One of the big US banks texted me today to say that
if QE3 actually happens, we could see gold at $5,000 and
silver at $1,000. I feel terribly sorry for anybody on fixed
incomes tied to a fiat currency because they are not going
to be able to buy things with that paper money."
China, Russia, Brazil, India, the Mid-East petro-powers
have diversified their $7 trillion reserves into euros over
the last decade to limit dollar exposure. As Europe's monetary
union itself faces an existential crisis, there is no other
safe-haven currency able to absorb the flows. The Swiss
franc, Canada's loonie, the Aussie, and Korea's won are
too small.
"There is no depth of market in these other currencies,
so gold is the obvious play," said Neil Mellor from
BNY Mellon. Western central banks (though not the US, Germany,
or Italy) sold much of their gold at the depths of the bear
market a decade ago. The Bank of England wins the booby
prize for selling into the bottom at €254 an ounce
on Gordon Brown's orders in 1999. But Russia, China, India,
the Gulf states, the Philippines, and Kazakhstan have been
buying.
China is coy, revealing purchases with a long delay. It
has admitted to doubling its gold reserves to 1,054 tonnes
or $54bn. This is just a tiny sliver of its $3.2 trillion
reserves. China's Chamber of Commerce said this should be
raised eightfold to 8,000 tonnes.
Xia Bin, an adviser to China's central bank, said in June
that the country's reserve strategy needs an "urgent"
overhaul. Instead of buying paper IOU's from a prostrate
West, China should invest in strategic assets and accumulate
gold by "buying the dips".
Step by step, the world is edging towards a revived Gold
Standard as it becomes clearer that Japan and the West have
reached debt saturation. World Bank chief Robert Zoellick
said it was time to "consider employing gold as an
international reference point." The Swiss parliament
is to hold hearings on a parallel "Gold Franc".
Utah has recognised gold as legal tender for tax payments.
A new Gold Standard would probably be based on a variant
of the 'Bancor' proposed by Keynes in the late 1940s. This
was a basket of 30 commodities intended to be less deflationary
than pure gold, which had compounded in the Great Depression.
The idea was revived by China's central bank chief Zhou
Xiaochuan two years ago as a way of curbing the "credit-based"
excess.
Mr Bernanke himself was grilled by Congress this week on
the role of gold. Why do people by gold? "As protection
against of what we call tail risks: really, really bad outcomes,"
he replied.