The Return of the
Gold Standard by Peter Schiff | July 6, 2012
In my latest book, The Real Crash: America's Coming Bankruptcy
– How to Save Yourself and Your Country, I devote
a full chapter to the merits of the historical gold standard
and reasons to reinstate it. What I did not mention and
few investors notice is that central banks are already returning
to gold as the ultimate safe haven asset.
I believe this change in policy, combined with continued
inflation of Western currencies, is creating a stable floor
for the gold price and an even brighter upside potential.
A Strategic Shift
The return to gold is unmistakably the product of a strategic,
not merely a tactical, shift in global central banking policy.
Central banks in the developed world have now altogether
stopped selling bullion. This was foreshadowed by their
behavior over the past decade, when they sold even less
gold than they were permitted to under the anti-dumping
Central Bank Gold Agreements. Clearly the concern about
dumping gold was out of step with the trend. But more importantly,
central banks in the emerging markets have been buying gold
by the truckload.
Since the financial crisis of '08, nations as diverse as
Mexico, the Philippines, Thailand, Kazakhstan, Turkey, Ukraine,
Russia, Saudi Arabia, and India have led the way back to
gold as a primary reserve asset. Russia alone has added
an impressive 400 tonnes of bullion to its reserves, most
of it coming from domestic purchases. Mexico has added over
120 tonnes, including 78 tonnes from one mega-purchase in
March 2011. The Philippines have bought over 60 tonnes,
with 32 tonnes coming in as recently as March 2012. Thailand
has added approximately 60 tonnes, and Kazakhstan just shy
of 30 tonnes. Turkey amended its regulatory policy late
last year to allow commercial banks to count gold towards
their reserve requirements, adding over 120 tonnes to its
official reserves. And bullion imports into mainland China
through Hong Kong have been reaching all-time highs.
Finally, loyal US allies Saudi Arabia and India, in what
is sure to leave particularly bitter taste in Washington's
mouth, have been adding gold to their reserves by the hundreds
In short, the governments of emerging markets recognize
that the global monetary order is on the verge of a reset.
These emerging markets are the economic engines of the 21st
century, and they're determined not to be undermined by
Western fiat paper.
Taking the Long View
The depth of this new strategy has been on display throughout
the precious metals correction of the past few months. Emerging
market central banks have continued to be aggressive buyers.
This is very bullish. As governmental actors, central banks
seek out stability and predictability. When they shift course,
they do so only deliberately and gradually, much like aircraft
carriers. Western central banks have set a clear course
toward inflation, while emerging market banks are shifting
toward sound money.
The implications here are enormous for private investors.
We now see the biggest market participants buying the yellow
metal massively on the dips. What's more, because central
banks enjoy substantial clout in the gold market, their
purchasing decisions have an outsized effect on price. Institutional
investors are coming to once again see precious metals as
a 'legitimate' form of investment. It is this positive feedback
loop that will serve to stabilize gold as it re-emerges
as a reserve asset.
It's Still The One
Gold remains the bedrock of reserve holdings at central
banks, even in a world dominated by fiat currencies. Apparently,
when it comes to a paper-based global monetary system, it's
easier to talk the talk than walk the walk. Government officials
the world over, but especially in the developed world, have
been quick to call gold an anachronism – unsuitable
for a modern, globalized economy. But these same governments
have never found it in themselves to sell off their holdings,
or for that matter, to surrender even a substantial fraction
of them. Those who have clamored the loudest have, in fact,
behaved the most conservatively.
The US, which has a whopping 75 percent of its reserve
holdings in gold, and the Western European countries, which
have an average of approximately 64 percent of their reserve
holdings in gold, seem to believe no one should own gold
– except them! It shouldn't surprise anyone that emerging
market central banks have spotted the double standard. As
they advance economically, these nations are less likely
to do what Washington tells them is right and more likely
to think for themselves. And with an average of less than
20 percent of their reserve holdings in gold, they clearly
know they have some catching up to do.
Behind the smoke and mirrors then, central banks in the
developed world are hoarders. Central banks in the emerging
markets are scramblers. Significantly, nobody is selling,
The Fiat Fantasy Meets Reality
What is causing the rush back to gold? Two words: excess
debt. Independent central banking has always been more of
a dream than a reality. Politicians knew from the beginning
that they could run up the tab and then corner central bankers
into bailing them out via inflation, AKA stealth default.
Regrettably, central bankers have dutifully obliged –
no one, for example, has yet resigned in protest. Only a
few have ever defied their governments, and only for short
Of course, governments throughout history have created
the conditions for their own collapse by tampering with
their money supply to pay debts. Undermining the currency
means undermining the entire economy, which lowers tax receipts
and creates more debt. Soon, the unintended consequences
of the policy overwhelm its intended consequences, and the
state collapses – along with the jobs of those central
bankers. Committed, nonetheless, the central bankers are.
Against this historical cycle, the best insurance policy
is physical gold. Those with the most of it will best weather
the coming rounds of competitive devaluation. No wonder
that central banks in the emerging markets are scrambling
to play catch up to their developed-world counterparts.
How much gold will central banks stockpile? We cannot and
do not know for sure. What we can and do know for sure is
that they have prudently decided on a strategic shift in
policy. This is creating a floor for the price of gold and
a brighter future ahead for those who are prepared for the
return of sound money.