Even talk of a gold standard would boost the price

By Matthew Lynn

LONDON (MarketWatch) — What would it take to break the gold price out of the $1,600 to $1,700 an ounce range in which it has been trading for the past year? Another massive blast of quantitative easing from the Federal Reserve? A final breakdown of the euro? A war between Israel and Iran?

They are all possibilities, of course. But the most likely candidate is a serious debate about a return to some form of the gold standard.

In the U.S., the Republican Party has already pledged to study restoring the link between the dollar and gold if it wins the upcoming election. In Switzerland there have been parliamentary debates about restoring the link between the Swiss franc and gold.

Central banks are already increasing their holdings of gold. Don’t be surprised if it starts to play an increasing role in the ever-more fevered attempts to fix Europe’s monetary system.

European Central Bank President Mario Draghi won’t attend this week’s international gathering of central bankers in Jackson Hole, Wyo. Charles Forelle discusses on Markets Hub. Photo: Bloomberg.

What would gold be priced at if it reclaimed its role at the center of the monetary system? There are plenty of predictions out there but the truth is no one really knows.

The interesting point is this, however.

Markets are anticipatory. They are always trying to get ahead of the game. It doesn’t take an actual return to the gold standard to send the price soaring. Just the debate should be more than enough.

And that is already under way.

The final link between gold and money was severed 41 years ago this month, when President Richard Nixon ended the Bretton Woods systems that fixed the price of gold in dollars, and fixed other currencies to the American one. When that decision was made, gold was trading at $35 an ounce, a price that had been set by set by President Franklin D. Roosevelt in 1933. Since then it has risen to around $1,650 an ounce.

As a rough rule of thumb, currency systems last around 40 years. The classic pre-World War I gold standard lasted that long. The Bretton Woods system lasted 27 years. On that reckoning, the existing system of floating central bank currencies, with the dollar as the global reserve currency, is already living on borrowed time.

The strains are showing. The dollar is in long-term decline as the U.S. shrinks in relative importance. Central banks are frantically printing more paper money but having little impact on the real economy. Asset markets are getting ever more unhinged. It is hardly surprising that people look at the mess and start to ask hard questions about whether the monetary system is really working.

The price of gold should rise along with speculation about a return to the gold standard.

There are three places the debate on gold will get going.

In the U.S., it has already started. The Federal Reserve looks set to follow the Bank of Japan on the road to precisely nowhere: a decade of printing more and more money, while the economy flat lines, living standards stutter, and the debt-to-GDP ratio climbs past 200% or more. As that happens, the debate on gold can only grow more intense.

Next, there are minor, economically successful nations. It is no surprise that a country such as Switzerland has started debating gold. Trading in dollars, and holding that as your reserve asset while the currency relentlessly declines in value, does not look very attractive. Who might join the Swiss in debating the gold standard? Perhaps some of the dwindling band of triple-A rated countries, such as Canada or Singapore.

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