A new Gold Standard is being born
The world is moving step by step towards a de facto Gold Standard, without any meetings of G20 leaders to announce the idea or bless the project.
Some readers will already have seen the GFMS Gold Survey for 2012 which reported that central banks around the world bought more bullion last year in terms of tonnage than at any time in almost half a century.
They added a net 536 tonnes in 2012 as they diversified fresh reserves away from the four fiat suspects: dollar, euro, sterling, and yen.
The Washington Accord, where Britain, Spain, Holland, Switzerland, and others sold a chunk of their gold each year, already seems another era – the Gordon Brown era, you might call it.
That was the illusionary period when investors thought the euro would take its place as the twin pillar of a new G2 condominium alongside the dollar. That hope has faded. Central bank holdings of euro bonds have fallen back to 26pc, where they were almost a decade ago.
Neither the euro nor the dollar can inspire full confidence, although for different reasons. EMU is a dysfunctional construct, covering two incompatible economies, prone to lurching from crisis to crisis, without a unified treasury to back it up. The dollar stands on a pyramid of debt. We all know that this debt will be inflated away over time – for better or worse. The only real disagreement is over the speed.
The central bank buyers are of course the rising powers of Asia and the commodity bloc, now holders of two thirds of the world’s $11 trillion foreign reserves, and all its incremental reserves.
It is no secret that China is buying the dips, seeking to raise the gold share of its reserves well above 2pc. Russia has openly targeted a 10pc share. Variants of this are occurring from the Pacific region to the Gulf and Latin America. And now the Bundesbank has chosen to pull part of its gold from New York and Paris.
Personally, I doubt that Buba had any secret agenda, or knows something hidden from the rest of us. It responded to massive popular pressure and prodding from lawmakers in the Bundestag to bring home Germany’s gold. Yet that is not the end of the story. The fact that this popular pressure exists – and is well-organised – reflects a breakdown in trust between the major democracies and economic powers. It is a new political fact in the global system.
Pimco’s Mohammed El Erian said this may have a knock-on effect:
“In the first instance, it could translate into pressures on other countries to also repatriate part of their gold holdings. After all, if you can safely store your gold at home — a big if for some countries — no government would wish to be seen as one of the last to outsource all of this activity to foreign central banks.
If developments are limited to this problem, there would be no material impact on the functioning and well-being of the global economy. If, however, perceptions of growing mutual mistrusts translate into larger multilateral tensions, then the world would find itself facing even greater difficulties resolving payments imbalances and resisting beggar-thy-neighbour national policies.
“The most likely outcome right now is for Germany’s decision to have minimum systemic impact. But should this be wrong and the decision fuel greater suspicion – a risk scenario rather than the baseline – the resulting hit to what remains in multilateral policy co-operation would be problematic for virtually everybody.
As I reported on Tuesday, gold veteran Jim Sinclair thinks it is an earthquake, comparing it to Charles de Gaulle’s decision to pull French gold from New York in the late 1960s – the precursor to the breakdown of the Bretton Woods system three years later when Nixon suspended gold conversion.
Mr Sinclair predicts that the Bundesbank’s action will prove the death knell of dollar power. I do not really see where this argument leads. Currencies were fixed in de Gaulle’s time. They float today. It is within the EMU fixed-exchange system – ie between Germany and Spain – that we see an (old) Gold Standard dynamic at work with all its destructive power, and the risk of sudden ruptures always present. The global system is supple. It bends to pressures.
My guess is that any new Gold Standard will be sui generis, and better for it. Let gold will take its place as a third reserve currency, one that cannot be devalued, and one that holds the others to account, but not so dominant that it hitches our collective destinies to the inflationary ups (yes, gold was highly inflationary after the Conquista) and the deflationary downs of global mine supply. That would indeed be a return to a barbarous relic.
Hopefully, it will be nothing like the interwar system. That was a dollar peg that transmitted US deflation to the whole world when the Fed tightened too hard in 1928 and went berserk in 1930.
A third reserve currency is just what America needs. As Prof Micheal Pettis from Beijing University has argued, holding the world’s reserve currency is an “exorbitant burden” that the US could do without.
The Triffin Dilemma – advanced by the Belgian economist Robert Triffin in the 1960s – suggests that the holder of the paramount currency faces an inherent contradiction. It must run a structural trade deficit over time to keep the system afloat, but this will undermine its own economy. The system self-destructs.
A partial Gold Standard – created by the global market, and beholden to nobody – is the best of all worlds. It offers a store of value (though no yield). It acts a balancing force. It is not dominant enough to smother the system.
Let us have three world currencies, a tripod with a golden leg. It might even be stable.