A New Gold Standard: Orderly or Chaotic?
As I write this, gold has just broken through US$1,600 for the first time since April 2013.
The timing is impeccable.
This morning as I walked into the office, a co-worker asked me what I expected for gold. Around 9am this morning, the yellow metal was trading at US$1,583.
I’ll tell you what I told him.
I expect gold to hit US$1,600 over the next couple of days…followed by a sell-off later in January.
And within two hours of having that conversation, the price of gold jumped US$24 per ounce.
I suspect the jump in the yellow metal has much to do with Iran launching missiles at US forces based in Iraq. The fear metal is at work now.
In the meantime, let’s kick off 2020 with a Jim’s retelling of gold’s role as money last century.
Then join me tomorrow for what to expect for gold in 2020.
Read on for more.
Until next time,
A New Gold Standard:
Orderly or Chaotic?
Over the past century, monetary systems change about every 30 to 40 years on average. Before 1914, the global monetary system was based on the classical gold standard.
Then in 1945, a new monetary system emerged at Bretton Woods. I was at Bretton Woods this past summer to commemorate its 75th anniversary.
Under that system, the dollar became the global reserve currency, linked to gold at US$35 per ounce.
In 1971 Nixon ended the direct convertibility of the dollar to gold.
For the first time, the monetary system had no gold backing….
Either way, gold goes up
Today, the existing monetary system is nearly 50 years old, so the world is long overdue for a change. Gold should once again play a leading role.
I’ve written and spoken publicly for years about the prospects for a new gold standard. My analysis is straightforward.
International monetary figures have a choice.
They can reintroduce gold into the monetary system either on a strict or loose basis (such as a ‘reference price’ in monetary policy decision-making).
This can be done as the result of a new monetary conference, a la Bretton Woods. It could be organised by some convening power, probably the US working with China.
Or they can ignore the problem, let a debt crisis materialise (that will play out in interest rates and foreign exchange markets) and watch gold soar to US$14,000 per ounce or higher, not because they wanted it to, but because the system is out of control.
I’ve also said that the former course (a conference) is more desirable, but the latter course (chaos) is more likely.
A monetary conference would be far preferable. Why not avoid the train wreck rather than clear up the wreckage? But will probably be ignored until it’s too late.
Either way, the price of gold soars.
Undoing the link to gold
The same force that made the US dollar the world’s reserve currency is working to dethrone it.
It was at Bretton Woods that the US dollar was officially designated the world’s leading reserve currency — a position that it still holds today.
Under the Bretton Woods system, all major currencies were pegged to the US dollar at a fixed exchange rate.
The US dollar itself was pegged to gold at the rate of US$35 per ounce.
Indirectly, the other currencies had a fixed gold value because of their peg to the US dollar.
Other currencies could devalue against the US dollar, and therefore against gold, if they received permission from the International Monetary Fund (IMF).
However, the US dollar could not devalue, at least in theory.
It was the keystone of the entire system — intended to be permanently anchored to gold.
From 1950 to 1970, the Bretton Woods system worked fairly well.
Trading partners of the US who earned dollars could cash those dollars into the US Treasury and be paid in gold at the fixed rate.
In 1950, the US had about 20,000 tons of gold.
By 1970, that amount had been reduced to about 9,000 tons. The 11,000 ton decline went to US trading partners, primarily Germany, France, and Italy, who earned dollars and cashed them in for gold.
The UK pound sterling had previously held the dominant reserve currency role starting in 1816, following the end of the Napoleonic Wars and the official adoption of the gold standard by the UK.
Many observers assume the 1944 Bretton Woods conference was the moment the US dollar replaced sterling as the world’s leading reserve currency.
In fact, that replacement of sterling by the dollar as the world’s leading reserve currency was a process that took 30 years, from 1914 to 1944.
In fact, the period from 1919 to 1939 was really one in which the world had two major reserve currencies — dollars and sterling — operating side by side.
Finally, in 1939, England suspended gold shipments in order to fight the Second World War and the role of sterling as a reliable store of value was greatly diminished.
Slow and steady transition
The 1944 Bretton Woods conference was merely recognition of a process of US dollar reserve dominance that had started in 1914.
The significance of the process by which the US dollar replaced sterling over a 30-year period has huge implications for you today.
Slippage in the US dollar’s role as the leading global reserve currency is not necessarily something that would happen overnight, but is more likely to be a slow, steady process.
Signs of this are already visible.
In 2000, US dollar assets were about 70% of global reserves.
Today, the comparable figure is about 62%.
If this trend continues, one could easily see the US dollar fall below 50% of global reserves in the not too distant future.
It is equally obvious that a major creditor nation is emerging to challenge the US today just as the US emerged to challenge the UK in 1914.
That power is China.
The US had massive gold inflows during 1914–44.
China has been experiencing massive gold inflows in recent years.
Gold reserves at the People’s Bank of China (PBOC) increased to 1948.31 tons in the fourth quarter of 2019. For comparison, it held 1,658 tons in June 2015.
But China has acquired thousands of metric tons since without reporting these acquisitions to the IMF or World Gold Council.
Based on available data on imports and the output of Chinese mines, actual Chinese government and private gold holdings are likely much higher.
It’s hard to pinpoint because China operates through secret channels and does not officially report its gold holdings except at rare intervals.
China’s gold acquisition is not the result of a formal gold standard, but is happening by stealth acquisitions on the market.
They’re using intelligence and military assets, covert operations, and market manipulation. But the result is the same.
The decline of the US dollar
Gold’s been flowing to China in recent years, just as gold flowed to the US before Bretton Woods.
China is not alone in its efforts to achieve creditor status and to acquire gold.
Russia has greatly increased its gold reserves over the past several years and has little external debt.
The move to accumulate gold in Russia is no secret, and as Putin advisor Sergey Glazyev told Russian Insider, ‘The ruble is the most gold-backed currency in the world.’
Iran has also imported massive amounts of gold, mostly through Turkey and Dubai, although no one knows the exact amount, because Iranian gold imports are a state secret.
Other countries, including BRICS members Brazil, India, and South Africa, have joined Russia and China in their desire to break free of US dollar dominance.
Sterling faced a single rival in 1914, the US dollar.
Today, the US dollar faces a host of rivals.
The decline of the dollar as a reserve currency started in 2000 with the advent of the euro, and accelerated in 2010 with the beginning of a new currency war.
The US dollar collapse has already begun and the need for a new monetary order will need to emerge.
The question is whether it will be an orderly process resulting from a new monetary conference, or a chaotic one.
Unfortunately, it’ll probably be chaotic. Don’t count on the elites to act in time.
All the best,
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