Is A New Gold Standard On The Horizon?

Not quite behind closed doors, but certainly without much pomp and ceremony, it seems as though slowly we are shuffling towards a new de facto universal gold standard. It has already been revealed that Central Banks invested more in gold bullion, during 2012, than at any other stage within the last almost fifty years.

As a result of increasing uncertainty and instability with regards to the leading global currencies, gold, to the sum of 536 tonnes, was bought within the last year, in order to diversify portfolios.

It wasn’t all that long ago that the euro was being earmarked as a new twin pillar, alongside the dollar, and major global economies were shifting out large chunks of gold each year.  Such is the fragility of the global economic environment, however, that we are now talking about the mere survival of the European single currency, and central bank holdings have plummeted back down to 26pc, where they were almost a decade ago.

Both of these two pillars are revealing themselves to be more salt than solidity, and neither offers much in the way of stability.  The euro’s concept is simply misguided, at the very least, and appears to be lurching uncoordinatedly from crisis to crisis.  The dollar, on the other hand, is sitting atop a pyramid of debt, with eventual inflation as the only potential solution.

It is the raising powers of the Asian continent where much of this central bank gold purchasing is taking place.  China has made no secret over its priority of upping its reserves well above 2% and, indeed, the giant global player is fast becoming the centre of gold production and purchasing – both recreational and investable.  Russia, too, has stated a tangible target of achieving a 10% share of gold in its central bank reserves.  Others are also getting involved in this move and Germany’s recent decision to repatriate a large chunk of its gold is the latest sign of its increasing importance.

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Although, there is no realistic conspiracy behind the Bundesbank’s decision to recall its gold, the fact that it was persuaded to act on popular demand proves the increasing level of mistrust, which exists between the world’s leading democracies and global powers.  This is a reality, that if prolongued, or indeed exaggerated further, will play a major role in the creation of a new global political and economic map.

Even if Germany’s move does lead to others following suit, it is unlikely that the simple repatriation of gold will impact the global economy at all.  If, however, there is a knock-on effect and the simmering mistrust begins to bubble over, it could well lead to more substantial shifts in global economic relationships.

One area of concern for observers is that a similar move in the past, by Charles de Gaulle’s France, to pull money out of New York, did lead to further, more drastic consequences, namely President Nixon suspending gold conversion, and thus the scaremongering does have some substance.

Generally, however, such a move by the Germans does seem to be an overreaction to the current economic situation and, indeed, an exaggeration of the importance of gold.  Although gold does have many powerful and unique features, it is certainly not the answer to all of the world’s financial problems, which is what many would currently have you believe.  Having said that, a new, more flexible version of the old gold standard could well be on the horizon.

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