Market Insights, The US Dollar

Why We May See a New Gold Standard

Gold Alliance disclaimer

Last year, central banks, including Russia and China, bought the most gold since 1967. And China has accelerated its gold acquisitions by adding more than 100 tons of gold to its reserves since December 2018. Many European central banks have repatriated their gold over the past few years. This trend is not a mere coincidence. These are signs that we are approaching the end of 40 years of monetary status quo.

When that happens, we could see the most significant monetary changes since President Nixon ended the gold standard in 1971.

The US doesn’t want to see its fiat dollar system fail. It wants—and needs—to prevent investors and markets from rushing out of dollars in favor of gold as we saw in the ’70s. Thus, Western central banks are trying to stay in control of the price of gold and making moves behind the scenes to control its price.

The war on gold is ongoing—in fact, it’s been going on for a century. In the ’60s, it gained traction when the London Gold Pool was formed by the US, the UK, Germany, and France, among others.

At a meeting in 1961 at the Bank for International Settlements, central bank chiefs agreed to establish a gold pool worth $270 million. The banks could sell off these gold holdings to prevent the gold price from exceeding $35 per troy ounce (the price set via Bretton Woods).

In 1968, France exited the pool, which was then disbanded, triggering a 13-year-long bull market that pushed gold to a price of $800 per troy ounce in 1980.

That brings us to today where several Washington insiders are calling openly for a return to the gold standard, including Robert Zoellick, the former president of the World Bank.

Gold could be added to the special drawing right of the IMF, according to a 2012 study by the Chatham House gold task force. Lord Meghnad Desai, chair of the OMFIF advisory council, has said that “we could ask that gold be nominated as part of the Special Drawing Right. That is one thing I think is quite likely to happen. This will be easier if China increases its official gold holdings.”

And, in fact, that is what China is doing: Beijing’s goal is to increase its gold reserves to 8,000 tonnes, which would put the country on par with the US and the EU in terms of gold-to-GDP ratio. This would, at least in theory, allow a joint US-EU-China gold revaluation to support the financial system if and when needed.

The US could surprise the world with a unilateral gold revaluation, and China seems to be aware of that. Back in 2010, a cable was sent to Washington from the US embassy in Beijing, quoting a Chinese news report about the consequences of a dollar devaluation: “If we use all of our foreign exchange reserves to buy U.S. Treasury bonds, then when someday the Federal Reserve suddenly announces that [10 old dollars are now worth only 1 new dollar], and the new dollar is pegged to the gold, we will be dumbfounded.” (Via Wikileaks)

Numerous other statements show that China understands the forces on Wall Street that suppress the price of gold. Zhou Xiaochuan, then governor of the People’s Bank of China, wrote in an article in 2009: “After the disintegration of the Bretton Woods system [the gold standard collapsed. Under the influence of the dollar hegemony, the stabilizing effect of gold was widely questioned]; the ‘gold is useless’ discussion began to spread around the globe. [More and more people are recognizing] that the ‘gold is useless’ story contains too many lies. Gold now suffers from a ‘smokescreen’ designed by the U.S., which stores 74% of global official gold reserves, to put down other currencies and maintain the dollar hegemony.”

China and Russia have since then stopped purchasing US Treasuries in shifted their focus to physical gold.

All that is to say that gold is making a stunning comeback to the world stage and a new gold standard is, in practice, being born—without any formal decision. Ambrose Evans-Pritchard, an influential international business editor at The Telegraph, put it this way: “The world is moving step by step toward a de-facto gold standard, without any meetings of G20 leaders to announce this.”

You can take advantage of gold’s comeback by ensuring that a part of your investment portfolio is allocated to precious metals. Would you like to get more information about protecting and growing your wealth with gold? Then, I will gladly discuss it with you—with no obligations—if you have a few minutes to do so.

Schedule an appointment with me here.

About Fred Abadi

In his over 14 years in the financial industry, Fred has focused on commodities and precious metals as investment assets. He has penned several articles on topics such as the commodities markets and investing in precious metals for retirement accounts. Fred has helped thousands of clients safeguard their investments with gold and other precious metals. He has been with Gold Alliance for over two years as a leading Sr. Portfolio Manager.