The Global De Facto Gold Standard

The spot price of gold reached an all-time high of $1,594.00 per ounce on 14^th of July as more countries and individuals turn to gold as an anchor of stability.   This as the two major world currencies and the twin pillars of the international monetary system are under threat of collapse.

In Europe the debt crisis has spread to countries that are the third- and fourth-largest economies in the Eurozone, Italy and Spain -- countries potentially too big to save.  This development is concurrent with the recent bailouts of Ireland, Greece, and Portugal, nations that are still not out of the woods, as some will (as in the case of Greece) require additional funding, while others such as Ireland are experiencing difficulties in raising money to fund their debt and may also be in line for further support.

It has been estimated that a 3.5-trillion-euro (US $5.0 trillion) rescue fund would ensure the survival of the euro and the Eurozone.  But where is that money to come from?  The combined annual Gross Domestic Product of the two largest countries in the European Union, Germany and France, is US $5.9 trillion and the total GDP of all the countries of the European Union is US $16.3 trillion.  There is no way a rescue fund of the size necessary could be established without essentially printing a massive amount of euros, thus creating hyperinflation and a collapse of the European monetary system.

On this side of the Atlantic, the supposed recovery of 2010 has completely disintegrated and the Obama regime refuses to control its unsustainable spending and pursue pro-growth policies to eliminate the nation's massive deficits.  Therefore the Federal Reserve is hinting at starting up the printing presses again.  The last effort at this myopic policy (Quantative Easing Part II) only succeeded in ramping up inflation worldwide, fomenting global anger at the United States resulting in a flight from the dollar, and creating a stock market and commodity bubble. 

The Obama administration and the Democrats in Congress are still in the "high school hi-jinks" mode of playing one-upmanship games with the Republicans by trying to embarrass and intimidate them, as winning at politics by any means possible is paramount in their fevered imagination.  The so-called debt ceiling negotiations are a deliberate circus being orchestrated by the ringmaster: Barack Obama.

It is apparent that the majority of those in power in the United States refuse to recognize the dire circumstances the United States finds itself in and are captive to the false assumption that the worst case scenario could never happen here.  If America continues on its present path, the citizens of this country will, to their detriment, find out that it can and will.

In response to the debasement of the US dollar and the potential collapse of the euro, many of the emerging nations of Asia are also operating under a loose monetary scenario.  Most now have negative real interest rates, such as China where inflation is running at 6.5% per year yet the one-year deposit rate is just 3.5%.  The same is true in India and many other countries including the United States.  Thus more citizens, if they can, are turning to gold or tangible property.

It is not just individual citizens worldwide that are turning to gold, but many countries now see that metal as their only safe haven.  Over the past few years many countries, in an attempt to diversify their reserves, which were overwhlemingly in inflated US dollars, turned to the euro.  With the European Union now facing an existential crisis there is no other safe-haven currency that can absorb the cash flows. 

China, therefore, has doubled its gold reserves in the past two years and there is active discussion in Beijing that the country should immediately embark on a program to increase those holdings by a factor of eight rather than buy paper IOUs from potentially bankrupt Western nations.  Russia, India, the Persian Gulf states, the Philippines, and a variety of other nations have also embarked on a gold-buying binge.

Slowly but inexorably, the world is edging toward a quasi-gold standard as it become evident that most of the West and Japan have reached a debt saturation point and can no longer continue to debase the major reserve currencies without devastating consequences.

In a recent column by Ambrose Evans-Pritchard in The Telegraph he points out:

World Bank chief Robert Zoellick said it was time to "consider employing gold as an international reference point."  The Swiss parliament is to hold hearings on a parallel "Gold Franc".

A new Gold Standard would probably be based on a variant of the "Bancor" proposed by Keynes in the late 1940's.  This was a basket of 30 commodities intended to be less deflationary than pure gold, which had compounded in the Great Depression.  The idea was revived by China's central bank chief Zhou Xiaochuan two years ago as a way of curbing the "credit based" excess.

Mr. Evans-Pritchard also quoted the chairman of Britain's largest pure gold listing, Petropavlovsk, as saying:

It is very scary: the flight to gold is accelerating at a faster and faster speed.  One of the big US banks texted me today to say if QE3 actually happens, we could see gold at US$5,000 [per ounce] and silver at US$1,000.00.  I feel terribly sorry for anyone on fixed incomes tied to a fiat currency because they are not going to be able to buy things with that paper money.

The consequences of having rigid and naïve ideologues in virtually all positions of power in Washington D.C. and in many capitals in Europe are becoming more self-evident by the day.  Time and the options available to reverse course are rapidly running out.  The present course of attempting to solve financial or economic problems by continuing to throw money at them has never worked and can only end in disaster.  The dramatic turn towards gold and other commodities reflects the depth of this concern.