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PeterSibley
07-10-2006, 07:33 AM
I've just been reading this in Asian Times Online, an interesting article ,not something I'm qualified to comment on though.Any thoughts ?

http://www.atimes.com/atimes/Global_Economy/HE16Dj01.html



Back to the gold standard
By Peter Morici

Gold is selling for more than US$700 an ounce, up from $258 in 2001 - and this is but one of the many signs of a flight to gold, which has become a worldwide phenomenon. We could yet see a return to the gold standard by the world's central banks. The main cause? The economic policies of the Bush White House - but this requires a bit of explanation.

Jewelry and industrial applications absorb 85% of new gold supplies. Although production has fallen a bit and industrial demand has increased, this alone cannot explain surging prices, because bringing new deposits on line would cost less than $700

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an ounce. The big new players in the gold market are exchange-traded funds. These store bullion for investors who have lost confidence in the US dollar, and may be a precursor to a new gold standard.

In 1944, the International Monetary Fund established a system of fixed currency-exchange rates. The US dollar was fixed to gold and other currencies set to the dollar. This system ultimately failed because rising production costs pushed the industrial price of gold above its monetary value, and fixed exchange rates proved unsustainable. Productivity and competitiveness advanced more rapidly in Japan and Germany than in the United Kingdom, France and the United States, and trade imbalances caused crises for the pound, franc and dollar.

When the pound and franc became overvalued, those were devalued against the dollar, yen and mark. When the dollar became overvalued, US president Richard Nixon ended its convertibility into gold in 1972, and the system of fixed exchange rates was abandoned by the end of 1973. Subsequently, the price of gold rose from $100 an ounce to a peak of $700 in October 1980.

Over the next two decades, central banks demonetarized gold. They increasingly backed their currencies with US dollars, and to a lesser extent German marks (then euros) and Japanese yen. Many sold off significant portions of their gold. The price of gold fluctuated but trended to lows of $255 in July 1999 and $258 an ounce in April 2001.

Two things made this possible. In the United States, Federal Reserve chairman Paul Volcker whipped inflation and presidents Jimmy Carter and Ronald Reagan put the US economy on the path of deregulation. These steps unleashed mighty waves of productivity and innovation, created the US prosperity of the past 15 years, and made the dollar a better and more stable store of value than gold.

In recent years, though, record budget deficits, dysfunctional energy and environmental policies, and a dollar overvalued against the Chinese yuan and other Asian currencies have created huge US trade deficits. Dollars and dollar-denominated securities have flooded into international capital markets. These now total $5 trillion, increase $700 billion each year, and erode confidence in the dollar.

To keep the yuan from rising against the dollar, China purchases more than $200 billion in foreign securities every year. A few central banks are buying gold again, and some economists are counseling the People's Bank of China, the country's central bank, to diversify its reserves from dollars into gold.

A significant revaluation of the dollar against the yuan seems inevitable, and it will cause a wholesale adjustment for the dollar against other Asian currencies. With so much of what the world consumes now coming from China and other Asian economies, the dollar will be worth a lot less to gold miners in South Africa or Russia, and Asian currencies would be worth more. The Chinese yuan or South Korean won price of gold would not rise, and might fall, but the US dollar price of gold would increase, a lot.

International investors with wealth to park are foolish to put it in dollars; however, the currencies with the best prospects are backed by governments with poor track records for controlling inflation or honoring commitments to foreign investors. Could you tell your mother her money would be safe in Korean or Chinese bonds?

If private investors continue to doubt the dollar and bet on gold, central banks will be forced into gold. Investors won't trust currencies back by dollars, and central banks would be just as foolish as private investors to trust won- or yuan-denominated bonds.

What brought the US to this pass? The root causes, as mentioned, are high government deficits and bad policies on energy and the environment, which have added to the country's trade deficit by exacerbating its dependence on foreign oil. And on all these matters, the buck stops (to put it ironically) with the administration of President George W Bush. The decision last week not to cite China as a currency violator, which again showed the US president's refusal to address the root causes of the trade deficit, will not improve matters.

Unless the United States gets its economic house in order, gold will become money again, and national currencies will only be money if backed by gold.

Peter Morici is a professor at the University of Maryland's Robert H Smith School of Business, former chief economist at the US International Trade Commission, and a commentator on economic and political issues.

PeterSibley
07-11-2006, 06:56 AM
So much for that ! I actually thought it was a good article !

Tristan
07-11-2006, 09:11 AM
This is something I don't want to think about.

High C
07-11-2006, 09:19 AM
It's Bush's fault.

John of Phoenix
07-11-2006, 09:37 AM
You'll see continued volatility in gold for many reasons, and because of that it won't be used as a monetary standard. Governments like stability for their currencies and with an easily manipulated commodity like gold, they can't get it. Remember when we were on the gold standard the price of gold was fixed.

The US dollar is currently the world's reserve currency because of our perceived economic security. If we "stay the course", the Euro may replace it.

"Nothing lasts forever but the earth and wind."

High C
07-11-2006, 12:33 PM
Even with its recent runup, I can't imagine a worse long term investment than gold.

Meerkat
07-11-2006, 12:59 PM
It's Bush's fault.Whoa! I'm impressed! You're actually getting the right idea - finally!

Meerkat
07-11-2006, 01:00 PM
Gold is a bit too chewy and lacks calories. Buy land and grow food! ;)

peb
07-11-2006, 02:10 PM
You'll see continued volatility in gold for many reasons, and because of that it won't be used as a monetary standard. Governments like stability for their currencies and with an easily manipulated commodity like gold, they can't get it. Remember when we were on the gold standard the price of gold was fixed.

The US dollar is currently the world's reserve currency because of our perceived economic security. If we "stay the course", the Euro may replace it.

"Nothing lasts forever but the earth and wind."

Commodities are not easily manipulated in this day and age.

BTW
Of course the price of gold was fixed under the gold standard, THAT IS THE DEFINITION OF A GOLD STANDARD!!!!

peb
07-11-2006, 02:12 PM
Even with its recent runup, I can't imagine a worse long term investment than gold.

You don't imagine very well. Try cash. Long term, gold is surprising well at holding its value in real terms. I am not a gold bug.

Meerkat
07-11-2006, 02:39 PM
Define what you mean by cash, please.

High C
07-11-2006, 03:38 PM
You don't imagine very well. Try cash. Long term, gold is surprising well at holding its value in real terms. I am not a gold bug.

Cash isn't an investment, it's cash, and merely holding value is not the objective of investment.

If my broker had performed lke this, I'da fired him long ago! ;)

http://www.gold.org/value/stats/statistics/images/avpriceofgold1900-2005.gif

Meerkat
07-11-2006, 03:41 PM
Based on historical definitions, US currency is not cash, it's currency! - no intrinsic value.

peb
07-11-2006, 04:10 PM
Well the graph tells us nithing up until 1972 because the price of gold was fixed (ala we had a gold standard). After that, it tells us that us dollars have depreciated quite a bit.

Cash is not an investment, true. But I meant cash instruments such as money market accoutns, etc.

Gold is not that bad of an idea (in moderation), although right now it is a little expensive. It is a great hedge against inflation. And every once in a while, typically once in a lifetime, something comes along and really upsets the cart. When that happens, gold is a good thing.

But you are correct, it is not held in order to increase in value. It is held in order to hold value, hopefully no matter what happens.

John of Phoenix
07-11-2006, 04:13 PM
Try spending a Krugerrand at Safeway.

High C
07-11-2006, 04:15 PM
...cash instruments such as money market accoutns, etc.


Given the many recent Fed rate hikes, money markets are starting to be a decent investment. I have one, a money market mutual fund, that's paying about 4.5% right now, totally liquid, too. Not too shabby for a safe, liquid investment.

peb
07-11-2006, 04:17 PM
Try spending a Krugerrand at Safeway.

Gold is the most liquid commodities in the history of mankind. Invent a time machine, go anywhere and anytime in history and you probably find an easy way to convert gold into the local currency.

peb
07-11-2006, 04:20 PM
BTW, I hope my gold "investment" does absolutely nothing in terms of dollars for the rest of my life. I hope that it is worth the same 40 years from now as it is now. I hope that it doesn't flucuate one cent in that timeframe. If that happens, it means the economy is probably doing ok.