Gold standards unlikely to work

Will the US consider returning to a gold standard if Republican Party nominee Mitt Romney wins the forthcoming presidential election? The financial market and media are abuzz with debate on the subject following a call for a Presidential Commission that would study ways to stabilise the US currency and possibly fix the value of the dollar to gold or some other asset or index of assets, should Romney win the election.

Of course, it is not for the first time in the US that gold standard advocates have something to talk about. Even as far back as 1980, the Republican platform of Ronald Reagan called for a return to a gold standard. It proposed that the US government agree that 40 per cent of the US Treasury Notes it put into circulation would be backed by physical gold held by the US Treasury.

However, nothing materialised. The Gold Commission, in the early 1980s, convened by President Reagan concluded that there were no valid reasons to think that a return to the use of gold as the denominator of the dollar’s value would assist in stabilising the dollar’s value or the international currency regime of floating rates.

It is, therefore, somewhat intriguing that talks of returning to a gold standard have resurfaced. It is conjectured that large gold mining interests, speculative investors and gold bulls in general may be keen to revive the gold standard discussion in order to prop up gold prices that are struggling to find traction in the face of slowing physical demand and muted investor interest.

According to the New York-based CPM Group specialising commodities research, consulting and management services, every gold standard that has ever existed has collapsed, and none of them prevented either the long-term historical decline in the purchasing power of the dollar, the pound sterling, the French franc, or other currency pegged to the gold price, let alone the gold price itself.

Asserting that gold standards seldom worked, the consultancy says gold and silver do not solve the problem of inherent monetary system instability and ultimate failure nor is gold standard a panacea for currency market volatility. “Monetary disciple is what is needed”, CPM Group pointed out in a recent report.

Ironically, any return to a gold standard could be effected by first establishing a disciplined creation of currency, and once that was achieved, the return to a gold standard would be redundant. What is needed is monetary discipline.

During most of the last three hundred years, gold prices were fixed against the pound sterling, the dollar, and other currencies. Busting the myth that gold’s purchasing power is constant over time, CPM Group’s research has shown how all those currencies have suffered massive losses in purchasing power over time. Gold also lost massive amounts of its historical purchasing power, the report showed.

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