The gold standard has been making
headlines recently. What does it mean for the gold market?
On Tuesday, Bloomberg published an interesting article
entitled “Make America Gold Again: Calls for
Everyone’s Favorite Standard Are Back”. It argues
that the idea of fixing the U.S. dollar to gold is regaining popularity. It
should not be surprising. When times are tough (or when recovery after a
financial crisis is sluggish), alternatives to mainstream economic theories
become more popular. Moreover, the faith in central banks has diminished
recently, which can be associated with the general anti-establishment
movement in politics all over the world. People are realizing that the Fed is
not an elected committee, and it conducts monetary policy in a complete
arbitrary way, affecting the situation of billions of people. Therefore,
there is a revival of the idea to tie the Fed’s hands by adopting a
rule-based approach to monetary policy. It goes without saying that the gold
standard is probably the best of all rule-based approaches since the money
supply depends on the gold supply, which is determined by the market (the
price of gold compared to the costs of mining).
Surely, the odds of the gold standard returning in the
world or in the U.S. are rather negligible right now. However, there are many
regional initiatives aimed at increasing the role of gold in the contemporary
monetary system. For example, the Shariah standard for gold is expected to be
completed this year. This standard aims to
provide guidance on the use of gold in Islamic financial products and
transactions, which could increase the demand for gold, according to the World Gold Council. Another example
are ongoing talks about implementing a gold reserve bank in Zimbabwe. The
country suffered from hyperinflation a few years ago and abandoned the
Zimbabwean dollar. The implementation of the gold bank would mean that the
country has a gold-backed currency. And we could not forget states within the
U.S. defining gold coins as legal tender. Last year, we wrote about Texas creating a gold depository. In
February, we covered a bill introduced in Kentucky
to define precious metals as legal tender. In May, the Arizona House Rules
Committee voted unanimously to pass a bill which allows for the use of gold
and silver as legal tender. And just last week, the state of Tennessee officially supported the establishment
of a depository facility to house gold and other precious metals for
Tennesseans.
The take-home message is that the gold standard will not
be back any time soon, but more and more people are appreciating the role of
gold as a monetary asset again. Several years ago it would be unthinkable.
The actions taken by the U.S. states show that the sentiment towards gold has
changed to more positive. This is good news for the gold market. The
mentioned gold initiatives would probably not increase the demand for gold
radically, but they may positively affect the psychology of the gold market.
If you enjoyed the above analysis, we invite you to check
out our other services. We focus on fundamental analysis in our monthly Market Overview reports and we provide
daily Gold & Silver Trading Alerts with
clear buy and sell signals. If you’re not ready to subscribe yet and are not
on our mailing list yet, we urge you to join
our gold newsletter today. It’s free and if you
don’t like it, you can easily unsubscribe.
Disclaimer:
Please note that the aim of the above analysis is to discuss the likely
long-term impact of the featured phenomenon on the price of gold and this
analysis does not indicate (nor does it aim to do so) whether gold is likely
to move higher or lower in the short- or medium term. In order to determine
the latter, many additional factors need to be considered (i.e. sentiment,
chart patterns, cycles, indicators, ratios, self-similar patterns and more)
and we are taking them into account (and discussing the short- and
medium-term outlook) in our trading alerts.
Thank you.
Arkadiusz Sieron
Sunshine Profits‘ Gold News Monitor and Market Overview Editor
