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On April 19, the Shanghai Gold Fix
officially began. The pricing mechanism is intended to be a replacement
for the London Gold Fix, the primary price-discovery mechanism for gold
bullion today. The London “bullion” market is not a market in bullion. Rather, it is a market in “unallocated” gold, defined as an unsecured liability of banks.
In short, it looks suspiciously like an exercise in paper-hanging. The London Bullion Market Association claimed 21.95 million ounces of “net” clearing per day on average in 2013, worth about $27 billion. Estimates of “gross” trading are considerably higher
than this. Supposedly, one might be able to call in these unsecured
liabilities of banks, and receive real bullion. However, when people
actually try this, banks have a pattern of shunting clients into cash settlement.
The Shanghai Exchange appears to be a real market in bullion, with
immediate physical delivery on every contract. Curiously, the opening
of the Shanghai gold fix coincided with a dramatic admission by
Deutschebank that it had been rigging the London gold and silver markets, accompanied by promises that it would help authorities identify other market manipulators.
Many have considered the phony “paper gold” markets, including the U.S.
Comex futures market and also, potentially, gold ETFs, to be a
significant impediment to using gold as a standard of currency value.
Is China laying the framework for a new world gold standard system? One
Chinese analyst called it “the culmination of a two-year plan to move away from a U.S.-centric monetary system.”
China’s longer-term intentions were perhaps made more apparent by an essay by Dr. Zhou Xiaochuan, governor of China’s central bank, in March 2009.
The outbreak of the current crisis and
its spillover in the world have confronted us with a long-existing but
still unanswered question, i.e., what kind of international reserve
currency do we need to secure global financial stability and facilitate
world economic growth, which was one of the purposes for establishing
the IMF? There were various institutional arrangements in an attempt to
find a solution, including the Silver Standard, the Gold Standard, the
Gold Exchange Standard and the Bretton Woods system. The above
question, however, as the ongoing financial crisis demonstrates, is far
from being solved, and has become even more severe due to the inherent
weaknesses of the current international monetary system.
Theoretically, an international reserve currency should first be
anchored to a stable benchmark and issued according to a clear set of
rules, therefore to ensure orderly supply; second, its supply should be
flexible enough to allow timely adjustment according to the changing
demand; third, such adjustments should be disconnected from economic
conditions and sovereign interests of any single country. The
acceptance of credit-based national currencies as major international
reserve currencies, as is the case in the current system, is a rare
special case in history. The crisis again calls for creative reform of
the existing international monetary system towards an international
reserve currency with a stable value, rule-based issuance and
manageable supply, so as to achieve the objective of safeguarding
global economic and financial stability.
I think that is pretty clear.
The idea of floating fiat currencies, and an active “monetary policy”
to manage domestic economies, is very popular in the Anglophone world.
The U.S. dollar, and British pound, are linked to nothing. But, much of
the rest of the world has already abandoned a “soft-money” approach. Fifty-five countries use the euro as their standard of value,
either the currency itself or as the reserve currency of a currency
board system. Although the euro is a floating fiat currency not much
different than the dollar or pound, every euro-using government has
voluntarily abandoned any “domestic monetary policy” and has instead
adopted an external benchmark of value. A gold standard system is not
much different than a euro-standard system, except for the choice of
the standard of value.
China has always used dollars as a basis of monetary value – all the
way back to the 17th century, when China imported Spanish silver
dollars in great quantity. Today, the yuan’s value is still based on
the U.S. dollar, although in recent years, bending to U.S. political
pressures, it has become something of a crawling peg instead of a fixed
one.
Outside the Anglophone world, governments and leaders have long pined
for the return of the world gold standard. In 2004, Malaysia’s
president Mahathir Mohamad began a program to establish a pan-Islamic
international gold standard currency. In 2009, at the Arab League
Summit in Doha, Muammar Gaddafi of Libya called on African and Muslim
nations to create an international gold-based currency, to be used in
trade for oil. At a G8 currency meeting in 2009, Russia president
Dmitry Medvedev held up a half-ounce gold coin and called it “an
example of a future world currency.”
The long history of floating fiat currencies ends in their eventual
self-destruction. I am not going to say that will happen right away,
but I note that “helicopter money” is becoming a serious topic of conversation, and that legendary macro investor Stanley Druckenmiller is becoming a major owner of gold. If the dollar-centric era is coming to an end, we now know what will replace it.
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