Dollar uppermost in basket plan, forecaster says

The recent proposal by U.S. Treasury Secretary James Baker to link world currencies and a basket of commodities, including gold, has more to do with stabilizing the troubled U.S. dollar than remonetizing gold, says gold-price forecaster Martin Murenbeeld.

According to Mr Murenbeeld, who publishes a w eekly forecast from his Toronto office, Mr Baker “has expressed a wish in the past for objective indicators and mechanisms by which the authorities can determine appropriate currency levels and determine which country or countries should take steps to adjust economic policy as a result.

“He now suggests it might be fruitful to include a basket of commodities as one of the objective indicators, to ensure that while the currencies may be stabilized against each other, they will not en masse decline against a basket of commodities, including gold. To say it differently, the efforts to stabilize currencies should not lead to higher inflation.”

Gold, currently priced in the $460(US)-per-oz range, was pegged by the U.S., until the late 1960s, at $35 per oz.

Mr Murenbeeld says theoretically, a monetary policy based on a commodities basket would be tightened when the basket price increases and be loosened when the opposite occurs.

“It is precisely because authorities have found it too difficult to apply such a simple policy in the past that the gold standard and gold- exchange standard are no longer with us,” he says.

Keeping interest rates down, for political reasons (there is a U.S. presidential election in 1988) or whatever, and bond yields flat is Mr Murenbeeld’s interpretation (he admits he is being cynical) of this new proposal for a commodities basket. Japan and Germany, he suggests, will veto the idea.

Mr Baker proposed his commodities basket in a speech at the annual meeting of the International Monetary Fund and World Bank.