Metals Commentary: Gold and the coming new monetary system

For decades we have referred to Bretton Woods in the sense of “during the Bretton Woods period” and “after the demise of Bretton Woods.”

So we now blink when we hear powerful people suggesting a new meeting, like that at Bretton Woods in 1944, of superpowers to structure a new global monetary system. The big meeting of the G-20 was expected to take place in Washington, D. C., in mid-November, although there has already been a heavyweight meeting between European and Asian powers.

The term Bretton Woods today means a (former) monetary system rather than a sleepy resort in New Hampshire. Essentially, the Bretton Woods system called for convertible currencies with fixed exchange rates against the U. S. dollar, with the dollar itself being convertible into gold at US$35 per oz.

The U. S. had the luxury of having the dollar as the world’s reserve currency, but also the obligation to maintain a reasonable amount of gold backing for the dollar. A little discipline was all that was required, or that was the idea.

The system was very successful until the U. S. and others abdicated on the discipline part of the deal. As U. S. Treasury Secretary John Connally famously put it in 1971, after the abdication: “It may be our currency, but it’s your problem.”

The International Monetary Fund (IMF) was created at more or less the same time as the Bretton Woods Monetary Agreement. The IMF, sort of a global bank, was created to stimulate growth and to stabilize economic excesses. Countries that signed up contributed half gold and half their own currency to subscribe for shares, and 60 years ago, the U. S. had clear dominance.

Since then, the IMF has been seen as something of a U. S. pawn and has lost influence. Its principal asset is a 100-million-oz. position in gold (but we don’t know where these ounces are; we don’t think the IMF has its own vault).

Observers now suggest the IMF should be revitalized as part of a new system, but we doubt it. At a minimum, this would require a recapitalization, major changes in ownership (i. e. power), a reconsideration of gold’s role, and possible relocation of the head office well away from the U. S.

As always, people keep hoping for some magic wand to solve our problems. But this is no 1944. Then, there was only one major power in the world, the U. S., perhaps accounting for half the world’s gross national product, and the Americans, in conjunction with the Brits, carried the day. At the time, other national governments could sign up for Bretton Woods and the IMF or not, but they had no real input.

Today, there are many powerful interests besides the U. S., such as Europe, China, Japan, Russia, India and Brazil (the “other powers”). They have real clout, hold the U. S. responsible for much of the current mess, and are no longer willing to have their destinies determined in Washington or New York.

We were around when Bretton Woods (the agreement) was blown up in the late 1960s and early 1970s. The U. S. didn’t like the gold discipline and gambled that it could make the dollar the reserve currency of the world.

And it succeeded, probably better than it ever dreamed. Central Bank holdings of dollars have expanded from billions to trillions and floating rates have been the rule during the 40-year, post-Bretton Woods era.

Today, however, the current mess is producing one devaluation after another — the flipside of repudiating Bretton Woods.

So even the U. S. now appears to want a new system, maybe with fixed exchange rates.

But to get the U. S. and the other powers together will be like herding cats. We are sure that currency baskets will be proposed, but without discipline, there can be no confidence in anything. When a currency like the pound sterling, once the proudest and strongest in the world, faces an abyss, it’s time — it’s past time — for policy makers to wake up.

Gold is always the uninvited guest at any monetary gathering and we are sure the November meeting will be no different.

As part of the program to enhance the dollar’s image as the reserve currency, Western central banks have relentlessly sold, deprecated and otherwise trashed gold in a 40-year effort to demonetize it.

Yet, love it or hate it, there it is, still part of most Central Bank portfolios. And still, for hundreds of millions of people, the only real money.

Sophisticated people say gold is the only money that is not somebody else’s liability, while poor people see gold as an asset of last resort, as a means to buy food when currencies melt down.

Sure, a monetary standard should be comprised of a basket consisting of gold, copper, bread, beer and oil, etc., but this cannot function as a store of value, as a medium of exchange or as a canary in a coal mine.

So, in our view, kicking and screaming, central banks will reconsider gold, imperfect as it is, and the process of remonetization will begin. If in fact this happens, at a minimum, central bank sales will stop, and that alone would be very bullish for the gold price.

Government opposition to gold is bewildering. The U. S. has far more gold than any other country, is a major world producer, is a huge manufacturer of the heavy equipment used by mines the world over and, as a nation, the U. S. could use the goodwill that high gold prices would generate in Africa and Latin America.

Even so, U. S. antipathy towards gold is ongoing. It’s bizarre.

It took the U. S. four years of the Great Depression to reflate the system with gold in the 1930s. We hope matters move more quickly this time at the big meetings between all the powers.

— The author is president of Pollitt & Co., an employee-owned brokerage firm with offices in Toronto and Montreal (www.pollitt.com),and a former chairman of Wesdome Gold Mines.