Gold standard unlikely, analyst says

The currency troubles being experienced by numerous countries, particularly in Europe, have some persons calling for a return to a gold standard. One observer who thinks a rigid gold standard is a remote possibility at present is gold-price forecaster Martin Murenbeeld of Victoria.

“My guess is that the G-7 will not adopt a gold standard monetary system in the near future,” Murenbeeld writes in a recent newsletter.

“The reasons are inherent in the currency turmoil of recent weeks. Fixed exchange rates require a level of policy co-operation totally at odds with the forces of nationalism.

“Canadians want a made-in-Canada monetary and fiscal policy, not one made in the U.S. The British want a made-in-Britain policy, not one made in Germany.” For a gold standard to work, each government would define its currency in terms of gold. The U.S. would peg its dollar at 1/350 of an ounce (US$350 = one ounce) and could defend the value by, for example, loosening or tightening monetary policy and/or buying and selling gold in the open market in exchange for its currency, Murenbeeld writes.

“The disciplining factor is the level of gold reserves. Were gold reserves to decline, the government would have to adopt policies which would discourage the public from exchanging the currency of gold,” he writes. Each currency would be defined in terms of gold and each currency would have a fixed exchange ratio with other currencies (which Murenbeeld believes would work to the disadvantage of a gold standard monetary system). While the role of gold in the world economy would become more prominent, the arrangement might not suit the gold producer.

“If gold is fixed at too low a rate, it could become unprofitable to mine gold. And if gold is fixed at a high rate, say US$500 per oz., the ensuing inflation could soon make such a windfall decidedly less attractive,” he writes, arguing that owners of gold would sell their metal to the government in exchange for currency, thereby raising the money supply, leading to an economic boom and, in all probability, inflation.