Why Gold Still Sets the Standard

By Preston, Alex | New Statesman (1996), November 15, 2010 | Go to article overview

Why Gold Still Sets the Standard


Preston, Alex, New Statesman (1996)


The history of stock-market panics is written in gold. The past few years have proved gold's position as the last repository of worth in a disintegrating world--it has more than doubled in value since the sub-prime meltdown in 2007. At the end of September, JPMorgan reopened its underground gold vault in New York. Vaulting, which most banks abandoned in the 1990s, has become big business again as gold has soared in price (the banks take a percentage of the value of the bullion they store, so the recent spike in the market has rendered previously uneconomical vaults profitable). For the first time ever, private investors own more of the precious metal than central banks.

[ILLUSTRATION OMITTED]

On 8 November, the president of the World Bank, Robert Zoellick, caused a rumpus in the financial press. "World Bank head calls for return to gold standard", read the headlines. In a deeply divided global economic system where QE2--the US Federal Reserve's latest round of quantitative easing-is provoking heated debate, the re-establishment of gold as a financial lingua franca might make sense. Yet Zoellick's article in the Financial Times wasn't about gold. The mention of bullion was a parenthetical comment in the middle of a nuanced appeal for greater co-operation between the economic superpowers in the lead-up to the G20 meeting in Seoul on 11-12 November. It is a sign of gold's lasting fetish appeal that journalists have fixated on the reference to a return of the standard.

Message rather subtle

Zoellick is bright enough to know that his allusion to glittering metal would dominate the pink pages. There is something both dramatic and comforting in the idea of gold once again being the final arbiter of value--dramatic because previous panics have led to either the abandonment of or a return to the gold standard; comforting because talk of the standard takes financial journalists back to an economic universe that they understand, the one they learned about at university. The solid permanence of bullion returns us to a simpler, more comprehensible age.

Zoellick did not call for a return to the gold standard. In the current economic climate, such a move would be regressive and restrictive. His exact words were: "The system should also consider employing gold as an international reference point of market expectations about inflation, deflation and future currency values." He also noted: "Although textbooks may view gold as the old money, markets are using gold as an alternative monetary asset today." Gold's ability to reflect the views of the markets should be used to inform currency decisions, he was arguing--hardly a call to re-establish the standard. So why did Zoellick even mention gold? First, he knew it would get him headlines. But it also sent a couple of subtle messages to central bankers ahead of the Seoul talks.

The article calls for nations to work together in Seoul to establish a new mechanism for the interaction of currencies, rather than maintain the present antagonism. …

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