The Possibility of Resurrecting the Gold Standard

“The Financial World According to Inya” Column,
by Inya Ivkovic, MA

In January, at the World Economic Forum in Davos, the French President Nicolas Sarkozy, suggested — albeit receiving a lukewarm reception — the idea of resurrecting the Bretton Woods currency agreement. The Bretton Woods agreement laid the foundation for the gold standard, which former President Nixon brought down like a house of cards in the early 1970s.

Most economists understand the reasoning behind the proposal, but doubt that the resurrection of the gold standard is possible in today’s world, which is intricately connected and deeply interdependent. These days, there is so much money travelling at lightning speeds from one border to another with a click of a mouse. Without a doubt, the economic realities of the 1970s are no match for the technological savvy of the 21st century.

And still, mere months after the Great Recession, the stakes are much, much higher. This is why it is true that many foreign exchange experts, even those at the International Monetary Fund, are willing, or desperate enough, to entertain unconventional ideas, and even some as antiquated as the return to the gold standard.

Such despondency is coming from perceiving the glass as half empty rather than half full. Some market analysts argue that the greenback’s recent gains against the euro and yen have less to do with confidence and more with the depressing fact that the U.S. dollar is nothing more than the best in a basket of bad apples. It is almost as if currency exchange traders are putting on a bizarre beauty pageant, trying to pick the least ugly contestant instead of the most attractive one.

It is no wonder, however, since the euro has lost over 10% against the dollar and the yen approximately six percent since December of last year. Why the euro is declining in value is no mystery. Uncertainties surrounding Greece’s debt and other struggling economies in the Eurozone have wreaked quite the havoc on the currency. In fact, European money managers and currency traders fear an extended downtrend for the euro over the next three to five years. Additionally, confidence in the entire European monetary union appears to be weakening. As for Japan’s economy, after a decade of the life being sucked out of it by stagflation, it is no wonder the yen is underperforming.

But it is not just the euro’s and yen’s underperformance that is changing the world’s perceptions about the U.S. dollar. With or without major currencies such as the euro and yen underperforming, foreign exchange traders have little faith in the dollar’s future. In the short term, of course, many money managers and FX traders have struggled to position themselves on the right side of the euro’s recent nosedive. But, in the long term, most are convinced that the U.S. dollar will have nowhere else to go but tumbling down.

What are making investors sick to their stomachs are the U.S. fiscal and monetary policies. As a result, many are seeking refuge in alternative investments, such as commodities. Just to give you an indication of how bullish institutional direction is on gold, for example, a recent filing with the Securities and Exchange Commission (SEC) has billionaire investor George Soros more than doubling his bet on the price of gold going up in the fourth quarter of 2010.

There might something sinister behind the odds stacking against the dollar. Some money managers with a finger on Washington’s pulse even believe that it is in Obama’s Administration’s interest to allow the gradual devaluation of the dollar as one way to shrink the country’s hideous debt and to give its ailing economy the necessary boost through cheaper exports.

At face value, such a view is at odds with the official stance towards the dollar. The U.S. policymakers insist they believe in the strong dollar and are doing everything within their power to strengthen it. Yet, saying so and doing so are not necessarily the same.

In any event, even though there are plenty of arguments and sound reasoning to bring back the gold standard and prevent the disgrace of the U.S. dollar by giving it the backing of the commodity whose value transcended from one century to another, the chances of that happening are slim to none. The headwinds are too strong and the will to fight them does not exist.