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Gold tops $1,400 amid new debate over tying currencies to the metal

November 8, 2010 | 12:08 pm

Gold’s surge continued Monday, with the metal topping $1,400 an ounce for the first time after the head of the World Bank raised the idea of pegging currency values to gold -- a return, on some level, to the old days of the gold standard.

Near-term gold futures gained $5.50 to reach a record $1,402.80 an ounce in New York trading.

World Bank President Robert Zoellick, writing in the Financial Times on Sunday before this week’s summit of the G20 nations, put forth ideas for addressing the imbalances in trade and currency values that are vexing global leaders in the aftermath of the 2008 financial crash.

He laid out five points, and the fifth one centers on “a plan to build a co-operative monetary system that reflects emerging economic conditions.”

Goldbarz That system, Zoellick wrote, “should also consider employing gold as an international reference point of market expectations about inflation, deflation and future currency values. Although textbooks may view gold as the old money, markets are using gold as an alternative monetary asset today.”

Zoellick didn’t say “gold standard,” but it sounded enough like that to stir fresh debate in the economic blogosphere.

What is, or was, the gold standard? Essentially, it requires that currency values be anchored to the price of gold. The idea, as the Financial Times’ Martin Wolf puts it, is to rein in governments’ (and central bankers’) ability to do what they please in terms of money creation via paper currencies.

“The advantage of a link to gold (or some other commodity) is that the value of money would apparently be free from manipulation by the government,” Wolf wrote in an excellent explainer Nov. 1. “The aim, then, would be to ‘de-politicize’ money. The argument in favour of doing so is that in the long run governments will always abuse the right to create money at will. Historical experience suggests that this is indeed the case.”

President Nixon took the U.S. off the post-World War II gold standard in 1971. Since then, paper currencies worldwide have been backed only by the promises of the governments that issue them.

With the Federal Reserve embarked on plan to pump an additional $600 billion into the financial system via Treasury bond purchases, the issue of monetary abuse is red hot again. Critics say the Fed’s money printing will eventually fuel dangerous inflation.

A return to the gold standard has been discussed periodically since 1971, but many economists say it’s  unworkable and would hamstring governments in terms of economic policy.  One argument is that there simply isn’t enough gold around to keep pace with the expansion of the global economy and the money creation that would require.

Reacting to Zoellick, economists Brad DeLong and Paul Krugman each say a new gold standard could drive the global economy into a deflationary bust.

Jon Nadler, a veteran precious-metals analyst at Kitco Metals in Montreal, put it this way in a report Monday:

The idea of including gold (a modicum thereof) in a broad basket of currencies and other assets might eventually sound even more appealing that at the present time. However, a return to the ‘good old days’ is not only improbable, but also implausible. Unless, of course, one does not ‘mind’ a parallel return to global growth patterns from, say, circa the 1600s. A sudden adoption of a strictly gold-based system would in fact guarantee an immediate global plunge into economic dark ages. Thus, Mr. Zoellick’s intent may well be noble, but reality contradicts his nostalgia.

-- Tom Petruno

Photo credit: Dario Pignatelli / Bloomberg News

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