What about Bob, indeed. Over the past day or so, the blogosphere and global markets have been alight over World Bank President Robert Zoellick alluding to gold serving as a reference point for international reserve holdings. Do a quick search of "Zoellick gold standard" and see for yourselves. Meanwhile, the rising price of spot gold--now past the $1,400 level--is being attributed to Zoellick's statement triggering a renewed gold rush. Before going any further, some context is necessary. On Sunday, Zoellick penned an op-ed in the Financial Times on how the G-20 must look beyond Bretton Woods II. Note that in Zoellick's usage, BWII isn't really referring to the now-infamous Dooley, Folkerts-Landau and Gerber concept. Instead, he is referring to the post-1971 international monetary system where the dollar-gold standard was superseded by the current system free of such restraints. For the sake of reference, here's what he said in its entirety in the last of his suggestions:Fifth, the G20 should complement this growth recovery programme with a plan to build a co-operative monetary system that reflects emerging economic conditions. This new system is likely to need to involve the dollar, the euro, the yen, the pound and a renminbi that moves towards internationalisation and then an open capital account.Is Zoellick really advocating the return to an international monetary system that involves referencing currencies to gold--a seeming return to a pre-Nixon era? While gold bugs may see this statement as another sign to buy yet more gold, I have my own share of doubts. While it certainly looks striking that the "World Bank president" would advocate something rather drastic, remember that Zoellick is a leftover appointee from the Bush administration who has served in many national posts including US trade representative under Dubya. When it was still very much a force to be reckoned with Zoellick was also aligned with the neoconservative Project for the New American Century. So, let's just say that despite being American, what he says doesn't necessarily jibe with views of the Obama administration.
The system 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.
The backlash against Zoellick is expectedly strong. Call it the revenge of the textbook toters. Among other arguments raised are that gold is too volatile to serve as a reference, that anchoring monetary policy to gold ignores the deflationary effects which set in during the Great Depression, and that the physical stock of gold cannot increase at a rate meeting growth in global trade. Then again, others are not so dismissive and call for a debate on the reintroduction of a gold standard in some form.
Me? I am honestly puzzled by Zoellick's motives in bringing up this matter. First, he's at the nominal development institution of the Bretton Woods twins (the World Bank) not the monetary institution that has more input on such matters (the IMF). Second, nobody's particularly keen on the idea, so it's a moot point. Perhaps the neocon in him is emerging to try and make the Obama administration look bad given his relatively esteemed international post. Hey, if Sarah Palin can play Whack-O-Bama, why not Bob? The WSJ noticed this odd monetary couple, too.
At any rate, Reuters offers some thoughts on the prospect of world markets warming up to a new gold standard:
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HOW MIGHT A NEW GOLD STANDARD WORK?
Zoellick's comments were vague, but analysts say he may be pushing for a system in which the World Bank's own currency--Special Drawing Rights or SDRs [that it also uses but the IMF issues, actually]--is changed to reflect the value of the dollar, euro, pound, yen and the yuan and somehow incorporate gold.
The suggestion does not set out, for example, how such a standard might work when monetary authorities need to make extraordinary provisions such as quantitative easing or sterilised currency intervention. It also does not make clear how it would prevent monetary authorities from trading around or outside of any bands that might be set.
IS IT A REALISTIC PROPOSAL?
The initial response, given the size of the gold market alone, is no. Gold is a precious metal by virtue of its limited supply, and annual gold supply could not keep pace with any increase in money supply, especially if central banks make use of quantitative easing to flush their economies with cash.
"Unlike the World Bank, we do not believe that a form of the gold standard will return. Very simply, there is not enough gold supply in the world for the metal to perform in this role," says UBS precious metals strategist Edel Tully. "As Paul Donavon, from UBS Global Economics points out, any reserve currency needs a supply that can grow as rapidly as global trade. Gold supply falls significantly short of this basic requirement."
WOULD THERE BE INTERNATIONAL SUPPORT FOR IT?
Zoellick's suggestion that gold be used as an international reference point of market expectations for price pressures and future currency values comes in the middle of a virtual international currency war. The U.S. dollar has fallen broadly this year, having lost nearly 13 percent against a basket of major currencies in the past five months. That has triggered an outcry from many key emerging economies, which have seen the competitiveness of their exports dwindle as well as a pick-up in so-called "hot money" inflows from speculative investors.
The United States continues to exert pressure on China to allow its yuan currency to appreciate and wipe out some of the competitive edge of the world's biggest exporter, and members of the G20 have rejected placing limits on currency and trade surpluses as a means of rebalancing the global economy.
With a distinct lack of accord over how to correct the surpluses of the emerging world and the deficits of the developed one, the chances of a deal on adopting a gold standard, in any form, appear limited. "It is conceivable for greater cooperation in the currency region, but gold may not necessarily be at the heart of any realignment of the currency system," says Daragh Maher, deputy head of global foreign exchange research at Credit Agricole CIB. "More cooperation, such as a (U.S. Treasury Secretary Timothy) Geithner-like approach, but not specific target levels (for current account imbalances) but something that would involve not tolerating imbalances domestically may be something to be considered," he says. With the Federal Reserve set to pump over half a trillion dollars into the U.S. economy, the rise in money supply and subsequent rise in inflation would make it difficult to hold enough gold.
Hans Redeker, global head of foreign exchange strategy at BNP Paribas, says the supply of money would depend on the amount of gold one holds. So an increase in money supply would have nothing to do with economic circumstances. "It's a step in the right direction, but it is not going to fly. People are desperately seeking ways to stem the wave of liquidity (from U.S. monetary easing), but bringing back the gold standard is not realistic," he says. Redeker adds that throwing gold into the global currency mix would not help stem excess liquidity by the United States, which is fuelling inflation especially in China and emerging Asia.
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If Zoellick's objective was making Obama look bad in pointing out the increasing folly of using the dollar as a global reserve currency given its issuer's nonchalance at debasing it, then consider Bob's job done. That is, even if the suggestion has few real policy implications with regard to incorporating gold in a basket of currencies. ImPalin' [sic?] US monetary policy sure is fun when your erstwhile political opponents are at the controls. The SGDR--who'd have thunk it?
