The gold standard has been making headlines recently. What does it mean for the gold market?
On Tuesday, Bloomberg published an interesting article entitled “Make America Gold Again: Calls for Everyone’s Favorite Standard Are Back”. It argues that the idea of fixing the U.S. dollar to gold is regaining popularity. It should not be surprising. When times are tough (or when recovery after a financial crisis is sluggish), alternatives to mainstream economic theories become more popular. Moreover, the faith in central banks has diminished recently, which can be associated with the general anti-establishment movement in politics all over the world. People are realizing that the Fed is not an elected committee, and it conducts monetary policy in a complete arbitrary way, affecting the situation of billions of people. Therefore, there is a revival of the idea to tie the Fed’s hands by adopting a rule-based approach to monetary policy. It goes without saying that the gold standard is probably the best of all rule-based approaches since the money supply depends on the gold supply, which is determined by the market (the price of gold compared to the costs of mining).
Surely, the odds of the gold standard returning in the world or in the U.S. are rather negligible right now. However, there are many regional initiatives aimed at increasing the role of gold in the contemporary monetary system. For example, the Shariah standard for gold is expected to be completed this year. This standard aims to provide guidance on the use of gold in Islamic financial products and transactions, which could increase the demand for gold, according to the World Gold Council. Another example are ongoing talks about implementing a gold reserve bank in Zimbabwe. The country suffered from hyperinflation a few years ago and abandoned the Zimbabwean dollar. The implementation of the gold bank would mean that the country has a gold-backed currency. And we could not forget states within the U.S. defining gold coins as legal tender. Last year, we wrote about Texas creating a gold depository. In February, we covered a bill introduced in Kentucky to define precious metals as legal tender. In May, the Arizona House Rules Committee voted unanimously to pass a bill which allows for the use of gold and silver as legal tender. And just last week, the state of Tennessee officially supported the establishment of a depository facility to house gold and other precious metals for Tennesseans.
The take-home message is that the gold standard will not be back any time soon, but more and more people are appreciating the role of gold as a monetary asset again. Several years ago it would be unthinkable. The actions taken by the U.S. states show that the sentiment towards gold has changed to more positive. This is good news for the gold market. The mentioned gold initiatives would probably not increase the demand for gold radically, but they may positively affect the psychology of the gold market.
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Disclaimer: Please note that the aim of the above analysis is to discuss the likely long-term impact of the featured phenomenon on the price of gold and this analysis does not indicate (nor does it aim to do so) whether gold is likely to move higher or lower in the short- or medium term. In order to determine the latter, many additional factors need to be considered (i.e. sentiment, chart patterns, cycles, indicators, ratios, self-similar patterns and more) and we are taking them into account (and discussing the short- and medium-term outlook) in our trading alerts.
Thank you.
Arkadiusz Sieron
Sunshine Profits‘ Gold News Monitor and Market Overview Editor
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