The Secret Return to the "Gold Standard"

Under a true gold standard, paper notes are "convertible" into pre-determined, fixed quantities of gold. But back in 1971, as the US was faced with huge budget deficits and a plunging dollar, President Nixon enacted a series of economic moves which led to the shut down of the gold standard.

By William Patalon III
November 5, 2012
Money Morning

Although it happened more than 40 years ago, many Americans still rue the day back in 1971 when U.S. President Richard M. Nixon effectively took this country off the so-called "gold standard."

Under a true gold standard, paper notes are "convertible" into pre-determined, fixed quantities of the "yellow metal."

What actually happened back in 1971 was that President Nixon - facing huge budget and trade deficits, and a plunging dollar - enacted a series of economic moves, including the unilateral cancellation of the direct convertibility of the U.S. dollar into gold.

By slamming the "gold window" shut, Nixon also brought down the curtain on the existing Bretton Woods system of global financial exchange.

The fallout was immediate, creating a situation that financial historians still refer to as the "Nixon Shock."

Proponents of the gold standard say the real damage is still being wrought: That decision four decades ago led directly to the uncertainty, volatility and irresponsibility that we see in the U.S. economy and global financial markets today.

Whether you agree or not is a topic for another time.

But what I'm here to tell you today is that the world's central banks have quietly - almost secretly - returned the world to a new version of the gold standard.

Back in 2010, the world's central banks became net buyers of gold for the first time since 1988. Buying ramped last year and net purchases exceeded 455 metric tons (tonnes). That was the largest net purchase since 1964.

But the world's central bankers will handily eclipse the 2011 totals here in 2012: They will purchase a projected 493 metric tons this year as they expand reserves to diversify away from the U.S. dollar and protect their countries' economies against inflation, Thomson Reuters GFMS said.

And GFMS said you can expect central banks "to remain a significant gold buyer for some time to come."

Real Asset Returns Editor Peter Krauth told me he completely agrees with that assessment.

As Peter explained: "You can see their thinking, Bill ... you can see them saying: "We have enough of all these fiat currencies in our bank reserves - now we want something that's going to counter those holdings, that's a valuable asset and that has all the right fundamentals in place.' And that asset is gold."

We're seeing the results of this "new gold standard" in the marketplace...

For instance, gold had its biggest day in three weeks on Thursday after reports surfaced that central banks in Brazil and Turkey boosted their holdings.

Turkey purchased 6.8 tons in September, and Brazil added 1.7 tons - its first purchase in nearly four years.

The countries that are most-aggressively adding to their yellow-metal reserves include South Korea, The Philippines, Kazakhstan, Russia, Mexico, Turkey, Argentina and the Ukraine.

Gold has risen 11.1% so far in the third quarter and was up 16% on a year-to-date basis. It has outperformed virtually all of the world's top stock markets so far in 2012, according to a report by the World Gold Council.

And here's a key point: Central bankers aren't day-traders. So when they make a move like this, there's generally a long-term time view.

"All the fundamentals are in place for this to continue," Peter told me. "These guys tend to have a long time frame in mind. So when you see a shift like this, it's a big deal. And the chances are that this could last for a very long time."

In a recent report, 24/7 Wall Street did a nifty job ranking and analyzing the Top 10 global gold holders. To understand just how committed the world's central bankers are to this "new gold standard," let's look at a modified version of the news service's rankings and notes.

We'll rate which countries will be buyers, holders or sellers of gold (we're including the International Monetary Fund, or IMF, here as well, which brings our list to 11). And that will give us a big hint about the future direction of gold prices.

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