Update-2 Special Report: Analysts--World Bank President Comments Could Lift Gold Prices Eventually

November 8, 2010

By Debbie Carlson and Allen Sykora Of Kitco News

(Kitco News) -Gold should be used as an “international reference point” as the Group of 20 nations strive to revive global economic growth, World Bank President Robert Zoellick wrote in an opinion article printed in Monday’s Financial Times.

Zoellick said it’s necessary to develop a monetary system to replace Bretton Woods 2, although he said it will take time.  A new cooperative monetary system that reflects emerging economic conditions will need to involve the dollar, the euro, the yen, the pound and “a renminbi that moves toward internationalization.” Gold, he said, should be considered as the “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 opinion piece comes ahead of a meeting of G-20 ministers starting Thursday in Seoul as they try to reach economic cooperation. Zoellick outlines five steps for leaders to consider, including the U.S. and China agreeing on “specific, mutually reinforcing steps to boost growth,” and to forego currency intervention, except when agreed by others.

He said that the G-20 should “agree on parallel agendas of structural reforms, not to just rebalance demand but to spur growth.”

So far gold has not reacted to Zoellick’s words as the dollar is up on a short-covering bounce. However, analysts initially thought that any possible move toward this approach would support gold prices.

Some Comments from Analysts and Economists:


“An article by World Bank President Robert Zoellick in the Financial Times has caused quite a stir. Mr Zoellick calls upon leading economies to consider readopting a modified global gold standard to guide currency movements. The system should include the US dollar, the euro, the yen, the British pound and the yuan. Furthermore, gold should be used as an international reference point of market expectations about inflation, deflation and future currency values. Even if such plans are still a long way from realization, they are still likely to give some psychological support to gold prices.”

Gold Core

“Gold's safe haven credentials have been increased by World Bank president Robert Zoellick's suggestion that leading economies should consider readopting a modified global gold standard to guide currency movements. G20 economies should consider using gold as a reference point for market expectations of currency values, inflation and deflation as they reform the global monetary system, Zoellick wrote in an opinion article in the Financial Times. While textbooks may view gold as ‘old money,’ markets use it as an alternative monetary asset, Zoellick wrote. His comments come after the Federal Reserve's announced plans to buy $600 billion in Treasurys which has led to concerns about the dollar and the emergence of inflation and possibly stagflation.”

Ed Meir, MF Global

“The Fed's decision announced last week to pump an extra $600 billion into the (U.S.) economy has sparked wide-spread alarm among various central bankers. Brazil and Germany strongly criticized the move last week, while a number of Asian banks said they were preparing measures to defend their economies against large capital inflows, with some even floating the idea of capital controls…. Even the World Bank president suggested in the Financial Times that leading economies should consider readopting a modified gold standard to guide currency movements, sending the precious metal to a record high of $1398 earlier today. These disagreements will need to get papered over by the time the G-20 summit issues its final communiqué later this week…. More importantly, the unanimity of sentiment against the Fed decision leaves the dollar in a perennially weakened state, which means that it won’t be too long before commodities regroup and push higher. At some point, however, these gains will turn on themselves, as higher prices will lead to bouts of demand destruction or rising inflation -and higher rates - particularly in some of the emerging markets, but we don’t seem to be there just yet.”

Joe Foster, Van Eck International Investors Gold Fund

“What gold would do is instill some sort of discipline in the system that is not there currently and hasn’t been there for years and years. There would be a lot of resistance from people who want to see the current system remain in place…Hopefully, it will get discussed and explored. But in terms of it actually happening I don’t have a lot of hope for that.”

If it was adopted, the impact on gold prices would depend on how any standard was enacted.

“Do they allow changes in the price of gold to affect monetary policy? It’s hard to imagine that happening, given the current system….If they just use gold as some sort of bellwether indicator of what they should do with monetary policy, I would think it would have a minimal impact. But if they were to actually use it to back the currency or partially back the currency, gold prices would have to be set much higher than they are right now.”

George Gero, RBC Capital Markets Global Futures

“I don’t think it’s having any effect on gold (prices currently). All we see now is a little profit-taking…If there was an implication (for the standard to be adopted), you’d have a bigger move…Central bankers don’t like gold, and it is very doubtful we’ll ever go back on a gold standard….Nobody wants to admit their currency isn’t any good. Central bankers think gold is a distraction and a competition. The price of gold is a political and economic barometer, so they really don’t like gold…They want to sell their government bonds and Treasurys, not gold. And of course, if you had a gold standard, it would highlight who has what and where and how much and what any currency is worth. Most central bankers want to have some kind of hold on how their currencies behave.”

Sterling Smith, Country Hedging

“The likelihood of it being adopted, given the current state of affairs and race to the bottom, is probably thin to none…We would have to get a lot of agreement from a lot of people. I see some really good things about this. What it would do is tame the currency markets a little bit and help prevent manipulation. It would also bring this idea of racing to the bottom, or printing money, to an end, which I think is a good idea as well…I think gold itself probably can rally off of this (should it be adopted). Anybody who would want to expand their monetary base would need to buy gold.”

Ralph Preston, senior market analyst, Heritage West Financial

I think that it is going to happen but I believe that there must be a much greater degree of financial and political disorder across the globe before the governments of the world sign unto such new way of doing business. The current paradigm must be shattered just as in WWII (Bretton Woods I) before a New World Order can be established.

Here comes $10,000 gold…. It’s just a matter of the timing and the events that will lead to this brave new world.

Mike Daly, gold and silver specialist at PFGBest

“I don’t think it’s going to fly. The bottom line is a lot of countries are printing money when they should be using bullion to back their currencies. If they did that, though, gold would be at $2,000. But I don’t think it’s practical. There’s just not enough gold out there. But it’s a headline grabber and it got people’s attention."

Peter Grant, USAGOLD – Centennial Precious Metals

“I think any way you slice it, it has a positive impact. The argument is there is not enough gold to cover all of the debt…There is not enough gold to go around at $1,400. But that changes as the price of gold goes up….

“It seems rather unlikely to me that we return to any true semblance of the gold standard because it inordinately favors those that have gold…In agreeing to a gold standard, a country that doesn’t have a lot of gold cedes a fair amount of power because they are under-allocated to that specific asset class…The topic seems to be a hot one. When you talk about the World Bank, that’s not some fly-by-night operation. To have that topic bandied about at the World Bank or IMF suggests there is a growing comfort with a hard asset like gold.”

Greg Marshall, President and CEO of Global Asset Management

“By inflating the money supply, (it) intentionally erodes the value of the dollar. I believe we will absolutely return to a monetary policy that will be tied to the price of gold. This is the only way to control governments from creating money out of thin air. In all of recorded history, no paper (fiat) currency has survived gold.”


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