Amidst the global economic meltdown which is such a major worry to virtually all of us in the western world there is considerable speculation on the role of gold, if any, in any future solutions aimed at getting the world out of the mess created by credit controls, or lack of them, getting hugely out of hand. While to the gold believer it is natural - even logical - that some role for gold should develop perhaps in a future reserve currency basket, there is considerable resistance to this idea amongst the more traditional economists and bankers. The John Maynard Keynes ‘barbarous relic' quote is engraved on the hearts of many of those who set world monetary policy today.
What may be encouraging for the gold lobby in this respect now is that hugely powerful countries like China and Russia are looking to have their inputs into future global monetary policies and they are not inheritors of Keynesian thinking. Indeed the approaches by both these countries in the debate leading up to tomorrow's G20 meeting in London seem much more pragmatic, particularly in the light of the difficulties in which the US economy has become embroiled. The huge, and rising, US deficit cannot instil confidence in the long term future of the dollar and countries are beginning to speak out against dollar hegemony - and what might have been seen to be the only alternative - the Euro - for a reserve currency doesn't look to be faring much better.
As gold guru Jeff Nichols points out in one of his most recent postings on his website: China and Russia are agitating for a demotion of the dollar in the world monetary system with a new super-sovereign basket of currencies, possibly even including gold as the Russians have suggested, gaining stature as the new lynchpin.
Though, Nichols goes on to say such talk may hearten the advocates of gold, the possibility of any sudden change in the world monetary system seems remote, if only because no alternative can provide the, necessarily very large and very liquid capital markets necessary to accommodate reinvestment of reserve assets now held in U.S. dollars.
Nichols also reckons that, in the event, these countries, and others which might be involved in the creation of a new reserve currency basket to replace the dollar would almost certainly not welcome the then virtually inevitable revaluations of their currencies against the dollar leading to falls in exports
Nichols concludes Whether or not there is much discussion of a new international monetary order at this week's meeting of the Group of Twenty, the topic will surely come up again and again in the months and years ahead . . . and, if it gains traction, gold could be a surprising beneficiary.
The other speculation of note as it affects gold for the moment is the reported agenda item for the G20 meeting on IMF gold sales to help poorer nations in need. While a commissioned report on this subject has already recommended the sale of some of the IMF's supposed gold holdings (some commentators doubt that the IMF actually holds such gold stocks), there is still no certainty that this will in effect take place.As my colleague Rhona O'Connell points out - and she is rated as one of the world's top gold researchers/analysts - approval for IMF gold sales can't be done without an 85% majority (US currently has 17.3% but is in favour in principle) and the only metal that could currently be sold is already allocated for IMF funding purposes. All the rest is still subject to the Second Amendment to the Articles and these would take a lot of changing - and quotas are not up for renewal until 2011 although it has been suggested that this should be brought forward if possible. The subject may well come up, but if it does then so should the renewal of the Central Bank Gold Agreement.
Whatever tomorrow's G20 meeting holds in store with respect to gold, there are even more pressing matters and any immediate impact on gold is likely to be sidelined by arguments on further injections of huge capital sums into global markets, quantitative easing and other experimental ‘solutions' to avoid the next Great Depression. We are living in an economic environment where unproven ‘remedies' are being pulled out of hats with no certainty as to whether they will improve the situation - or perhaps make it worse! Gold should thrive on such uncertainty which is the one counter to some gloomy prognostications on short term supply/demand patterns. Continued lack of confidence in global markets is likely to keep the yellow metal as an important investment element in terms of wealth preservation at least, despite what may, or may not, come out of the G20 meeting.