Return to Gold Standard becomes a US election issue

Metals trader Sharps Pixley’s chief executive Ross Norman comments that gold might have to rise to $45,000/oz if the metal were to form the basis of a return to a gold standard.

There was a time when politicians kissed babies to show they had the common touch and a real connection with ordinary folk. With the outcome of the US elections finely poised, gold and a return to a gold standard is seen as a potential vote-winner – today they are embracing gold, not babies.

In South Carolina 33% of voters are gold standard supporters, with 18% warm to the idea while only 11% are against and 6% cool on the proposal. Gold is a clear 3-1 vote winner.

To be fair, Republican presidential candidates Newt Gingrich and Ron Paul have both consistently been strong supporters of ‘hard money’ but their advocating a “gold commission” to consider a return to a gold standard is interesting at two levels – firstly in what tells us about the mood in the USA – and secondly by its potential impact on the gold market itself.

President Nixon moved the US out of the gold standard in 1971 and brought to an end the Bretton Woods system of monetary management introduced in 1946 where currencies were pegged to each other and the dollar was pegged to gold at a price of $35/ounce. The proposal is to back US dollars with gold (and possibly silver).

The main benefit of the gold standard was that, by linking a countries currency to a fixed asset like gold. it prevented policy makers from over-expanding the economy – it was a forced discipline or straight-jacket which effectively has a self-regulating and stabilizing effect on the economy. As such, the government can only print money depending upon the levels of gold reserves it has. This discourages inflation, budget deficits and debt. Furthermore, the more productive nations benefit – as they should – because the more they export, the more gold they can purchase and therefore money they can print to grow their economy further.

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