A new paper published by the Official Monetary and Financial Institutions Forum (OMFIF) describes how gold is ready to become officially part of the monetary system … again. In order to stabilize the world monetary system, in the light of a deteriorating global currency war and the lack of a real alternative world reserve currency, gold is the only alternative currency that is ready to take on a leading role. One thing is for sure, it is the ONLY time tested currency as ALL paper based money systems have failed in history. Although the Renminbi is a candidate to play an leading role in the future, it is not ready to take up that role yet. One thing will be proven once again: Gold was money and gold continues to be money, although we temporarily somehow “forgot” in it in the West.
The document (44 pages) describes five reasons why the world would benefit for gold’s official role as money.
- First, the West is experiencing the longest economic crisis since the 1930s, weakening the US and European currencies.
- Second, Asia with a stronger economic and political role, avoids to become victim of the transatlantic financial crisis.
- Third, “China and Asia have over-saved and have huge surpluses in the form of massive monetary reserves that have become the most potent factor behind reserve diversification into other assets including gold.”
- Fourth, with the rise of the renminbi, Asia offers an alternative for the supremacy of the western currencies.
- Fifth, the failed attempt of the West to “dismantle the yellow metal’s monetary role” is backfiring now. “Gold stands ready to fill the vacuum created by the evident failings of the dollar and the euro, and the not-yetrequited ambitions of the renminbi.”
Obviously we are not there yet. A lot of things need to be settled before such an evolution can take place including a stable gold price in different currencies and decisions on official gold reserves (monetary base to gold ratio). The OMFIF suggests it is time to start preparing “contingency plans.”
Two quotes from the executive summary of the paper:
The world is preparing for possible twin shocks from the parlous position of the two main reserve currencies, the dollar and the euro. As China weighs up its options for joining in the reserve asset game, gold – the official asset that plays no formal part in the monetary system, yet has never really gone away – is poised, once again, to play a pivotal role. Many dismiss gold as a relic of the past or as an inadequate hedge against inflation. But from an asset management point of view, as well as on the basis of political analysis, gold has a lot going for it; it correlates negatively with the greenback, and no other reserve asset seems safe from the coming dollar shock.
As the international community attempts to take on these challenges, gold waits in the wings. For the first time in many years, gold stands well prepared to move once more towards the centre-stage. This could be the start of an immensely important phase in the history of world money.
John Butler commented on the Financial Sense right after the document was published, confirming his prediction in an earlier article and in his book The Golden Revolution (Wiley, 2012). He writes: “I believe this is of great historical significance. The economic and financial market implications are substantial. The global ‘savers’, that is, the countries that export more than they import, are finally forcing the world back onto a more stable monetary foundation that will make it far harder to print money to paper over fundamental economic problems and ‘kick the can’. Yes, this implies that profligate governments will find it more difficult to finance deficits in future.”