The US went off the gold standard in 1933, and in 1971 it stopped converting dollars to gold. These were major policy changes, so dramatic that even today, many decades later, economists argue whether they were vital or a terrible blunder.
Although gold is no longer used as currency, it still plays a significant role in finance, and that appears to be growing. Is the world moving toward a new gold standard?
Important Benefits
Investopedia defines a gold standard “as a monetary system where a country’s currency or paper money is directly linked to gold.” Investopedia adds that this type of system offers several important benefits, among them: it limits governments’ ability to print fiat (paper) money recklessly, helps control inflation, and limits the government’s ability to raise the national debt.
Nevertheless, the government decided change was necessary. One reason was to prevent foreign nations from “overburdening” the system by exchanging their dollars for gold. Another was that government should be able to implement expansionary policies when necessary, for example, to reduce unemployment during recessions.
When the US was on the gold standard, the government would exchange gold for dollars at $35/ounce. On August 10, gold was trading in the $1960/ounce range.
Over the years, gold has retained most of its value, despite inflation, depression, great recessions, market crashes, and even a pandemic. The dollar, on the other hand, has not done as well: It lost nearly 98% of its value. This is just one of the reasons major countries are getting out of dollars, why central banks keep purchasing gold, and why rumors of a new, gold-backed currency are generating so much interest.
…And Still Buying
According to investment advisors Schiff Gold, central banks added a record amount of gold to their reserves through the first half of 2023. But even countries adding the yellow metal to their reserves sometimes sell for a number of reasons. For example, they may want to mint new gold coins, bars, or sell for jewelry. Over the long term, however, they continue to increase their positions, and this was true in 2023 too.
Central banks purchased a record amount of gold in the first quarter, and although their purchases slowed in the second quarter they still added a net 103 tons to their reserves. “These bring central bank purchases in the first half of 2023 to a net total 387 tons according to data compiled by the World Gold Council,” Schiff reports. “This was the highest first-half total since (the World Gold Council) began compiling quarterly data in 2000.”
Kazakhstan and Uzbekistan were among the countries that reduced their positions. And so too did Russia, Cambodia, and Germany; according to press reports, the bullion likely was used for minting coins. Turkey was the biggest buyer in the first quarter, but it began selling in March, also to meet internal demand. Since then, however, it resumed purchasing and has added 11.4 tons to its holdings in June.
But the People’s Bank of China (PBOC) finished in first place among the buyers, having purchased the most gold during the first half of the year. It added 103 tons to its official holdings, no great surprise since the PBOC has increased its official gold holdings steadily since November 2022. Those now stand at 2,113 tons. Gold accounts for 4% of China’s total reserves. Zero Hedge reports the bank continued buying in July, when it purchased an additional 23 tons. Moreover, the official numbers may not tell the whole story, as there has been speculation that China in fact owns and buys much more gold than it discloses.
Jim Rickards, an investment banker, consultant and commentator, noted in 2015 that “many people speculate that China keeps several thousand tons of gold ‘off the books’ in an account called the State Administration for Foreign Exchange.” And at least some data lend credibility to this report. According to Schiff, “Last year there were large unreported increases in central bank gold holdings…. Many analysts believe China is the mystery buyer, stockpiling gold to minimize exposure to the dollar.”
Joining BRICS
South Africa will host the other BRICS nations – Brazil, Russia, India, China – in late August, and among the issues they will discuss is the creation of a new currency. Ongoing economic problems, including high inflation, growing budget deficits and lingering concerns about a possible US default on its debt have raised concerns in these and other countries about dollar-denominated debt.
And that’s why they are exploring alternatives to the dollar. According to Fortune, several have already agreed to use non-dollar currencies in their cross-border trade. As noted above, central banks are shifting more of their reserves from dollars to gold, and political and/or economic issues may accelerate this trend
Can de-dollarization dethrone the greenback? Opinions vary. A former White House economist believes a new, gold-backed BRICS currency could end the dollar’s rule. On the other hand, Treasury Secretary Janet Yellen believes the dollar will remain the currency of choice “as most countries have no alternative,” reports Fortune.
Launching a new currency is a herculean task. This is true especially in the case of BRICS members, which vary greatly in economic power, political systems, and alliances. Also, they would have to agree on very complicated issues such as exchange rates and payments systems.
“A BRICS version of the Euro is unlikely for now,” states Fortune. “None of the countries involved show any desire to discontinue its local currency.”
Investment advisor and financial commentator Mike “Mish” Shedlock agrees. He dismisses the numerous reports about BRICS countries issuing a gold-backed currency since “they are all (just) proposals, they are mostly to totally sensational hype, and not a one of them have any meaningful details.” To paraphrase Shakespeare, in his opinion, all of the talk about a new gold-backed currency is just sound and fury, and signifying nothing.
Going forward, the criticism, threats, and bluster about the dollar will likely persist. Even so, for now it appears the greenback will remain the world’s reserve currency.
But what about the numerous reports about a new gold-backed currency, some quoting very prominent individuals? Can all of them be wrong? Are anti-American countries planning a “black swan” event to shock the markets?
We’ll have answers to these questions in a few days. Meanwhile, fasten your seatbelts. The ride ahead should be very interesting -- and may also be very bumpy.
Sources: bloomberg.com; fortune.com; investopedia.com; mishtalk.com; quizlet.com; wikipedia.org; zerohedge.com
Gerald Harris is a financial and feature writer. Gerald can be reached at This email address is being protected from spambots. You need JavaScript enabled to view it.