Gold Standard

A New Gold Standard?

by
BusinessUS & World
In review, 2022 was an economically historic year as both stocks and bonds where down for the third time in the last 100 years, the other two times being 1931 and 1969. While history might not repeat itself it does rhyme, lets look back at what happened after these historically bad years.  
Following 1931 the global economic system was upended with the Gold Reserve Act of 1934. The Gold Reserve Act of 1934 was a law passed by the United States Congress that authorized the President to increase the gold content of the US dollar, effectively raising the price of gold from $20.67 per ounce to $35 per ounce. The act also authorized the President to prohibit the export, hoarding, melting, or earmarking of gold, and it granted the President the power to fix the price of gold. The act also transferred ownership of most of the gold held by the Federal Reserve to the United States Treasury and authorized the Treasury to use the gold to support the value of the US dollar. The act was primarily intended to help stabilize the US economy during the Great Depression by raising the price of gold and strengthening the value of the US dollar.
1969 was followed by the Nixon Shock where the Bretton Woods international monetary agreement was dissolved and the US Dollar decoupled from gold. The Nixon Shock was a series of economic measures taken by President Richard Nixon in 1971, including the suspension of the convertibility of the US dollar to gold and the imposition of wage and price controls. These actions had a major impact on the global economy and marked a significant shift away from the post-World War II Bretton Woods system of fixed exchange rates. The Nixon Shock also led to a devaluation of the US dollar and increased inflation, which had lasting effects on the US and global economies.
The Nixon Shock led to a significant increase in the price of gold, as the suspension of the convertibility of the US dollar to gold effectively ended the gold standard. Prior to the Nixon Shock, the price of gold was fixed at $35 per ounce and the US dollar was pegged to gold. The suspension of the gold standard allowed the price of gold to float, and it quickly rose in response to the devaluation of the dollar. The price of gold reached a peak of around $190 per ounce in 1980, reflecting the high inflation and economic uncertainty of the period.
Additionally, the suspension of the gold standard and the devaluation of the dollar led to a loss of confidence in the US dollar and a shift towards gold as a safe-haven asset. This increased demand for gold further pushed up its price.

The question posed is do we see a similar event following 2022? Whether it be a revaluation of gold, reintroducing a gold standard to anchor the value of the US Dollar or maybe even introducing an asset backed digital currency valued by a basket of precious metals, are there major global financial changes on the horizon? I don’t have a definitive answer but I’m seeing evidence that people may be positioning themselves for such a change. Last year central banks began buying record amounts of gold. It is no secret that Central Banks, IMF and Federal Reserve are captaining the global financial ship and following their actions may show signs of things to come.

Central banks buy gold for a variety of reasons. One of the main reasons is to diversify their foreign exchange reserves. By holding gold, central banks can reduce their exposure to currency risk and protect their reserves from inflation. Additionally, gold is considered a safe-haven asset that tends to hold its value during times of economic uncertainty, which makes it an attractive option for central banks looking to preserve the value of their reserves.

Another reason central banks buy gold is as a hedge against potential financial crises. In the event of a crisis, central banks can use their gold reserves to backstop their economies and stabilize their currencies. This is especially important for central banks in emerging economies that may not have as deep and liquid capital markets as developed economies.


Another reason is to maintain the value of their currency. Gold can act as a store of value, and by holding gold, central banks can help to maintain the value of their currency by linking it to the value of gold. This can help to reduce inflation and stabilize the economy.
Finally, some central banks buy gold as a way to support their domestic gold mining industries. This can be a way to create jobs and stimulate economic growth.

It is theoretically possible for the US to return to a gold standard, but it would be highly unlikely due to the significant changes in the global economy and monetary system since the Nixon Shock.

A return to a gold standard would require a large amount of gold to be held by the US government and a commitment to maintain a fixed exchange rate between the US dollar and gold. This would limit the ability of the Federal Reserve to use monetary policy to stabilize the economy, as it would be constrained by the need to maintain the gold standard.

Additionally, a return to a gold standard would make it difficult for the US to run a trade deficit, as it would have to export gold to pay for imports. This would make it difficult for the US to maintain its position as a global economic power and could lead to a decline in living standards.

Furthermore, the gold held by the US government would be worth trillions of dollars, and it would be difficult to acquire that amount of gold without disrupting the global gold market and driving up the price of gold.

Finally, a return to a gold standard would require a significant change in the international monetary system, as other countries would have to adopt a similar standard in order for it to be effective. This would be a challenging and unlikely task to achieve in today’s globalized economy.

Gold prices are at an all-time high due to a combination of factors, including:

  • Economic uncertainty: The ongoing COVID-19 pandemic has led to increased economic uncertainty and financial market volatility, which has increased demand for safe-haven assets like gold. As investors seek to protect their wealth during times of uncertainty, they tend to flock to assets like gold, which has a long history of holding its value.
  • Low interest rates: Gold does not pay interest or dividends, so its price tends to rise when interest rates are low. With central banks around the world cutting interest rates to near-zero in response to the economic impact of the pandemic, the opportunity cost of holding gold has decreased, making it more attractive to investors.
  • Fiscal stimulus: Governments around the world have implemented large-scale fiscal stimulus measures to support their economies during the pandemic. This has led to concerns about inflation and currency debasement, which has also increased demand for gold as a hedge against these risks.
  • Supply and demand: The global gold mining industry has been impacted by the pandemic, leading to a reduction in supply. This combined with the increase in demand for gold has put upward pressure on prices.
  • Risk-on attitude: Gold prices tend to rise when investors are risk-averse and fall when they are risk-on. The recent increase in gold prices may reflect investors becoming more cautious and more uncertain about the future.

It is important to note that gold prices are subject to fluctuation, and the reasons for the price changes are subject to change. Additionally, different factors can affect the gold price at different times.

If the world were to return to a gold standard, it would have a significant impact on the global economy and financial system. Here are a few potential consequences:

Limited monetary policy: Under a gold standard, the amount of money in circulation would be directly linked to the amount of gold held by the government. This would limit the ability of central banks to use monetary policy to stabilize the economy, as they would be constrained by the need to maintain the gold standard.

Reduced economic growth: A gold standard would make it difficult for countries to run trade deficits, as they would have to export gold to pay for imports. This could limit the ability of countries to maintain their position as global economic powers and could lead to a decline in living standards.

Increased volatility: A gold standard would make the global economy more susceptible to fluctuations in the supply of gold. A decrease in the supply of gold could lead to deflation, while an increase in the supply could lead to inflation.

Increased financial stability: One of the main arguments for returning to the gold standard is that it would increase financial stability. Since the amount of money in circulation would be directly linked to the amount of gold held by the government, it would reduce the risk of inflation and currency debasement.

Challenges in implementation: Returning to a gold standard would require a significant change in the international monetary system, as other countries would have to adopt a similar standard in order for it to be effective. This would be a challenging and unlikely task to achieve in today’s globalized economy.

It is important to note that a return to a gold standard would have different implications for different countries, and the impact would be different depending on the country’s economic conditions, resources, and trade relations. 

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