Forbes calling for gold standard

June 11, 2014 08:05 AM
  • Today’s AM fix was USD 1,262.50, EUR 932.63 and GBP 751.76 per ounce.
  • Yesterday’s AM fix was USD 1,253.50, EUR 924.62 and GBP 746.22 per ounce.  
  • Gold climbed $7.50 or 0.6% yesterday to $1,260.80/oz. Silver rose $0.15 or 0.79% to $19.23/oz.

Gold and silver rose strongly yesterday on short covering and speculation that Indian demand is picking up.

Prime Minister Narendra Modi's new government has signalled a loosening of gold import rules, and this morning, India’s Trade Secretary said India needs to rationalize import duties on gold bullion.

Gold may also have been bid higher due to concerns about commodity financing deals in China.

Gold held near the highest in almost two weeks and palladium traded near over a three-year high at $852 per ounce. Palladium has surged 19% this year due to concerns regarding Russian supply and continuing industrial unrest in South Africa, the second-largest producer after Russia. Labour talks ended acrimoniously again two days ago in South Africa.

The global gold price setting benchmark, or fix, is open to manipulation, said the head of the London Metal Exchange (LME), which is competing to offer an alternative to the silver fix when the system is disbanded in August.


The chairman and founder of one of the world’s top financial magazines, Steve Forbes, has issued a warning that the Federal Reserve and other central banks' ultra-loose dollar policies could trigger an “economic meltdown.”

The Fed’s "vastly misguided monetary policies are now setting the stage for a new economic and social catastrophe — one that could rival the financial crisis and horrors of the 1930s,” Forbes warns.

His warnings come at a time of important recent monetary and geopolitical developments regarding the increasing use of the renminbi in the international payments system as a trade currency and as a reserve currency. In 2000, the U.S. dollar made up 71% of all reserves held by governments around the world. Today, it accounts for just 62%, and this number is expected to fall this year and in the coming years.

Azerbaijan’s sovereign wealth fund plans to invest up to $1.8 billion in renminbi this year, in what would be one of the largest investments in the Chinese currency to be made public – and a further indication of its rapid move towards reserve currency status.

Shahmar Movsumov, chief executive of the $37 billion State Oil Fund of Azerbaijan (Sofaz), told the Financial Times that the fund hoped to start investing in the currency by the end of the year. “It’s one of the currencies that are becoming important, so why not invest in renminbi?” he said.

Gold standard

Forbes warns about this trend and advises a return to a gold standard as the only way to avoid disaster in his new book, Money: How the Destruction of the Dollar Threatens the Global Economy -- and What We Can Do About It.

In it, he says that U.S. economic success and prosperity will only return if the dollar is fixed to gold bullion, and not subject to the Fed’s arbitrary liquidity hydrants.

The book is co-authored by the respected Elizabeth Ames. It says that a gold standard would “lower interest rates,” provide for “cheaper capital” and lead to “gangbuster growth."

“If the American economy had the growth rates it once achieved under a gold standard, it would be three times -- instead of two times -- the size of the Chinese economy today.”

Forbes believes a new gold standard would curtail reckless government spending and make government more accountable. Alas, today’s Fed is now abetting the reckless spendthrifts in government by buying and monetizing U.S. debt.

Forbes adds that those inflation fears could be assuaged by a gold-based currency board, which he adds have been around for more than 150 years. In fact, Hong Kong, Denmark, Lithuania and Bulgaria use a currency board, a basket of currencies, euros and euro bonds, along with gold to back their national currencies.

Gold is not a strict, unwavering standard, as critics suggest; the price can change. “Gold is far less rigid than people realize. It is both flexible and stable,” Forbes wrote. “A gold standard no more means a fixed supply of money than a use of the metric system means there has to be a fixed number of rulers.”

The Fed’s easy money policies could end up being the black swan event that leads to market meltdown. Interest rate spikes and inflation hikes frequently lead to economic crises. Currently, economists note inflation is not a problem, but once the trillions in bank reserves created by the Fed come pouring into the U.S. economy, that will change.

Higher commodity prices are the canary in the coal mine for inflation, notably food price spikes. There is also the fact that the Fed and other central banks have again created significant and dangerous bubbles in stock, bond, and property markets.

The size and complexity of the U.S. economy would make the conversion to a gold standard difficult to do, analysts have noted. In order to back the dollars now in circulation and on deposit -- about $2.7 trillion -- with the approximately 261 million ounces of gold believed to be held by the U.S. government, gold prices would have to rise as high as $10,000 an ounce.

About the Author

Mark O'Byrne is executive director of Ireland-based GoldCore.