If the post-1971 monetary system is bad, why isn’t gold higher?
Second, financial markets are big supporters of the current monetary systembecause they like the lax monetary policy and the liquidity drops of the central banks. Remember, the US stock market welcomed the closing of the window on gold, rising 3% the day after Nixon’s infamous speech.
Third, even poor systems can run for a while. Communist economies did not collapse immediately, despite their obvious ineffectiveness. Le Bois Breton operated for almost 30 years despite its obvious flaws. In addition, some institutional changes have been implemented in order to strengthen the current system, such as independence of central banks, inflation targeting, ban on direct monetization of public debt, etc.
However, the most important reason is probably that the gold standard was somehow replaced by the US dollar standardbecause the greenback has replaced gold as the world’s reserve currency. In such a system, there is simply no alternative to the US dollar as a global reserve. Indeed, America has become even more central in global finance than it was in 1971 and because virtually all countries conduct equally ill-advised monetary and fiscal policies (and some central banks like the ECB or the BoJ are even more radical than the Fed). The strength of the greenback restricts the prices of gold denominated in dollars.
However, it should be remembered that unlike the gold standard, under which currencies were backed by gold (or: they were in fact defined as units of gold weight), today’s currencies rely only on the reputation of their issuers, which is not set in stone. This is in fact why the Bois Bretons finally collapsed. Initially, the United States had a great reputation and no one dared even question Uncle Sam’s ability to convert dollars into gold. But the protracted war in Vietnam, Johnson’s big social programs, rising government spending and growing deficits undermined that reputation, and other countries began to demand gold for their dollars.
The same could happen in the future, especially as Trump left his mark on America’s reputation. With Biden pursuing the populist economic doctrine of his predecessor, the greenback is expected to face new headwinds. Plus, with ultra-low interest rates and a huge pile of debt, there is little leeway to inflate the economic bubble. While a return to the gold standard seems unlikely, recurring business cycles and economic crises are more than certain. This is great news for gold.
In other words, the current system persists primarily through confidence in the ability of central banks to control inflation, even without the discipline of the gold standard. However, this belief can collapse one day. The Fed may be correct that the current high inflation is temporary. Corn otherwise, we could have the ‘Powell Shock’ which could bolster gold just like the Nixon Shock.
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Arkadiusz Sieron, PhD
Sunshine Profits: Effective investment through diligence and care.