World needs to prepare for return to gold standard as Washington disrupts financial order

Source:Global Times Published: 2019/8/25 21:08:39

Illustration: Xia Qing/GT

The safe-haven property of gold has fully manifested in recent weeks. Spot gold hit $1,535.11 an ounce on August 13, the highest level since 2013.

I believe the gold price could reach as high as $1,800 an ounce in the future, and in the meantime, there will be increasing discussions about the world's return to the gold standard. The global market structure has been undergoing tremendous changes these days. The US has been pulling itself out of the multilateral arena for the purposes of protecting and enhancing the value of its own market space. As a result, signs of structural adjustments in the world market have become increasingly evident, but are still far from raising the general attention of the global financial community. In fact, many people still hope that such structural adjustments won't happen, so the market can go back to the old days.

Yet, it's impossible to go back to the past because the structural adjustments are based on global capital surplus and severe overcapacity, which could cause serious world economic and financial crises.

So what would be the outcome?

The most significant change is a return to the gold standard. As capital surplus and overcapacity have exerted great pressure on the world market space, the world financial system is also trying to adapt to the huge change which is centered on the status of the dollar. From the perspective of the global financial system, the dollar is a super currency that has a strong backing of global geopolitics. 

The status of the super currency is supposed to be unshakable, but the problem is that the US itself wants to give up this status and pursue a future characterized by US President Donald Trump's freestyle, thereby leaving the world market in uncertainty.

What will "post-dollar era" currencies look like? What currency can replace the status of the dollar?

In fact, this will be a process of continuous trials. It would be hard for the Bretton Woods Conference to succeed in the current era, so the new super currency has to be selected through extensive experimentation. 

First of all, digital currencies. Governments in various countries are making efforts in this regard, and market forces have also cultivated various digital currencies like Bitcoin and Libra. But they are far from being universally recognized and trusted by the global markets, and they are also far from winning the support of major economies. 

Second, regional currencies including the euro. Politicians around the world actually missed many opportunities after World War II, because world politics seriously disrupted global financial order, but no one would admit it. The result is the weakening status of regional currencies, like the euro.

Then what's left is the gold standard. After the collapse of the Bretton Woods System, the questioning of the gold standard has never stopped. The gold standard essentially represents a world financial order. When an old financial order faces collapse, it is necessary to create a new financial order. When the US decoupled the value of the dollar from gold, it actually committed to take on the responsibility of world finance, based on which a new financial order was formed. It is this financial order that has allowed the US to enjoy huge development dividends. Now, the US is unwilling to continue assuming and fulfilling such responsibilities for the current world financial order, and Trump has continuously intervened in the operation of the Fed and global financial market order. This development points to the necessity of seeking and building a new financial order, which is the fundamental basis for the re-emergence of the gold standard in the world financial market.

So the gold standard is an effort by the world market and financial system to balance the "Trumpian future." It means that the US can take its own path and Americans will have the right to look after themselves, but other countries around the world will also have the right to make their own choices. In other words, this will be a process of rebalancing in the world financial market, forcing the US to face up to problems. It needs to make a choice: fulfill the obligations and responsibilities for international finance, or abandon the international status of the dollar, thus allowing the dollar to become a common currency.

These are simply judgments and projections made from the perspective of geo-capitalism. For the US, the gold standard is a choice that cannot be avoided. The existence of the choice matters a lot. Countries around the world would take back their gold reserves stored in the US, and there remains a big question mark over the US' response. Central banks would increase their holdings of gold reserves to prepare for the return of the gold standard. Gold prices will rise, and dollar assets and energy prices will also be affected.

Besides that, the most important thing is whether the US is willing to accept any big change or wants to return to the old financial order and abandon its current path. It remains to be seen and requires time and observation.

The article was compiled based on a report by Beijing-based private strategic think tank Anbound.


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