Gold, a civilized relic of “an economy that has become barbaric”

In Le Monde 12/09/2019

World trade, bank reserves, world debt, extraterritorial justice… The dollar rules the financial world. The currency of Washington offers a deep market, stable value, liquidity and some security linked to the independence of the FED. But this neutrality of the dollar is threatened by President Trump’s trade war policy, and the subsequent currency warfare leads to devaluations.

The privileges attached to the dollar are no longer sustainable. However, as the expansion of the economy required a global currency, a new monetary order would emerge from the crisis and three candidates for succession illustrated this renaissance: a basket of currencies, virtual currencies and gold. The main quality of gold is that which the dollar loses: independence. If some central banks replace the dollar with gold in their reserves, it is because gold is no one’s debt and its interest rate, which exists, is determined not by a country, but by the difference in prices between the cash and forward prices.

Free of debt, of course, but in front of dollarized financial markets, the depth of the gold market and its liquidity are currently insufficient. They would demand a gold price or its production, or both, be multiplied. By how much? If dividing the values of paper money and global financial products by the quantities of gold hoarded, some calculate a value per ounce of gold ranging from $10,000 to $25,000. 7 to 17 times more than today, although the current price of $1500/T.oz is already forecast at $2000/T.oz in 6 to 12 months ; and perhaps more if current real interest rates persist with negative nominal rates, if Donald Trump continues to schizophrenically threaten the benefits of his own currency when he admonishes the chairman of the FED, if the United States votes for a Trump 2 mandate, if the revolt in Hong Kong continues to demand more social justice (some interpret more communism) and if the harmful Brexit process continues as the United Kingdom disunites: Scotland, Northern Ireland and Gibraltar perhaps.

10 000$ to 25 000 $, the spectrum is wide, but it remains narrow in the face of the reality of additional speculative elements associated with such a monetary disruption. A higher price, to better ensure market depth, stability, liquidity and financial security, would reserve gold for central banks and destroy gold demand of the jewellery industry and private investment. In addition, the environmental issue is increasingly muzzling mining production. For gold, too, the environmental transition has an inflationary effect!

The end of the dollar, the appearance of a new metallic world financial order are, like every major upheaval, projected by everyone, but without really wanting it fearing losing comfort of dollar rules. If gold can play the temporary role of a bridge between a dollarized world order and a future currency to be imagined, this future world is still unclear. Monetary basket governed and guaranteed by central banks, but how independent would these currencies be? Virtual currencies without written operating rules or guarantees guaranteeing the stability of their values? Bitcoin price chart is convincing of the danger of such tool?

In the end, could a new monetary order not be a mixture of the three hypotheses: a basket of virtual currencies regulated by financial authorities rather than by Facebook, backed by a metal such as gold and other metals or even other commodities?

According to Keynes in 1923, the gold standard was a “barbaric relic” outmoded in a new and civilized economy. Nearly a hundred years later, will it become the civilized talisman of a modern, but now barbaric economy?