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Abandoning the dollar for gold

Jan Skoyles looks at the recent stories of countries abandoning the dollar for gold in international transactions. This will have implications for the gold price, but will it have an impact on further debates involving the gold standard. At The Real Asset Co we promote a return to sound money and so developments such as those discussed below always grab our attention.

Last month the papers were full of reports stating Iran had agreed to sell their oil to India in exchange for gold. The agreement to trade in gold sidesteps the sanctions issued by the EU and US law which prohibit all new oil contracts and have frozen the Iranian central bank’s assets in the EU. Soon after the India/Iran story there were reports of both Russia and China making similar deals with the Iranians.

This isn’t the first time international payment agreements have been rumoured to be taking place. In 2009, there were reports of the Arab states, along with Russia, China, Japan and strangely, France, to start trading oil using a new basket of currencies. This basket was rumoured to include the Japanese yen and Chinese Yuan, the euro, a new,  single currency planned for nations in the Gulf Co-operation Council and of course, gold.

Nothing has come to light in any of these instances. But such rumours do impact upon both the gold price and further discussions of a return to some form of the gold standard.

Gold tactics

These sanctions on Iran are also not new ‘nor is the use of gold as a response to certain actions.

Back in late 1979, Iranian student Revolutionary Guards stormed the US Embassy, in Tehran, taking several US Hostages. The Americans responded by freezing Iran’s gold which was held in Fort Knox. The Iranians responded by panic buying gold from Zurich. The freezing of gold assets by the US Federal Reserve made other countries realise their gold was no longer safe, sparking a gold buying spree by the Middle East. This was enough to push the gold price above $850.

This act of lawlessness by the Iranian Revolutionary Guards was of course wrong – in the same way starting a nuclear war would be wrong. However the actions by the US government in 1979 was also wrong, as it is today for both the US and the EU to implement sanctions. They may, possibly, prevent a nuclear war, but an economic war seems likely.

This reoccurring issue of abandoning the US dollar, in order to push a political motive, for another national currency, a basket of currencies or even gold raises the question of whether it is ever a sensible idea to have one national currency as the international reserve currency.

Bad money

Canadian economist Robert Mundell argues no national currency should ever be used as a leading reserve currency. He argues precious metals were used as international money over the centuries ‘because they were more efficient than other instruments in fulfilling the required functions of money.’ Mundell goes onto argue that currencies which are controlled at the whim of a government tend to weaken over the long term as supply begins to outweigh demand.

For Mundell, currencies in which there are opportunities to exploit and overvalue due to the monopoly of government, is ‘bad’ money. This has been no more the case than with the United States and the dollar.  It now seems countries which are growing rapidly and have significant trading weight, are rapidly losing confidence in the US dollar and beginning to realise there is an alternative.

Paul Fabra states that whichever country’s fiat money you use, it will be dangerous; ‘in a world where real money is replaced by fiat money and monetary reserves increasingly consist of other countries’ fiat money, the monetary system resembles a house of cards.’

To have power of a monetary system is to remove democratic rights from those participating in that monetary system. This applies to both citizens of the currency and those who trade with them.

Gold money is danger money

For those who abandon the US Dollar in the oil trade, the future does not look bright. In 2003 a Middle Eastern oil producing nation abandoned the dollar in favour of the Euro. A few months after their president joyously announced his decision the Brits and American invaded, toppling Saddam Hussein from power. It was not long after this Iran, in 2009, also announced their foreign currency reserves would also be kept in euros, rather than US dollars. Is this how wars begin? Is it in fact not about human rights or oil but is in fact about whose currencies are the toughest?

There are reportedly other factors at work here, which are apparently the cause of these currency wars – namely the nuclear threat from Iran. But it is worth discussing the undemocratic nature of using a country’s currency as an international currency.

The Gold Standard of currencies

The Libertarian Dr Tim Baker once said to me, he doesn’t know which currency is the right one but whatever currency is chosen by the people is the correct one. This was no more the case than is seen in the period of the Classical Gold Standard.

The Classical Gold Standard is the most famous commodity standard in history. The decision to move onto the gold standard around the late 1870s was not the result of an international treaty or summit as we so often see on the news. There were no group photos taken of our great leaders announcing they had decided on this brand new way to trade. No, it happened gradually and by choice.

Great Britain, at the time was the great economic and political power, and had operated on a gold standard ever since 1717. By 1880 Great Britain’s trading partners had realised that due to the influence and power of the Commonwealth, it would be advantageous to move from their own metallic standards to what is now known as the Classical Gold Standard.

We then saw the US take advantage of its position as the wealthiest, least scathed country to come out of both World Wars. This was its opportunity to exert its power over the global financial system. Through several stages, the Americans removed gold completely from the international monetary system.

Now, with their trillion dollars of debt and more supply to meet demand – the house of cards that is dominated by the joker US dollar is beginning to wobble.

Gold powers

As we alluded to in a recent article, the Chinese economy has astonished us all with their economic performance since the 1970s. The majority of the measures which useless economic groups such as the WEF use to assess countries, are met by the Chinese.

The Chinese are hoarding gold, they’re rumoured to be partaking in gold payments with Iran. Are we beginning to see the next stage of a global currency change? These countries, Iran, India, China and Russia have a lot of what we want – oil and manufactured goods.

It is also worth noting, Venezuela has, in the last week, received the last of its $11bn worth of repatriated gold. The head of Venezuela’s Central Bank told the press on Monday, “ [during periods] of global financial crisis and turmoil in the developed economic centres, gold becomes one of the principal safe assets because it is the only means of international payment that has its own intrinsic value — in other words it is not a debt of other countries.”

The relationship between Chavez and the US is commonly known to not be a good one. Chavez once famously stated, ‘I hereby accuse the North American empire of being the biggest menace to our planet.’ His moves to repatriate the country’s gold may be seen to be making a point to the American government, which has long coerced the South American continent, but is Chavez also making a savvy move towards self-sufficiency.

Gold and democracy

Gold is a way of expressing your democratic right – your right to choose- why should these countries operate with the US Dollar as the reserve currency? Growing economic powers such as China are likely to  become the next world leaders, if they’re preparing to abandon a national currency for gold then maybe we’re beginning to see a second phase of the a gold standard. History repeats.

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Please Note: Information published here is provided to aid your thinking and investment decisions, not lead them. You should independently decide the best place for your money, and any investment decision you make is done so at your own risk. Data included here within may already be out of date.

About the Author

Jan SkoylesJan Skoyles is Head of Research at The Real Asset Company, a platform for secure and efficient gold investment. Jan first became interested in precious metals and sound money when she met Ned Naylor-Leyland whilst working alongside him in the summer of 2010. Jan then went on to write her undergraduate dissertation on the use of precious metals in the monetary system. After graduating from Aston University in 2011 Jan joined The Real Asset Co research desk. Her work and views are now featured on a range of media including BBC, Reuters, Wall Street Journal, Mail on Sunday, Forbes and The Telegraph. She has appeared on news channels including Russia Today to discuss the gold price and gold investing. You can keep up with Jan's commentary by subscribing to our RSS feed Gold Investment News.View all posts by Jan Skoyles

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  • therooster of Christ

    Gold is the ultimate money. Don’t gauge or judge past gold standards that did not trade in real-time. Real-time gold values have been the finishing touch that has now allowed debt-free store of value to marry with the convenience of instant global liquidity in the 21st century. The market can now monetize bullion based assets , add to liquidity (debt-free and as such, purge debt (fiat) back to where it came from. Gresham’s Law is reversing for the simple reason that it’s predicated on fixed trade values for gold. Real-time is where it’s at , baby !!!

  • major

    If the fiat Countries are willing to make war or confiscate People’s investments to prevent their currency from being marginalized; how can there be ANY safe investments. Citizens cannot resist oppression easily when backed by force and they cannot easily re-locate to alleged safe Countries, which I dont believe there are any in the global situation. We can be smart and move into safe assests only to have it ripped from our hands by self serving politicians. Explain to me how we can prevent THAT??

  • Richard

    Great article. Moving to Gold for International Payments is just the begiing, but to get ‘there’, gold’s value will have to explode as at its current price it can’t, doesn’t and won’t pay for very much. Gold has no real ‘JU-JU’ yet.

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