The world is slowly, if almost unnoticeably, moving back to embrace the gold standard. Russia, China and India are leading the drive by accumulating gold reserves.
Although these three countries will not spell out clearly that they are reverting to a future under the gold standard, by stockpiling the precious metal, their actions speak loud and clear. In the event of another fiat currency crisis, they will use the gold reserves to back the value of their currencies.
At present, countries issue paper money without the backing of hard assets because the US dollar, printed out of thin air, acts as the world’s reserve currency. But central banks’ unending money printing, via quantitative easing (QE), to prop up the financial markets has raised concern of currency destruction and hyperinflation.
The gold price has rebounded to around $1,200 per ounce after the central bank of Russia announced that it had bought 150 tonnes this year.
The Russians are moving fast to dump the dollar in favour of gold. With reserves of 1,150 tonnes, the central bank of Russia is now ranked the world’s sixth-largest gold hoarder. The yellow metal currently comprises 10 per cent of the central bank’s total assets. Russia is now locking horns with the US and President Vladimir Putin has announced that he will end the “dollar dictatorship” in the oil market. This means that Russia is trying to dethrone the petrodollar. The gigantic gas deals between Russia and China will be sealed in either yuan or rubles. Trade between the two countries will no longer be conducted in dollars.
China has declared it has gold reserves of slightly over 1,000 tonnes. But it is widely believed that Beijing has a far greater hoard after gradually selling off its US dollars for gold. Like Russia, China foresees the imminent collapse of the fiat money system brought about by QE and the huge debts of Western central banks that will never be repaid. This month, Song Xin, president of the China Gold Association, said China should amass 8,500 tonnes in gold reserves to surpass those of the United States. The US declares a total of more than 8,100 tonnes, though this figure has not been independently audited in recent memory. There is in fact growing doubt that the US has anywhere near that amount, with many suspecting that its gold stocks have been depleted by sell-offs and loans over the years to protect the dollar.
Xin wrote in Sina Finance in July this year: “Gold is money par excellence in all circumstances and will help support the renminbi [yuan] to become an international currency, as gold forms the very material basis for modern fiat currencies.”
If China were to use gold to back the yuan, the Chinese currency would strengthen and gain stability amid the wild fluctuations of fiat currencies triggered by the avalanche of money printing. Moreover, China has entered into yuan-swap agreements with 24 countries, the latest being Australia and Singapore. This will further enhance the use of yuan in international trade and financial transactions. Both the move toward the gold standard and the yuan-swap agreements will erode the role of the US dollar as the reserve currency.
India has declared it has 557 tonnes of gold reserves, more than 7 per cent of the total assets of the Reserve Bank of India. However, India’s demand or appetite for gold has been increasing at break-neck pace. The Reserve Bank of India will soon emerge as one of the largest hoarders, rivalling the central bank of China.
So far the move towards the gold standard is sluggish. Gold prices have been hammered down by market manipulation to protect the fiat currencies. But the national referendum on gold in Switzerland on November 30 will be a turning point. The Swiss vote will chart the future of gold. A “yes” vote would mean that the Swiss National Bank must purchase about 1,500 tonnes of gold over the next five years in order to build reserves of at least 20 per cent of its total assets.
Thai gold reserves remain relatively low at 152 tonnes, or 4 per cent of the Bank of Thailand’s assets. In preparation for the next financial crisis, it should sharply increase its gold holdings so as to back the baht and ensure currency stability and confidence. In addition, the Thai central bank should increase the size of its currency swap agreement with China to ensure that it will also have enough liquidity available to cope with the next round of global financial crisis.