Time for a new gold standard?

As G-20 leaders prepare to meet amid global currency concerns, World Bank President Robert Zoellick rekindles an old debate.

By TheStreet Staff Nov 8, 2010 1:48PM

thestreetGold © Comstock Images/JupiterimagesBy Alix Steel, TheStreet


The gold standard debate is now back on the table, thanks to recent comments by Robert Zoellick, president of the World Bank, in the Financial Times.


With a global currency war front and center at the Group of 20 meeting this week in South Korea, Zoellick raised the possibility of a gold standard.


Zoellick said that the world needs a "Bretton Woods II," which would be a global "cooperative monetary system" involving multiple currencies like the dollar, euro and yen, as well as gold. Zoellick said gold should be used as an "international reference point of market expectations about inflation, deflation and future currency values." Zoellick says that gold is not just old money but that markets are using the metal as a viable alternative to paper currencies.


Bretton Woods was established after World War II to repair fiscal damage by forming the International Monetary Fund and the International Bank for Reconstruction and Development. The agreement forced countries to adopt a gold standard, which President Nixon abandoned in 1971, leaving the U.S. dollar to become a world reserve currency instead.

Zoellick's call for some type of gold standard helped give the metal's price a midday boost Monday. Kitco's gold index was showing the spot price up $8, and December's futures contract on the Comex set a new intraday record, briefly topping $1,400 an ounce.


Many analysts argue that a gold standard simply doesn't work, because a reserve currency needs to be able to grow and gold's tight global supply prevents it from doing so.


Jon Nadler, a senior analyst at Kitco.com, says, "A return to the 'good old days' is not only improbable but also implausible. . . . (It) would in fact guarantee an immediate global plunge into economic dark ages."


A strict gold standard would curb the amount of money printing and currency manipulation currently angering worldwide economies right now, but it would also strip countries' ability to jump-start growth.


Since March 2009, when the Federal Reserve announced its $1.7 trillion bond purchase program, the Dow Jones Industrial Average ($INDU) has rallied 58%. A variety of factors contributed to the stock market bounce, but the Fed's ability to pump money into the system is one of the most lauded.


The U.S. currently holds 8,133.50 tons of gold in its reserves, which at today's price is worth $361 billion. Zoellick acknowledged that any kind of currency cooperation would take time, "but we need to begin."


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