Ever wondered why money isn’t worth the paper it is printed on? Why currencies float and occasionally sink? What ever happened to gold as the cornerstone of the currency market? There are some who believe that the world should return to aligning currency to a gold standard – in other words being able to redeem paper money for fixed weights of gold. For much of the 19th century and part of the present century, the exchange rates of the world’s most important trading countries were fixed in terms of gold. The system was known as the gold standard system of fixed exchange rates.
Some economists are very optimistic with regard to gold prices for a variety of reasons:
• The US dollar is trending downward against other major currencies, which increases the US dollar price of gold.
• The quantitative easing by central banks around the world will most likely lead to inflationary pressures which ultimately will increase the price of gold
As a result of this bullish behaviour gold is initially recovering some of its lost standing as the world’s reserve currency. What is more, with many countries now holding significant amounts of US dollars as reserves there is the probability that preference will be given to hold something else that maintains its value – gold is likely to be part of the mix. As a result many countries would favour the inclusion of gold in a currency basket that would make up of a new world currency based on Special Drawing Rights issued by the IMF. Although from 2009 The Daily Telegraph (UK) has an interesting article entitled Russia backs return to Gold Standard to solve financial crisis. It also has a video interview with Arkady Dvorkevich, the Kremlin’s chief economic adviser.