Could Brexit Lead to a Return of the Gold Standard?

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Kal Kotecha PhD
On June 16th I wrote an article titled: Don’t be Fooled by Gold’s Rise

Since then a lot has happened in the markets including Brexit which has resulted in the price of gold rising higher and sustaining. Even former Federal Reserve Chairman believes in the return of the gold standard. As written in Market Slant: After the Brexit referendum, Alan Greenspan, former Federal Reserve Chairman, says this is the worst period since being in public service. He says that a “terrible mistake” has been made by holding a referendum, which has led to a “terrible outcome in all respects.” He believes that Northern Ireland and Scotland will probably head in the same direction and seek independence from the European Union. As for the financial troubles, he warns that a debt crisis will be inevitable and blames leaders for failing to “restrain entitlement spending.” He goes on to say that he “would not be surprised to see the next unexpected move to be on the inflation side.” Hyperinflation, Greenspan says, is coming and we will not know about it until it happens. “If you look at human history,” he says, “there are times where we thought that there was no inflation and everything was going fine… The oil prices have had a terrific impact on global inflation and would not be surprised to see the next unexpected move to be on the inflation side. You don’t have it until it happens.” Greenspan’s simple solution to economic struggles: return to the gold standard. He notes that the economy performed successfully under the gold standard, even before the Federal Reserve was created.

“Now if we went back on the gold standard and we adhered to the actual structure of the gold standard as it exists let’s say, prior to 1913, we’d be fine. Remember that the period 1870 to 1913 was one of the most aggressive periods economically that we’ve had in the United States, and that was a golden period of the gold standard.”

One positive note that he added about Brexit: “Luckily, the UK was not part of the monetary union or else it would have been game over.” Article – Greenspan Urges Return Gold Standard

If Greenspan believes that returning to the gold standard will help save the U.S. economy from the upcoming economic collapse, other countries and jurisdictions must be taking action towards the enactment of a gold standard.

According to A Critique of Crisis Theory: A reader asks, what is the significance of the reported moves by the central banks of China, India, Russia and perhaps other countries to increase their gold reserves? Why are China, India and Russia moving to increase the percentage of their reserves held in gold as opposed to foreign currencies such the dollar and euro? Could the moves of these countries to increase their gold reserves point to a possible revival of the international gold standard in some form? The answer to the first question is that these countries are nervous about the future of all paper currencies. During the first phase of the crisis of 2007-09, the dollar fell not only against gold but also against the euro. Naturally, countries increased the percentage of euros in their reserves, since it seemed like a good bet against the falling dollar.  Article – A New Gold Standard/

According to Bloomberg: A move to a gold standard in China would require an exchange rate of as much as $64,000 an ounce, 50 times bullion’s price now, according to Bloomberg Intelligence. A traditional gold standard, in which the precious metal backs the currency, is basically impossible at current prices due to the amount of metal needed and there’s no evidence the sixth-biggest bullion holder will adopt one, Bloomberg Intelligence said in reports published Wednesday. Any attempt probably would involve new technologies and depend on the ratio of what is backed, it said. Chinese policy makers are trying to establish the yuan as a reserve currency, and backing it with gold would help attract foreign capital inflows, the Bloomberg research unit wrote. Theoretically, to create an exchange rate of one ounce of gold for every $64,000, the country would need about 10,000 metric tons of the metal, they estimated. That’s nine times the nation’s official holdings and about 6 percent of all the bullion ever mined globally. Article – Chinese Gold Standard Would Need A Rate 50 Times Bullion’s Price

Where would you rather park your money, in a currency backed by nothing or backed by gold? That being said, gold is NOT going to $64,000 US per ounce so does that mean China cannot back the Yuan with gold? It can by utilizing something more creative – such as a percentage of their currency backed by gold, for example 10% to start. That alone would result in gold trading between $5000-$10000 US per ounce – not out of the question. A lot of pundits claim gold is going to reach $10000 US per ounce but there has to be some reasoning other than picking a number out of thin air and China backing their currency with gold offers a good reason.

If China is storing gold for the purpose of backing its currency, what about India? Russia? Saudi Arabia? As well, soon the shorts will cover, Asian demand for gold will continue to rise and the general public will invest like herds but I believe the real winners will be investors who invest now in the junior mining sector. My long term readers have read that I was urging to accumulate during the bottom of the cycle last summer…but it is not too late. I believe we are in the 3rd inning of an extra innings game.

Happy Investing!

Kal Kotecha PhD

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