Nixon Nixed the Gold Standard, But Metal Still Precious
It may be forty years since President Richard Nixon dumped the gold standard, but the precious metal has never been so popular.
Gold continued to soar to record levels this week as investors fled to the safe haven amid a volatile stock market and worsening sentiment about the global economy.
The price of gold has more than doubled since the recession began in late 2007 and surged 19% since the beginning of June as U.S. politicians grappled with the debt ceiling, leading S&P to snatch the country's triple-A rating for the first time in history.
Gold hit another high on Friday.
The surging demand reflects investor fears over the demise of the dollar and other fiat currencies and, to a lesser extent, nostalgia for the gold standard, according to Jon Nadler, senior analyst of Kitco Bullion Dealers Montreal.
It highlights once again that in times of uncertainty investors look for the stability (of gold), something with actual intrinsic value, said Darin Newsom, a DTN senior analyst.
The record price in gold comes, somewhat ironically, during the week of the 40th anniversary of Nixon killing the gold standard, a move that detached the dollar from the precious metal, allowing the greenback to become the world's reserve currency -- a crucial role it maintains today. For now, at least.
The decision to squash the system in August 1971 represented a way to offset devalued money and rising inflation that ultimately led to a series of recessions riddled with growing unemployment and unbearably high oil prices -- a story of financial turmoil that is all too familiar.
Yet, seven presidents later, as the U.S. staggers under the weight of trillions of dollars of debt, investors are once again rushing to gold, perhaps craving the stability that once came with gold-backed dollars.
Reflecting confidence in golds upward trend, J.P. Morgan (NYSE:JPM) hiked its prediction for the metal by 39% a week ago, to $2,500 a troy ounce by the end of the year. The Wall Street bank had previously forecast just $1,800.
Goldman Sachs (NYSE:GS), meanwhile, pointed to worsening views by economists of the U.S. sliding back into a recession as reasons why it raised its forecast.
Morgan Stanley (NYSE:MS), UBS (NYSE:UBS) and Barclays Capital (NYSE:BCS), among others, also upped their price prediction on gold recently, while producers such as Randgold Resources (NASDAQ:GOLD), Barrick Gold (NYSE:ABX), and AngoGold Ashanti (NYSE:AU) continued to push the metal on potential buyers.
Today, more euro zone worries and economic worries are pulling investors from stocks to fixed income and gold, said George Gero, vice president at RBC Global Futures.
Gero sees open interest, an indicator of overall market and fund trading activity, in COMEX, rising until at least December 2013, which he said is a sign investors are planning on sticking around until at least the end of the year.
To take advantage of the current trend, Nadler suggests portfolios be comprised of 6% to 10% gold, with the intention of holding onto it for the long-term as a savings mechanism. If faster yielding profits are more desirable, the analysts advised investors try platinum, palladium or silver instead.
Gold is benefiting from the short-term trend followers, as well, according to Gero, as open interest, volume and moving averages continue to soar and point to more record prices.
Even central banks, many that for years dumped commodity assets, are becoming primary buyers of gold. South Korea, which is the worlds seventh biggest foreign-exchange reserve holder, recently bought 25 tons of gold, a 17-fold increase in its reserves.
Thailand has scooped up an additional 15.5% in gold over the last two months, bringing total reserves to about 4.07 million ounces, and India has bought 200 tons. Russia also jumped on the buying bandwagon this year, and Venezuelan President Hugo Chavez announced intentions on Wednesday to nationalize the gold sector to build the country's reserves.
Russia and the other central banks dont necessarily need the gold, Gero said, rather, they are trying to build reserves and signal to the world they are interested in gold being another currency for stability in their currency.
In some ways, the market is already treating gold like a currency because of its liquidity, portability and lack of political allegiance, according to Gero, and while central banks arent calling for the gold standard in the traditional form, they are relying on it as a default-free insurance of sorts.
Many holders of currencies that face loss of purchasing power buy gold now as an additional hedge as a lasting store of value, Gero said.
Gold Standard = 'Instant Global Contraction'
Criticism over Nixons decision to end the gold standard has never wavered among fiat loathers; however, a return to the traditional policy is nearly impossible with so much paper money in circulation and a limited bullion supply, according to Nadler.
Global growth cannot rely on the current supply, he said, noting anything similar to the Bretton Woods monetary policy would lead to instant global contraction of huge proportions.
Unless we are ready to accept global economic growth levels of the Middle Ages, we cannot peg global growth to the supply of bullion, he said.
After all, times were not as easy as they seemed during the short 60-plus years the U.S. operated under the gold standard, Nadler said. The economy contracted at least two dozen times, including two vicious depressions, and floundered under deflation.
The creation of the Federal Reserve, which came after the demise of the gold standard, led to better managed money and a stronger cycle of liquidity, according to Nadler. It helped shield a crisis that could have been far worse, one that he said todays world would be ill prepared to cope with.
Its nice that people remember [the Nixon Shock], but a full on return to that type of nirvana in terms of fiat policy loathers is no way to get back to classical standard by any stretch, Nadler said.
There are plenty of fiat currencies out there that are striving without any type of gold in the standard, he said.