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If The Gold Standard Returns Gold Price May Reach $10,000 Or More

by Michael Locklear

August 28, 2012 – Republican politicians are courting the gold lovers with their recent announcement that they support a return to the gold standard. We left the standard some 40 years ago when then President Nixon took bold and controversial steps to stabilize the US economy reeling from high inflation and escalating costs from the Vietnam War.

Facing demands from nation creditors that America pay its debts in 1971, Nixon and his advisers decided to break with the long-held tradition of backing the US dollar with gold. This was in response to the fact that there was little faith that the United States could effectively manage its budget and corresponding trade deficits.

In the second quarter of 1971, western Germany stepped up first to lead the way out of the Bretton Woods System . This system represented the first effort on the part of leading industrial nations to establish a stable management program for monetary interests of several sovereign countries. The agreement came in July, 1944 at the United Nations monetary and financial conference, which met at the Mount Washington Hotel located in Bretton Woods, New Hampshire. When this meeting took place World War II was still going on and the economies of Europe and Britain were in turmoil. After three weeks of intense debate the 730 representatives of the 44 World War II Allied countries reached the historic agreement to establish a system of regulations, methods and structures to manage the multinational financial system. The outgrowth of this agreement brought into existence organizations such as the international monetary fund( IMF) and the International Bank for Reconstruction and Development(IBRD) which would become the basis of the World Bank. In 1945 the new system had received enough support to begin its operations. This new agreement in effect united the signers in a relationship that tied their currencies to the US dollar.

28 years later following moves by West Germany in May and Switzerland in early August to leave the gold standard, the US administration followed suit. At the time the American public was clamoring for some action from the government to stabilize the US economy. Nixon’s move to wage and price controls, surcharges on imports and leaving the gold standard was met with great approval from the general public and the actions from there on were referred to as the “Nixon Shock”.

Now after 40 years the party of Nixon is baiting the gold bulls and the tea party with promises that they will return us to a system that is again tied to gold. The question is will it happen and could it work?

Congressman Ron Paul, Republican from Texas, a tea party darling said he went into politics because of Nixon’s 1971 decision to leave gold behind. Utah passed a law in 2011, that allows the use of gold as a legal tender, with strong tea party support. As these positions seem to be growing, Ron Paul and the tea party may have a small victory now the leaders of the Republican Party promised that today they will add the return to the gold standard to their 2012 platform at the Republican Party convention in Tampa, Florida.

All in all this move may face an early death as it has very little support from mainstream voters and monetary system experts. Returning to the gold standard could be a disaster for both global trade and economic growth.

Just to shore up the US monetary system by the gold currently held in reserve by United States government could mean that the price of gold would have to rise to around $10,000 per ounce. The move would more than likely throw the dollar into a devastating downward spiral, which after all is why Nixon and other leaders moved to leave gold in the first place.

Since the default reserve currency for the world is the dollar and the foundation of the international trade system is based on the dollar a move to the gold standard would in effect destroy the dollar’s credibility. Capital economics experts report that “it is hard to conceive of the circumstances under which no one would want to hold any dollars”.

The world Gold Council, which represents the gold mining industry and is charged with promoting the various uses of gold, agrees that due to the unlikelihood of agreements among nations and the questionable ability of gold stocks to sustainable levels needed to support high gold prices that any near-term move to the new gold standard is not in our future.

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