Dollar down, gold may shine again

I: As gold prices touched record levels as a safe investment tool after the US creditrating downgrade, a quiet debate is gaining currency: With the dollar losing its sheen, is the world moving back to a “gold standard“ system -40 years after it was abolished? On August 15, 1971, US president Richard Nixon suspended the system of having a fixed convertibility rate between gold and the dollar.
In fact, a number of countries have increased the proportion of gold in their reserves during the last few years, triggering the debate among policy makers whether a return to “gold standard“ is realistically possible.
India's official gold holdings increased to 560 tonnes after the Reserve Bank of India purchased 200 tonnes of the yellow metal from the International Monetary Fund two years ago.
China, too, has strengthened its gold reserves from 600 tonne to1,050tonneinthelastfewyears, while Switzerland is discussing the pros and cons of the introduction of a parallel “fold franc“.
Even in the US, the state of Utah has made gold the legal tender, which may be adopted by 13 otherstatesinthatcountry.World Bank chief Robert Zoellick also feels that perhaps time has come to “consider employing gold as an international reference point“.
As stocks continue to fall on catching the global flu in the aftermath of the US credit-rating downgrade by rating agency Standard and Poor's (S&P), a quiet debate is gaining currency: is the world returning to the gold standard, 40 years after US President Richard Nixon ended the yellow metal-based exchange rate system? A number of countries have increased the proportion of gold in their reserves over the last few years.
India bought itself some glitter two Diwalis ago: the Reserve Bank of India (RBI) purchased 200 tonnes of gold from the International Monetary Fund (IMF).
The symbolism is inescapable in a country that worships the metal and for a country that pawned its gold to bolster its foreign exchange reserves not too long ago.
China has increased its gold holdings from 600 tonnes to 1,050 tonnes in the last few years. At present, China is the world's second largest gold consuming market after the US.
The State of Utah in the US has made gold a legal tender; 13 other states are reportedly considering similar moves, and the Swiss parliament is to hold hearings on a parallel “Gold Franc“.


World Bank chief Robert Zoellick has said he feels the time has perhaps come to “consider employing gold as an international reference point.“ Are these early signs of return of the “gold standard?“ “I think at the present moment, there is no clear alternative to the dollar as a reserve currency,“ C Rangarajan, chairman of Prime Minister's Economic Advisory Council (PMEAC) and former RBI governor told HT. “There will be no shift from the dollar to other currencies. In a past uncertain situation, the safe haven was the US and entities moved into dollar. But now since the dollar itself is under attack, gold becomes the most attractive asset.“
Experts said the current crisis may lead to the creation of a new international exchange rate system, based on the principles of the orthodox gold standard.
“What died on August 15, 1971 wasn't just the gold standard,“ said Dani Rodrik, Rafiq Hariri Professor of International Political Economy at the John F. Kennedy School of Government, Harvard University and author of the recently-released The Globalisation Paradox.
“It was a regime that left significant room for domestic monetary and fiscal policy management underneath a thin veneer of international disciplines and multilateral roles,“ Rodrik told Hindustan Times.