Gold-backed dollar talk is cheap

Talk of the US returning to a gold standard — the backing of the value of dollars with gold — is hitting the mainstream.

Since 1971 when President Nixon took the US entirely off the gold standard, the dollar has been backed ostensibly by crude oil since oil could only be traded in dollars.

That oil/dollar connection is backed by the military, but that’s another story.

Well, now there is growing talk of bringing back the gold standard in some form, to reign in the value of the greenback.

But not all the talk is seriously taken.

“The fringe has become the mainstream,” Jesse Hurwitz, a U.S. economist at Barclays Capital in New York told Bloomberg.

He sees the gold standard as a bad idea but “something we’ll increasingly talk about.”

With gold holding steady in the $1,275-$1,300 range for the past month or so, it appears to have some backers to the idea.

But on Monday, the precious metal saw a $15 drop in a matter of seconds as a large seller dumped more than 5K contracts.

China’s central government has been a big buyer in the market and has also opened its own trading operation to combat price fixing of the West in both London and Chicago.

Deutsche Bank last month admitted to rigging the spot gold price and is working with regulators to finger other banks in on the rigging.

Now to be clear any peg of gold to the dollar would send both gold and silver soaring to all-time price highs.

Based on a 10% backing of gold to the dollar would have the precious metal trading at $5K or slightly more.

So don’t look for that to happen anytime in the near future, but do look for gold to move higher just on the thought that dollar devaluation — whether through inflation (highly unlikely) or currency weakness (more likely) — will provide a good hedge for wealth preservation.

Dollar weakness equals higher gold prices, with silver moving up only less so on a percentage basis.

 

 

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