The question many investors are asking, will gold price move up further? I have not written about economic issues for a long time, but i think the probability of gold moving up higher is quite high, as long as US dollar is trending low.
Many economists have voiced out against the present floating system of exchange rate and many have also advocated going back to the gold standard.
I will post an excellent article from the Forbes magazine here about this.
Time To Reform The International Monetary System
Charles W Kadlec
Restoring gold’s role in currency markets should be at the top of the G-20’s agenda.
A funny thing happened on the way to the G-20 meeting in Seoul, South Korea, this week: The world’s growing dissatisfaction with U.S. policy toward the dollar has derailed the Obama administration’s proposal to elevate trade balances as the reference point for currency values. Instead of asserting America’s traditional leadership role, President Barack Obama is confronting calls to replace the U.S.–and the dollar–as the center of the international monetary system.
The no-confidence vote led by China, Japan and Germany and supported by Brazil is the direct consequence of the Obama administration’s embrace of a Nixonian, weak-dollar policy as it struggles to resuscitate the U.S. economy. Blaming the Chinese renminbi-dollar exchange rate for high U.S. unemployment is eerily similar to the claims made by President Richard Nixon when, in 1971, he promised that suspending dollar/gold convertibility and an 8.5% devaluation of the dollar would make American labor more competitive.
Like President Nixon, Treasury Secretary Timothy Geithner claims that the U.S. supports a strong dollar. But just as in the early 1970s, the U.S. is unabashedly following an easy-money policy at home while letting the dollar fall on international currency markets.
With the world’s monetary system tethered to the dollar, this mix of U.S. policies led to the great, global inflation of the 1970s. No wonder the scramble is on to find a permanent replacement for the dollar.
The surprising answer may turn out to be a gold standard designed to reflect the realities of a 21st-century global economy.
World Bank President Robert Zoellick, writing in last Sunday’s Financial Times, broke a sound barrier among the leadership of the Group of Eight industrial countries with regards to restoring gold to a central role in a new, international monetary system. Such a system, he wrote, “is likely to need to involve the dollar, the euro, the yen, the pound and the renminbi. … The system should also consider employing gold as an international reference point of market expectations about inflation, deflation and future currency values. Although textbooks may view gold as the old money, markets are using gold as an alternative monetary asset today.”
Zoellick’s proposal should be considered for several reasons.
First, the leading alternatives to gold would represent a grand new experiment in operating the international monetary system, introducing yet more uncertainty into a developed world struggling to recover from financial crisis, and a developing world attempting to cope with an unstable dollar and hot money flows.
No single currency has the credibility or liquidity to displace the dollar. The sovereign debt crisis among E.U. countries limits the euro’s role, while lack of infrastructure and liquidity–and political risks–rule out the renminbi. And the central banks of Britain and Japan have not shown themselves to be particularly skillful in providing a stable currency within their own economies.
A basket of currencies, codified in an elevated role for the IMF’s Special Drawing Rights as an international medium of exchange, would face an extraordinary number of technical and pragmatic obstacles. Who would be empowered to decide the appropriate quantity of SDRs in the world? What agency would conduct the equivalent of open market operations? Empowering a new panel of men and women to manage the world’s currency system would raise more questions than it would answer, potentially triggering yet another currency crisis.
Patching up the current system of floating exchange rates will not provide a solution. Floating exchange rates have simply failed to fulfill their promise of addressing global trade imbalances. For example, since 1967 the dollar has been devalued by 72% against the euro and 75% against the yen. Yet net exports have gone from a modest surplus in 1967 to a $390 billion deficit–equivalent to 2.7% of GDP–in 2009. Given this history, the claim that greater currency flexibility can be used to reduce trade imbalances, or that if the Chinese would allow the dollar to fall by 20% or 40% against the renminbi the U.S. economy would be stronger and the unemployment rate lower, is simply not credible.
Finally, the longer the floating exchange rate system has been around, the more frequent and more intense the international crises. The 1970s were marked by oil shocks of 1973 and 1979, the 1980s by the Latin American debt crisis and the stock market crash of 1987, the 1990s by the Mexican peso crisis and the Asian currency crisis, and now the 2008 international financial crisis, the European sovereign debt crisis and the threat of a currency war.
During the Bretton Woods era of the 1950s and 1960s, the dollar was a reliable means of exchange. It delivered stable prices, facilitated the post World War II economic “miracles” of Western Europe and Japan, and helped a 20-year period of 4% growth in the U.S. The different results between that era, in which the dollar was linked to gold, and the growing uncertainty and instability of the past 40 years, show it was gold, not the dollar, that provided the vital ingredient for a growing world economy, price stability and modest trade imbalances. Restoring gold’s role as the key reference point therefore should be at the top of the G-20’s agenda for reforming the international monetary system.