Gold Gaining Favor As Republicans Support A Return To The Gold Standard (GLD, IAU, PHYS, UGL, PHYS)
Diane Alter: Five years of liberal monetary policy have made the rarely considered notion of a return to the gold standard a genuine issue on the Republican platform.
The Republican Party is set to announce a “gold commission” to its official policy platform in Tampa Bay this week. The move will mark the first time in three decades that the gold standard has returned to mainstream U.S. politics.
A committee spokeswoman confirmed to CNNMoney that the new proposal to support “gold as money” will be officially decided upon at the RNC Convention.
“Now, three decades later, as we face the task of cleaning up the wreckage of the current Administration’s policies, we propose a similar commission to investigate possible ways to set a fixed value for the dollar,” reads the proposal.
Republicans’ Gold Standard Proposal: A Nod to Ron Paul?
The draft calls for an audit of Federal Reserve monetary policy and a commission to explore restoring the connection between the U.S. dollar and gold.
Many credit the eyebrow-raising move to Texas Rep. Ron Paul, a longshot GOP presidential hopeful who has been a staunch advocate of returning to the gold standard. Paul, the token underdog in the race, does have a stream of loyal supporters who would support such a move.
But Marsha Blackburn, a Republican congresswoman from Tennessee and co-chair of the committee, shrugs off any connection to Paul and his coveted delegates.
“These were adopted because they are things that Republicans agree on. The House recently passed a bill on this, and this is something that we think needs to be done,” Blackburn told the Financial Times.
Advocates say that under a gold standard, the looming threat of inflation would disappear, as would price distortions, economic miscalculations and rogue investments. Plus, banks would return to their original functions and serve as money warehouses and lenders.
The gold standard return would squash fears over a declining U.S. dollar value as the Fed continues its loose monetary policy.
Sean Fieler, chairman of the conservative group the American Principles Project, told the FT, “There is a growing recognition within the Republican Party and in America more generally that we’re not going to be able to print our way to prosperity.”
Practical Issues of a Return to the Gold Standard
But such a move poses several practical issues.
- Bullion prices would likely be propelled to $10,000 an ounce as 262 million ounces of gold held by the U.S. government would be needed to back the current U.S. monetary base of roughly $2.56 trillion, Capital Economics reported.
- An abrupt appreciation in the dollar’s value would greatly damage the international trade balance.
- Many reforms would have to be implemented if we were to return to the gold standard. The government would have to balance its budget and states would have to abandon welfare programs
- Revisiting the gold standard and a fixed money supply would take away the central bank’s prowess to counterbalance demand shocks by tweaking interest rates. The result could be a more unstable economy and higher average unemployment over time.
- Finally, gold is volatile. The yellow metal has soared some 500% in dollar terms over the last 10 years.
Fed Chief Ben Bernanke has frequently voiced his apprehensions of a gold standard return. He has cited research showing how the inflexible restraints of the gold standard worsened the Great Depression.
In a lecture earlier this year, Bernanke pointed out that there simply isn’t enough gold in the world to support such a system.
“To have a gold standard, you have to go to South Africa or someplace and dig up tons of gold and move it to New York and put it in the basement of the Federal Reserve Bank of New York and that a lot of effort and work,” stressed Bernanke.
Gold Gaining Favor
Without or without a return to the gold standard, the yellow metal is again catching investors’ attention after a price slump this year.
Since the selloff from its September 2011 peak, gold’s fundamentals have only grown stronger.
Central banks worldwide are adding to their gold stores – which a return to the gold standard would encourage. The World Gold Council reported that after 20 years of net sales, central banks have become net buyers since 2010, and official sector purchases are on track to reach a record high this year.
While the new commission could only make recommendations, American Principles Project Chairman Fieler said its primary role would be in educating politicians and the public about the benefits of restoring the link between the dollar and gold.
“We’re not going to go from a standing start to the gold standard,” he noted.
Gold prices were up Monday with gold for December delivery closing up $2.70, or 0.2%, to $1,675.60 an ounce on the Comex division of the New York Mercantile Exchange.
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