Skip to main content Is A Return to The Gold Standard Possible?

March 08, 2022
Gold Bull Market

Article by Andrew Lane in

With current geopolitical issues, huge world debt, and inflation causing currency debasement across the globe, the possibilities of a return to the gold standard have never been more pertinent.

History of the Gold Standard

Dating back to Roman times, gold and silver were used as money and still are to this present day.

In the late 1870s, a stand-alone gold standard was adopted by several countries, including Germany, France, and the USA which set the trend. This enabled gold to be purchased in unlimited quantities at a fixed price in exchange for paper money.

The Gold standard then hit a tumultuous period during the first world war and following the Great Depression, and not a single country remained using the gold standard.
A few years later, the US had a different approach and instead set a new minimum price for gold. Pegging the price of gold to their currency provided the basis for an international gold standard after the second world war.

After a successful period of use, the more years that elapsed led to more problems around the availability of both currency and gold, and in 1971 diminishing gold reserves and a huge debt led to President Nixon “suspending” the convertibility of dollars into gold.

From this point and to the present day, the dollar became used more and more for international transactions, and even today, 40% of the world’s debt is in US dollars.

Russian Currency And Gold

Fast forward to the present day, and since Russia has been hit with sanctions, their currency has been destroyed, making all holders of the Ruble both international and domestic less wealthy. It is no secret that Russia has been accumulating gold and just two years ago announced that they are not reliant on the US dollar as their central bank reserves hold more Gold than US dollars.

It is rumored that over $600 Billion in Russia’s reserves is held abroad, which, following the sanctions, they now do not have access to. Their gold, however is on Russian soil. Never was the phrase “If you don’t hold it, you don’t own it” more true.

Russia may have two options with their gold wealth to prevent a complete collapse of their economy. They could back their currency with gold reserves (which admittedly comes with major implications in a rapidly debasing currency) or the wildcard play – they use their natural resources and introduce a system where gold is pegged to the oil price making their exports far more valuable.

Therefor every sale they make is transacted in gold instead of a near-worthless currency.

Oil Pegged to Gold?

At current rates, roughly 16 barrels of crude oil is equivalent to 1oz of gold. In 2021, Russia exported US $110 billion in Crude Oil. The conversion from US dollars to Roubles from the end of 2021 to the present day is not an attractive foreign exchange rate prospect.

Converting to gold would give Russia circa 55,000 oz at last year’s exports into a rising Gold price. This would shore up their economy and would also leave the West at their mercy. That is an attractive proposition for Russia.

Who else would stand to win on this? India for one who have been buying gold at a rate of knots and China too of course. Money Week still reports that China is estimated to have 30,000 Tonnes of Gold. Some say this is a conservative estimate. Gold is still seen as structurally necessary by the East. If Russia were to start this, others would have little option than to follow.

Disadvantages of a Gold Standard

The disadvantages of a Gold standard are that in times such as COVID showed us last year when the money printers went overtime, the additional gold required to back this cannot just be printed and would need to be legitimately sourced, which is far more time consuming and expensive than a printer.

There are arguments to and for at this point, depending on your views of MMT. Some would argue that the printing of money is a bad thing, and has unquestionable caused the rise in prices of just about everything today. Coming off a Gold standard has led to suppression of price discovery.

Others argue that printing money has been necessary to shore up the economy and save millions from poverty. That said, the lack of gold vs. available money caused the 1971 standard to be suspended, as debt levels rose far beyond the gold that backed it.

World's Debt Problem

Another critical element not to overlook is the world debt and what exactly will be done about it. The Bank of International Settlements (BIS) changing regulations allowing gold to become a Tier 1 asset in physical form only must have been done for a reason.

Is a revaluation of gold to much higher levels too obvious? Have China been astute to this and looking to back their digital yuan with their enormous Gold holdings? Could countries use a minimum price of gold to pay off spiraling debt?

Concluding Thoughts

The latest sanctions may have pushed near 3 billion people (assuming China and India buy into this) into trading in currencies other than the US dollar. If, and it is a big if, Russia were to peg gold to oil, then the price of gold would go through the roof overnight, and it would completely obliterate the paper derivatives market as the pursuit for physical gold would cause mayhem across the globe.

With its close relationship with gold, Silver would also assume the ascent north. It would also signify the end of the US dollar. Is that not what China, Russia and India all want who seem to be more prepared for this than any other nation? China already has a digital yuan. Could this be a huge own goal by the west?

Gold has a history comparable only to silver over thousands of years used as sound money. It is a tangible hard asset and doesn’t require power or the internet to own or trade. If it sits in your possession, then it has no counterparty risk. Could history be repeating itself, albeit with a Gold standard 2.0? It could .......

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