Friday, 19th May 2006 (1557 views)

The rising price of gold and falling confidence in the dollar has led to experts speculating that there could be a new gold standard on the horizon.

Peter Morici, professor at the University of Maryland School of Business and the former chief economist at the US International Trade Commission, believes that exchange-traded funds could indicate a new gold standard.

Professor Morici explains that the International Monetary Fund created a system of fixed currency exchange rates in 1944, whereby the dollar was fixed to gold and other currencies set to the dollar.

The convertibility of the dollar into gold was ended by President Nixon in 1972 and the yellow metal gradually became demonetarized. Many central banks sold off large portions of their gold and prosperity in the US made the dollar a better bet for storing value than gold.

However, huge budget deficits and other factors have led to a lack of confidence in the dollar and as investors pump money into gold, central banks will be urged to do the same.

Indeed, China's central bank was recently counselled to quadruple its gold reserves from 600 tonnes to 2,500 tonnes.

Professor Morici predicts that if the dollar continues its decline, "gold will become money again and national currencies will be money only if backed by gold".

 

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