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A New Gold Standard in the Making

Wednesday, June 3, 2020

The US dollar has been the lodestar for international trade for decades. It’s hard to find a commodity that isn’t priced based on dollars, and investors from around the globe can’t help but turn their eyes to the value of the currency itself.

Where the US economy goes, the world economy must follow. But one thing that could be taking shape suggests a decoupling from the US, with the dollar being relegated to a less important status, as gold regains its place in international trade.

The gold standard as exemplified by the Bretton Woods system has been gone for almost half a century, but elevated prices in recent years could suggest an unofficial gold standard already in the works.

A price too great to bear 

When the Bretton Woods system was in full swing after 1944, the idea was that currencies were pegged to the US dollar, and the dollar itself was given a fixed price relative to gold. As a result, gold prices were effectively static and the value of a nation’s currency depended on how much gold they had in their reserves. Britain faced a number of painful devaluations in the pre-1971 period, forcing them to reduce gold reserves. One of the latest sales in 1999 was estimated to have cost the UK as much as £14 billion.

But as inflation mounted in the 1970s, the US severed that crucial tie with gold, allowing the dollar to become a fiat currency. This allowed its value to float freely, and gave policy makers more control over the amount of dollars swishing around the global economy. As the dollar and the pound fell lower and lower over time, gold has done its job as a safe haven, soaring in value.

In that sense, the gold standard never truly went away. For investors willing to place their money into buying an asset with a centuries-old reputation for being an intrinsic store of wealth, the last few years have been highly rewarding.

As the British economy has been hit by shock after shock, gold has mounted an impressive price rally, taking it from less than £200 per troy ounce in the late 1990s to as high as £1,400 per troy ounce by May 2020. This outpaces the performance of stocks and shares, as well as the bond market, and as we shall see, gold is ripe for greater gains in the coming years.

Nowhere left to turn but gold 

Gold is in a special situation, ripe for investment, as so many other asset classes look increasingly overvalued by some standards, or overcrowded at the very least. The stock market has tumbled into a bear market, meaning it lost over 20 per cent and its performance depends on how quickly the economy can recover from the COVID-19-induced lockdown recession.

Bonds have been a suitable alternative to shares, especially since the unravelling of the Dot Com and subprime bubbles. Interest rates have fallen to virtually zero per cent, with bond yields falling in tandem, sending bond prices to record highs. However, with yields now hitting sub-zero or negative rates, the prospect for gains is incredibly slim.

Gold, by comparison, carries no yield and makes gains purely by price action alone. Assuming that you can time an investment wisely, you can make an inflation-adjusted positive return over time, which is just as well, because gold often surges during times of economic turmoil as evidenced by recent market moves. It took gold just five years to double in value, from £700 to £1,400 per troy ounce. If such a trend were to continue, as a baseline scenario, you could sell an ounce of gold for as much as £2,800 by 2025.

It might just be time to consider joining a growing number of investors and buy gold today. Prices are already hitting new all-time highs in pound sterling terms, and a breakout in US dollar prices could prove decisive in marking the start of a new bull market in gold. As stocks and bonds sink into low returns and a lack of profit over time, why not consider buying gold today?

The Gold Bullion Company is pleased to announce it has been able to resume dispatch of gold bullion items, but please note that new orders will take between three to four days to deliver. For more information about investing in gold today, contact the Gold Bullion Company here.