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COVID-19: The Beginning of Gold Standard 2.0?

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The COVID-19 pandemic has highlighted the lengths policy makers are willing to go to in order to ensure that economic growth is preserved. Measures such as quantitative easing (QE), which have not been seen since the last global financial crisis, have been used once again as part of central banks’ toolkits.

These measures make sense, when you consider how low interest rates actually are. With the Bank of England’s base rate sitting at 0.1 per cent, there’s virtually no room left for future rate cuts, so policy makers must be creative in stimulating growth from now on. What makes QE so important as a policy tool is its ability to weaken the pound, and this could do much to spur a great price rally in gold in the coming months.

Could this be the start of a new bull market in gold, or even the dawn of a new gold standard altogether?

Money printing accelerates

Whether it’s the BoE, the Fed or the ECB, some of the world’s largest central banks are implementing QE. In response to the market turbulence caused by COVID-19, the BoE announced a new round of QE worth £200 billion, which will be used to purchase government bonds. The aim is to keep long-term interest rates low and help stimulate growth in the macroeconomy.

As a basic principle, if supply of a given currency or asset increases, the unit value of said currency or asset usually decreases. Unless demand is adequate to pick up additional units of currency, its value is highly likely to fall, and it is more than probable that the value of the pound is under intense downward pressure as a result of the BoE’s new round of monetary stimuli.

Gold traditionally benefits immensely during times of weakness in sterling. One has to think back only to the great devaluation of 1976, when the IMF had to provide the UK with a bailout loan, or the crash in the pound in 2008 and again in 2016. All of these devaluation episodes had a tremendous impact on the price of gold, pushing it to new all-time highs each time. If history is any guide, a weak pound could send gold prices to even greater heights in 2020.

Dawn of a new gold standard?

The 1970s marked the apparent death of the post-war gold standard under the Bretton Woods system. Its collapse ushered in a half-century of currency debasement and high inflation, allowing gold prices to rise exponentially on more than one occasion. Although the US and many other leading economies use a system of fiat currency to trade with other nations, something of an unofficial gold standard could be forming before our very eyes. The UK famously held significant gold reserves for many years, but the 1999 sale of reserves, during a time now referred to as Brown’s Bottom, saw billions of pounds’ worth of gold sold off by the UK Government, weakening its hand, just before a significant bull market for gold.

Countries such as the Russian Federation have observed such actions carefully, and have been quietly accumulating gold reserves over recent years, all the while selling off holdings in US treasuries, limiting exposure to the US in the process. This apparent de-dollarisation is just one step in a long journey away from the US dollar as a reserve currency in the eyes of certain groups. If the current crisis abates, Russia will benefit from a sizeable emergency reserve of valuable gold to weather future storms.

If the current turmoil proves to be a turning point away from American economic dominance, countries with healthy reserves of gold such as Russia could become as major players as they were historically. Reuters reported that the Central Bank of Russia was recently ordered to resume buying up gold, meaning that they now possess gold reserves worth up to $120 billion, weighing up to 73.6 million troy ounces.

Want to position yourself so your portfolio is ready in the event of a significant price rally for gold? The Gold Bullion Company has a wide range of suitable investments for those wishing to buy gold. Call us on 01902 623 259 or contact us here, to learn more about the benefits of investing in precious metals during a time of unprecedented uncertainty.

Article Last Updated: Friday, April 24, 2020