Chatham House: Gold Standard Impractical But Gold Hedge Against Declining Values of Key Fiat Currencies

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Chatham House: Gold Standard Impractical But Gold Hedge Against Declining Values of Key Fiat Currencies

Gold’s London AM fix this morning was USD 1,774.75, EUR 1,321.48, and GBP 1,120.42 per ounce.

Yesterday's AM fix was USD 1,765.00, EUR 1,316.18, and GBP 1,113.28 per ounce.


Cross Currency Table – (Bloomberg)

Gold fell 0.3% in New York yesterday and closed at $1,766.80/oz. Gold gradually ticked higher in Asia rising to $1,777/oz prior to slight weakness in Europe which sees gold at $1,775/oz.

Gold’s slight gains come after two sessions of losses and may be due another massive ECB cash injection expected later this week and the weak dollar.

Today US consumer confidence figures hit the market at 15.00 GMT. A positive number should see gold weakness and a negative number should see safe haven buying.


Gold Spot $/oz 30 Days – (Bloomberg) 

Gold hit a 3 month high last week of $1,787.11 and appears to be consolidating above $1,750/oz. $1,800/oz is the key technical level which hasn’t broken yet, but we expect this will happen – possibly soon which could see gold quickly rise to $1,850/oz.

Central Bank Demand
The IMF managed to create much confusion yesterday by posting incorrect data regarding the Swedish central bank having bought nearly a $1 billion dollars worth of gold bullion or 18.3 tonnes.

The IMF subsequently confirmed they had made an error. But while all the focus was on the discrepancy between the Riksbank and the IMF, the more important development of continuing and significant central bank demand in January was lost.

Western central bank gold buying is likely to be seen in the coming months and years as western central banks realise the absolute folly of selling their gold reserves in recent years, including and especially the Bank of England, and begin to diversify their foreign exchange reserves by buying gold bullion again.

Silver’s Fundamentals
The gold-silver ratio has dropped to its lowest ratio in 4 months to just above 49, as silver has so far seen a 28% year to date rally versus gold’s 13% gain.  

Since 2003, we have said that the gold silver ratio will likely return to the geological gold silver ratio of around 15:1 due to the fact that a huge amount of silver has been used in industrial applications in the last 100 hundred years – making silver even more attractive than gold from a supply demand perspective.

Silver’s fundamentals remain even more compelling than gold’s. 

Chatham House: Gold Standard Impractical But Gold Hedge Against Declining Values of Key Fiat Currencies 
Gold’s use to back the value of the dollar would be impractical and there is little scope for the metal to play a more formal role in the international monetary system, the U.K.’s influential research institute Chatham House or the Royal Institute of International Affairs has said.

While a higher gold price may reflect a lack of confidence in key currencies and low returns on other assets, there’s no consistent correlation between bullion and economic variables that could be used to inform policy decision making, according to a task force that discussed possible roles for gold. 

The metal can be used to hedge against currency devaluation and other risks as part of a portfolio, but not on its own, it said.

“Reintroducing gold as an anchor would undoubtedly be impractical or even damaging, given bullion’s deflationary bias,” the task force, which held discussions over eight months, said in a report today. “Gold can serve as a hedge against declining values of key fiat currencies, and can also be useful for central banks looking to diversify their foreign reserves.”

While the gold standard may no longer exist, nations and international organizations still have 30,877 metric tons of bullion reserves, valued at about $1.77 trillion. 

The dollar has been the world’s reserve currency since the U.S. and allies agreed at the 1944 Bretton Woods conference to peg it to a rate of $35 per ounce of gold. It remained the most- traded legal tender after global currencies began freely floating in the early 1970s. The greenback dropped 12 percent against a basket of six major currencies since March 2009. The U.K. suspended the gold standard in 1931, Chatham House said.

“Greater discipline on financial markets might have been helpful in inhibiting the reckless banking and excessive debt accumulation of the past decade,” the task force said. “However, with the onset of the global crisis, had gold had a more formal role to play, the rigidity it imposes might also have been a handicap when a more flexible policy response was required.”

Including gold in the International Monetary Fund’s Special Drawing Rights system probably wouldn’t bring substantial benefits, and adding developing economies’ currencies to the basket would be more desirable, according to the task force. SDRs were created in 1969 and are an artificial currency that IMF members use to settle accounts with each other and can be converted into hard currencies.

Chatham House was founded in 1920 and is based in London. Members of the gold task force include Gerard Lyons, chief economist at Standard Chartered Plc, Meghnad Desai, professor emeritus of the London School of Economics and a member of Britain’s House of Lords, and Catherine Schenk, a professor of international economic history at the University of Glasgow.

“For gold to play a more formal role in the international monetary system, it would be imperative for it neither to hamper the system’s performance nor to create unacceptable constraints on national economic policies,” the task force said. 

Gold may “continue playing a significant role in the international monetary system, serving as a valuable hedge and safe haven, particularly in times when tail risks predominate.”

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OTHER NEWS
(Bloomberg) -- Sweden’s Riksbank Says Gold Reserves Unchanged After IMF Error
Sweden’s central bank said its gold reserves were unchanged in January after the International Monetary Fund reported earlier the nation had added bullion valued at about $974 million.

The country’s holdings are unchanged at 125.7 metric tons, Joanna Gerwin, acting head of communication at the Riksbank, said by phone today. Data released earlier on the IMF’s website showing that reserves increased by 18.3 tons were incorrect and will be withdrawn, the IMF said in an e-mailed statement.

Central banks are expanding reserves for the first time in a generation as holdings in exchange-traded products jumped to an all-time high. They added 439.7 tons last year, the most in almost five decades, and may buy a similar amount in 2012, the London-based World Gold Council estimates. Gold climbed the past 11 years and reached a record $1,921.15 an ounce in September.

“Central banks, mostly from emerging countries, will continue diversifying their currency reserves,” said Daniel Briesemann, an analyst at Commerzbank AG in Frankfurt. “This means supply will be reduced further, thus supporting prices. Central banks from the emerging countries are mainly underinvested in gold.”

Belarus raised its gold reserves by 5 tons to 42.6 tons in January, Kazakhstan increased them by 7.6 tons to 89.6 tons and Turkey boosted them by 4.1 tons to 199.4 tons, according to the IMF. Mexico reduced bullion reserves by 0.1 ton to 105.9 tons and Tajikistan cut them by 0.3 ton to 4.4 tons, the data show.

(Bloomberg) -- IMF Says Sweden’s Gold Reserves Incorrectly Reported on Website
The International Monetary Fund said it incorrectly reported Sweden’s gold reserves on its website due to a data entry error.

The nation’s reserves were unchanged in January, Alistair Thomson, a spokesman for the IMF, said today in an e-mail.

(Bloomberg) -- Gold Prices to Keep Climbing on ‘Trend Chasing,’ Nadler Says
Gold prices may keep climbing as investors are “trend chasing,” Jon Nadler, an analyst at Kitco Inc. in Montreal, said today in a radio interview on “Bloomberg Surveillance” with Tom Keene and Ken Prewitt.

Prices may climb to as high as $1,830 an ounce and have the potential to touch the record $1,923.70 reached in September, Nadler said.

Gold “is going up, because it’s going up,” Nadler said. “There’s absolutely lackluster physical demand. That worries me.” Still, investors may turn to the metal as “protection” amid economic turmoil, he said.

(Bloomberg) -- Gold-Silver Ratio Declines to Lowest Level Since November 1
The ratio of gold to silver dropped to the lowest level since Nov. 1, as investors sought to protect their wealth with holdings of a metal that may also benefit from economic growth. One ounce of gold bought as little as 49.8388 ounces of silver today. 

(Financial Times) -- NYSE Euronext launches gold and silver options 
NYSE Euronext's upstart US futures market has launched gold and silver options, the latest in a series of exchange moves to tap burgeoning  retail and hedge fund demand for metals trades.

SILVER 
Silver is trading at $35.55/oz, €26.46/oz and £22.44/oz. 

PLATINUM GROUP METALS 
Platinum is trading at $1,710.00/oz, palladium at $700.01/oz and rhodium at $1,475/oz. 

NEWS

(Bloomberg)
Gold Gains for First Time in Three Days as ETP Holdings Expand to Record

(FT)
NYSE Euronext launches gold and silver options

(BusinessWeek)
Gold's Use to Back Currency Is Impractical, Chatham House Says‎

(NDTV)
Gold inches up on weak dollar with eyes on ECB

(Business Week)
Commodity Investments May Increase by $40 Billion in 2012

COMMENTARY

(Chatham House)
Gold and the International Monetary System

(Zero Hedge)
The Post-2009 Northern & Western European Housing Bubble

(Zero Hedge)
Brodsky On Buffet On Gold

(Mish’s Global Economic Trend Analysis)
Capital Flight From Italy, Greece, Portugal Accelerates; Two Trillion Fantasy; Merkel Weaker Every Week; Crude and Geopolitical Risks

(True Economics)
Gurdgiev: Some interesting recent points on Gold

(Bloomberg)
Video:Europe to `Fall Apart' in 2012, Mauldin Says