New Gold Standard: Orderly or Chaotic? (by Jim Rickards)

  • Many observers assume the 1944 Bretton Woods conference was the moment the U.S. dollar replaced sterling as the world’s leading reserve currency. But, that replacement of sterling by the dollar as the world’s leading reserve currency was a process that took 30 years, from 1914 to 1944. The period from 1919–1939 was really one in which the world had two major reserve currencies — dollars and sterling — operating side by side. Finally, in 1939, England suspended gold shipments in order to fight the Second World War and the role of sterling as a reliable store of value was greatly diminished. The 1944 Bretton Woods conference was merely recognition of a process of dollar reserve dominance that had started in 1914.
  • Like the pound sterling, slippage in the dollar’s role as the leading global reserve currency is not necessarily something that would happen overnight, but is more likely to be a slow, steady process. The change is often so gradual that few notice it until it can no longer be denied.
  • A major creditor nation is emerging to challenge the U.S. today just as the U.S. emerged to challenge the U.K. in 1914. That power is China. The U.S. had massive gold inflows from 1914-1944. China has been experiencing massive gold inflows in recent years. China has acquired thousands of metric tonnes since without reporting these acquisitions to the IMF or World Gold Council. Based on available data on imports and the output of Chinese mines, actual Chinese government and private gold holdings are likely much higher than official listings. It’s hard to pinpoint because China operates through secret channels and does not officially report its gold holdings except at rare intervals.
  • China’s gold acquisition is not the result of a formal gold standard, but has been happening by stealth acquisitions on the market. They’ve used intelligence and military assets, covert operations and market manipulation. But the result is the same. Gold’s been flowing to China in recent years, just as gold flowed to the U.S. before Bretton Woods.
  • China is not alone in its efforts to achieve creditor status and to acquire gold. Russia has greatly increased its gold reserves over the past several years and has little external debt. The move to accumulate gold in Russia is no secret, and as Putin advisor Sergey Glazyev has said, “The ruble is the most gold-backed currency in the world.”
  • The dollar collapse has already begun and the need for a new monetary order is now emerging. I believe it will involve gold. The question is whether it will be an orderly process resulting from a new monetary conference, or a chaotic one. Unfortunately, it’ll probably be chaotic.