Quantitative easing revives gold’s reserve asset status

GOLD lost its central role in the world monetary system on Aug 15, 1971, when US President Richard Nixon announced the ending of the gold exchange system: America would settle its deficits in dollars, not in bullion.

Half a century later, gold has crept back as a major force in world money. One important reason is quantitative easing (QE). Central banks acquired large volumes of government bonds as a device to pour liquidity into markets shattered by catastrophic falls. But now that inflation has re-emerged much more strongly than anticipated, the bonds themselves have fallen significantly in value. This has exposed central banks to large balance sheet losses. This may not be an economic problem (because central banks can prosper despite having negative equity) but may cause them political headaches.

After Nixon’s action, individual countries were able in theory to exert national monetary sovereignty. In practice, however, market forces determined monetary policy and currency values. Gold was no longer the basis of the monetary system, yet its longevity as a basis of monetary circuit around the globe and through history made it still a desirable reserve asset. The market price of gold became perfectly “indexed”. It maintained its real value by adjusting its nominal value in line with inflation over the next 50 years.