Return to an old standard?
Faisal Islam
Sunday February 9, 2003
The Observer
The current ascent of gold has been driven by geopolitical worries. But this year will see a whole new source of demand open up, and a partial return to the Gold Standard. An audacious plan, pushed by Malaysia, seeks to reassert the role of the precious metal in the international trading system through the minting of 'gold dinars'.
For Malaysia, and its Prime Minister, Mahathir Mohamad, below, it marks a strike back, of sorts, against the inequities of the global financial system. Malaysia, despite having a prudent approach to economics, was unceremoniously dumped by world markets. Mahathir eschewed the International Monetary Fund's medicine and instituted capital controls and a currency peg.
Most world trade is settled using international currencies, predominantly the dollar, followed by the pound, yen and euro. Malaysia says that the Middle Eastern and Asian countries are acutely vulnerable to the exchange rate with these major currencies. 'The gold dinar could be an important facilitating mechanism to help the smaller countries of the world move away from an inherently unstable and ultimately unjust global monetary system,' Mahathir told a conference recently.
The scheme, which is set to be launched in the next few months, has been coolly received by some central bankers, who point out that the gold price has its own supply and demand dynamics. But at least part of the motivation for this mainly Muslim scheme is political - to provide an alternative to use of the US dollar. Mahathir believes that the scheme will provide fertile conditions for stronger economic development in the underperforming Muslim world.
But the dollar's current descent and the prospect of endless growing budget deficits has served up an economic rationale for an alternative unit of account. Morocco, Bahrain, Iran and Saudi Arabia have entered bilateral discussions with Malaysia. There is a real possibility that the oil markets could propel usage of the new coin. And there is a British connection too.
The Bank of England holds the gold reserves of many Middle Eastern nations. Member countries would settle dinar trade balances every quarter by transferring gold held at the Bank.
But this move is only part of a generally more positive attitude towards gold emerging in the East. The Bank of China has increased its reserves by 205 tonnes over the past two years. Mongolia, the Philippines and Kazakhstan have also upped gold reserves.
Some analysts believe new anti-money laundering laws have encouraged investors to shift assets from dollars into gold.
But there may be a simpler explanation. In this time of uncertainty, people are turning to the one asset that has symbolised a globally recognised store of wealth since the Pharoahs.
The three decades since President Nixon took the dollar off the Gold Standard is still the anomaly in three millennia of monetary history.
Guardian Unlimited © Guardian Newspapers Limited 2003
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