Gold grabs limelight as G-20 tackles dollar’s fall

Published: 2010/11/11 06:28:14 AM

GOLD is taking centre stage as the Group of 20 (G-20) two-day summit opens in South Korea today, with world leaders looking to the metal to underpin a new consensus on the global economy to avert a currency war and a damaging retreat into trade protectionism.

The meeting takes place against a backdrop of criticism of the US Federal Reserve’s $600bn quantitative easing (QE2) programme, which critics say has overinflated the currencies of emerging-market countries and compromised the competitiveness of their exports.

The US, fending off criticism of QE2, is also expected to continue to pursue its feud with China over its currency and its trade surplus, which was yesterday reported to be a mammoth $27,1bn last month, up from $16,9bn.

Although China has defended its yuan policies, it lifted the required reserve ratio for all deposit-taking institutions yesterday, meaning its biggest banks are setting aside a record 18% in reserves, BNP Paribas said.

Banking shares in China fell 2% after the increase, which could force lenders to put a total of about $ $27bn on deposit with the central bank, preventing them from extending it as credit.

Concern over the fate of the dollar has pushed the search for a new global consensus centre stage, turning a spotlight on gold that the metal has not enjoyed since the end of the gold standard in 1971 and its replacement by a system of floating currencies.

Yesterday, World Bank president Robert Zoellick, who first mooted a return to the gold standard in an interview with the Financial Times (FT) at the weekend, again stated that the global economy is moving towards a new monetary system with gold emerging as a preferred alternative to existing assets.

“There’s uncertainty about the future of the international monetary system,” he told a news conference in Singapore.

“As I said, whether people wish to acknowledge it or not, we are moving towards a Bretton Woods 3,” he said, referring to a possible agreement to replace the current system of floating currencies.

He also tried to ease concerns over the possibility of a global “currency war” but warned of growing protectionism if tensions over exchange rates were allowed to continue to fester.

Mr Zoellick stressed his FT article was not necessarily a call for a return to the gold standard. “What I tried to outline in the piece was that I don’t believe that you can return to a fixed exchange rate system, and therefore I don’t believe you can return to a gold standard,” Mr Zoellick said.

“But then the question is if you’ve got multiple reserve currencies, how will the international system co-operate?”

He said governments had to recognise the changes taking place in the global monetary system and take the necessary steps to adjust to a new regime.

“These things are happening…. So in my view, it’s better for the key governments involved to recognise it and start to figure out how do they want to change the rules and norms in the international system.”

Gold has become a favourite choice for investors seeking higher yields, a safe haven from volatile foreign exchange movements and uncertainties surrounding the global economy, he said.

“It’s also the case that gold is now being viewed as an alternative monetary asset.

“Gold has become a reference point because holders of money see weak or uncertain growth prospects in all currencies other than the renminbi (yuan), and the renminbi is not free for exchange. So in relative terms, gold is appealing to people who ask ‘where should I put my money?’…. it’s a hedge on uncertainty.”

He said the dollar will remain dominant but “people will look at alternative investment sources”.

Gold struck a record high yesterday in London, a day after it broke the 1400/oz barrier.

Under a new system he said “the key currencies will be the dollar, the euro, the pound, the yen and over time the renminbi (yuan) as it internationalises and moves towards an open capital account”.

He tried to downplay the possibility of a currency war but voiced concern about growing protectionism if “tensions in exchange rates” remain unchecked.

“I do think there are tensions in exchange rates and if not properly managed, those tensions risk increasing protectionism and that is what I am trying to fight and offer a counter approach.”

Chinese officials have raised concern that the Fed’s $600bn QE into the US economy will lead to capital inflows hitting emerging markets, reflecting global tensions over economic rebalancing on the agenda of the summit.

Despite worries about speculators, the rebound in China’s trade surplus last month highlighted how most of the cash rushing into the country is coming via more ordinary channels.

“They (the data) showed an outlook for strong economic growth, and I think the Chinese government will have more confidence to further tighten its monetary stance,” said Eliza Liu, an economist with CCB International in Beijing.

Although some analysts forecast that the surplus would narrow, the impressive trade performance came at a politically awkward time for Beijing. Reuters, Sapa-AFP


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