Gold can be expected to 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. However, reintroducing gold as an anchor in the international monetary system would be impractical and damaging given bullion’s deflationary bias, says a new Chatham House Report.
A Chatham House Taskforce has carried out the first in-depth and exhaustive examination of all the different suggested roles for gold in nearly 30 years.
The Taskforce investigated the role gold could play as an anchor, as a hedge or safe haven, as collateral or guarantee and as a policy indicator.
Key conclusions of the report include:
- For gold to play a more formal role in the international monetary system, it would be imperative that it neither hinders the system’s performance nor creates unacceptable constraints on national economic policies;
- Although the discipline a gold standard imposes on monetary policy may have been helpful in limiting the reckless banking and excessive debt accumulation of the past decade, the rigidity of a fixed price for gold would likely have been a serious handicap with the onset of the financial crisis when a much more flexible monetary response was required;
- There is no clear-cut role for gold as a policy indicator. Indeed, the historical behaviour of the gold price does not provide a particularly good indicator for either monetary or fiscal policy. In fact, since the financial crisis, the rise in the gold price has indicated the need for tighter policies which, if implemented, could have been deeply damaging;
- Gold can serve as a hedge against declining values of key fiat currencies, and can also be useful for central banks, but its role as a hedge is not cost free. Indeed, a major downside of holding gold is that its price can be extremely volatile. Also, it generates no yield, other than capital gains which are only realised when it is sold. Gold, therefore, can form part of a portfolio of assets that spreads valuation risk, but on the other hand, it is not very effective as a sole reserve asset.
Notes to Editors
Is there a Future Role for Gold in the International Monetary System?
Tuesday 28 February 17:30 - 18:30
Dr Gerard Lyons, Standard Chartered
Professor Catherine Schenk, University of Glasgow
Michael Lewis, Deutsche Bank
More on the Chatham House Gold Taskforce >>