Ajit Ranade: Much of today’s gold buying frenzy reflects a move away from the dollar
Subscribe to enjoy similar stories. On India’s Independence Day of 1971, US president Richard Nixon announced to the world that America was unhitching from the gold standard. This unilateral action spelt the end of the 1944-instituted Bretton Woods system, which had been set up in the wake of World War II to stabilize international finance and encourage global trade.
It worked by pegging the dollar to gold as part of an international system of fixed exchange rates with all settlements in dollars. This served very well for a couple of decades. The world saw high economic and trade growth with relatively low inflation.
The dollar enjoyed hegemony since all trade invoicing was in dollars. But there was a price to pay for that hegemony. The US ran a widening trade deficit even as gold investors got an arbitrage opportunity.
Since the dollar price of gold was fixed at $35 per ounce, one could take an unlimited amount of gold out of the US by exchanging dollars for the metal at a fixed price, and make a profit. As economic imbalances and inflation worsened across the world, with the US fiscal deficit growing (given the Vietnam War’s rising cost), this became unsustainable. The dollar was highly overvalued.
Meanwhile, central banks were profitably amassing gold by converting their dollar reserves. Gold in the US was fast depleting and the world started anticipating a devaluation, causing more frenzied gold buying. And sure enough, the system collapsed in August 1971.
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