An interesting question came to me last night, and I don’t (and can’t find) an answer. I’m wondering if anyone here has any ideas on the subject.
At present, not a single significant currency that I’m aware of is based in the value of gold. Nixon pulled the last corner of the rug out from under the dollar, in terms of precious metal backing, in 1971. So, the value of gold is quite relative – it fluctuates in relation to each currency as each of those currencies fluctuate in relation to each other.
So, what would happen if one (or more) of the official reserve currencies (which as of yesterday now includes China) was set to a gold standard? By doing so, a relationship would have to be set between that currency and an ounce of gold, such as the old $35/oz standard pre-Nixon.
Thus, would the holdings by individuals as part of an inflation hedge, or a hedge against complete collapse of national currency, suddenly be set at a relatively low current currency-per-ounce price, thereby creating a significant instant loss for that individual, who likely bought at least some of his/her gold at prices higher than the newly pegged price ratio? In other words, if a person had purchased ten ounces of gold at $1000/oz as a hedge against inflation, figuring gold would eventually hit much higher prices, but suddenly gold was pegged at $750/oz in a new gold-backed currency, it would seem that the person was just locked into a 25% loss ($250/oz).
And even if the $US didn’t immediately back itself with gold again, I would think that the backing of one of the other reserve currencies could have a significant stifling effect on the $US in a number of ways.
What am I missing? Thoughts?