Republicans have all but guaranteed the backing of the "gold vote" this November by raising an idea that even the most bullish mainstream bullion boosters believe is unrealistic — a return to the gold standard.
Gold prices would likely surge to $10,000 an ounce, the greenback's credibility would vanish, and global superpowers would risk a new trade war if Republicans were to restore the link between the U.S. dollar and gold that was severed 40 years ago.
But that isn't stopping Republicans from considering the idea, who will call for a commission to look at restoring a fixed value for the dollar, according to a draft of the party platform to be adopted at the Republican National Convention that begins this week in Tampa, Fla.
Gold has returned to the political discourse recently with the growing prominence of politicians like Ron Paul, the congressman from Texas who has said that he decided to enter politics on the day that President Richard Nixon shut the "gold window" in 1971, and with the tea party, which helped Utah pass a law last year to make gold legal tender.
But their support won't change the practical hurdles that would face such a wrenching shift in the currency system, one likely to have catastrophic effects on trade and growth.
To back the U.S. monetary based currently at around $2.56 trillion by the 262 million ounces of gold held by the United States government means bullion prices would soar as high as $10,000 an ounce, Capital Economics strategists said.
A sudden appreciation of the dollar's value would crush the greenback's credibility as the world's reserve currency and severely undermine the international trade balance.
"It is hard to conceive of the circumstances under which no one would want to hold any dollars," they said.
The World Gold Council, a trade group funded by gold mining companies to promote the many uses of bullion, including by investors, deems such a move "unlikely," citing international disagreement over the converting price and the fact that annual growth in gold stock may not match the monetary base.
Even the Gold Anti-Trust Action Committee (GATA), a group dedicated to exposing what its founders say is a conspiracy by Wall Street banks, the Federal Reserve and others to depress the price of gold and silver, doesn't see it happening.
At best they're hoping that the RNC will provoke an audit of U.S. holdings, proving GATA'S claim of a conspiracy.
"It really would be something for the Republican platform to call for a truly independent audit of the Fed and U.S. gold reserves," said GATA's chairman, Bill Murphy, a former Boston Patriots wide receiver who worked as a commodity broker on Wall Street before founding GATA in 1998.
Despite widespread disbelief, a reintroduction of the gold standard has gained more support in recent years amid an intensifying debate over how to tackle U.S. debt levels and spending, and increased global anxiety over the stability of fiat currencies — a government-issued currency whose value is based on the issuer's guarantee to pay the face amount on demand.
"The idea is that it forces the U.S. to live within its means," said Mark Luschini, chief investment strategist of broker-dealer Janney Montgomery Scott, which has around $54 billion in assets under management. "Think of it as a person with a debit card rather than a credit card. The debit card holder can only spend to what he or she has in the bank."
Governments abroad are also renewing their interest in owning gold as part of their reserves due to economic uncertainty. World central banks as a group became net buyers in 2010 after two decades of net sales. Official-sector purchase is on track to rise to a record high this year, WGC said.
The world official sector currently held about 29,500 tonnes, or 17 percent of the world's above-ground stocks. This compares to 19 percent held by investors and nearly half of the stocks made into gold jewelry.
The Republican proposal is reminiscent of a Gold Commission created by President Ronald Reagan in 1981, 10 years after President Richard Nixon broke the link between gold and the dollar during the 1971 oil crisis.
Reagan's commission ultimately supported the status quo, saying "restoring the gold standard does not appear to be a fruitful method for dealing with the continuing problem of inflation."
In 1973, the U.S. government raised the official dollar price of gold to $42.22 per ounce. A year later, Americans were permitted to own gold other than just jewelry.
The U.S. Congressional Budget Office warned on Wednesday that massive government spending cuts and tax hikes due next year will cause even worse economic damage than previously thought if Washington fails to come up with a solution.
Instead of planning for a gold standard return, the Republicans are trying to placate supporters at next week's RNC and to gain more firepower in the party's promoting responsible U.S. fiscal and monetary policies in the upcoming federal elections in November, analysts said.
Minutes from the Federal Reserve's latest meeting suggests the U.S. central bank will adopt stimulus fairly soon unless economic conditions improve dramatically. Some expect Fed Chairman Ben Bernanke could use his speech at the central bank's gathering in Jackson Hole, Wyo., at the end of this month to send a strong message to markets.
"Examining a return to the gold standard is one avenue to show the public and markets a level of seriousness about the U.S dollar, monetary policy and the budget deficit," said Jeffrey Wright, managing director of Global Hunter Securities.
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