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The soaring price of gold reflects international unease about the strength of major developed economies that must be taken seriously by the G20 group of leading nations, according to Robert Zoellick, president of the World Bank.
Mr Zoellick on Wednesday said the increasing use of gold as a monetary asset was an “elephant in the room” that was being ignored by policy makers in the debate over how to correct global trade and fiscal imbalances.
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The World Bank head added that the search for an alternative to the weak currencies of much of the developed world underlined the need for a co-ordinated package of growth measures based on free trade and structural reforms.
Mr Zoellick dismissed criticism of his proposal in Monday’s Financial Times for a new international monetary system involving multiple reserve currencies and including a role for gold as a reference point for market expectations of inflation and future currency values.
He said critics had misunderstood his proposal as a call for a return to the gold standard – the framework of fixed exchange rates backed by gold which was replaced after the second world war by the Bretton Woods system of fixed but adjustable exchange rates.
Speaking at a Financial Times conference on infrastructure spending, Mr Zoellick said the price of gold, which this week surged past $1,400 a troy ounce, indicated that the world was heading towards a new monetary system in which the US dollar would be only one of a number of reserve currencies with flexible exchange rates.
Others would include the euro, the yen, the pound and the renminbi, as China moved towards removing controls on the convertibility of the currency.
“Gold is now being viewed as an alternative monetary asset. This is not the same as a gold standard,” said Mr Zoellick. “Gold has become a reference point because holders of money see weak or uncertain growth prospects in all currencies other than the renminbi, 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 is a hedge against uncertainty.”
Mr Zoellick said the use of gold indicated that the major economies “need pro-growth policies, structural reforms, open trade and an anti-protectionist agenda”. He said that would build confidence in private sector development.
Mr Zoellick also said the US mid-term elections, in which the Republican party took control of the House of Representatives, gave US president Barack Obama an opportunity to make major progress on trade liberalisation with the assistance of Republican supporters.
He urged Mr Obama to “seize the moment” by resuscitating the dormant Doha round of talks on world trade, and by completing US negotiations on bilateral trade agreements with South Korea and other countries.
Mr Zoellick said progress towards an international package of pro-growth economic and trade policies should start at the summit of G20 leaders in Seoul later this week, in spite of pre-summit disputes over US proposals for the use of current account targets to help correct trade imbalances.
However, he said there was no “silver bullet” that would resolve the world’s problems with trade imbalances and capital flows, suggesting that achieving a revised international trading and monetary system would require a process of “relentless incrementalism”.
Mr Zoellick dismissed suggestions by Guido Mantega, Brazil’s finance minister, that the world is involved in a “currency war” as nations seek to prevent appreciation because of the potential impact on exports. However, he warned that foreign exchange market tensions would exacerbate protectionist pressures.
“I don’t believe we are going to be in a currency war; I think this is an overstated description,” he said. “I have had to deal with real wars in my career, so I know what they are and I’m sensitive to the use of the term.
“[But] I do think there are tensions in the system, and if not properly managed those tensions risk an increase in protectionism.”
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