Gold standards?

Golds journey from the forgotten asset class to the much-loved one in a space of few years is extremely astounding. To no ones surprise, the whip hand behind golds rally is nothing else than the ailing global financial system.
With the market buying gold tablets as a cure for all financial fevers, the yellow metal crossed $1400 earlier this week strengthening by around 27 percent this year. The key cog in the recent surge is massive quantitative easing in the US and growing inflationary pressure in emerging economies, touting investors to shun paper currency and pile into gold.
Not to speak of, the remarks made by Robert Zoellick, World Banks president, earlier this week that "the system should consider employing gold as an international reference point of market expectations", was mistaken by the market as a call for a return to the gold standard - further drumming up the excitement for gold.
Though, Zoellick himself later clarified the misconception, but such remarks and in turn strong and quick market reaction highlight deep ambiguity in the current financial system and imbalance in trade and capital flows. It also hints that there is a room for debate on the return to the modified version of gold standard.
Since it assures long-term price stability and prevents inflation, reformed gold standard may provide a rational system to run the global economic system. But many economic gurus strongly believe that odds are against it due to massive expansion in global economy and limited supply of gold.
The major drawback with the adoption of gold standard is that the system doesn provide remedy to assuage recession as the amount of money would be determined, or more appropriately limited, by the supply of physical gold. On top of that, when the economy grows faster than the gold supplies, tight liquidity condition leads to deflation, as real supply will increase while demand would not increase accordingly.
Martin Wolf, the chief economics commentator at the Financial Times, concludes that the shift to reformed gold standard could engender transition problem, stemming from the mismatch between the value of official gold holding and the size of the monetary system.
And last but not the least, the gold standard does not necessarily provide smooth mechanism to curb manipulation. This can be gauged from the fact that during the gold standard era (1930s) many economies had been engaged in competitive devaluations to spur exports and employment.
This raises the question that instead of making a pitch for complete shift to another financial system, policymakers and the worlds largest economies must plug the loopholes in the current global financial system by improving cooperation among countries and adopting measures that will promote fair trade competition.
In a nutshell, if the current financial fever has to be alleviated, the worlds top two economies, the US and China, will have to swallow bitter pills - the US by paring down stimulus and China by letting its currency to appreciate.