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Dollar peg to gold seen unlikely from G20 meeting

Section: Daily Dispatches

But it's remarkable that gold is getting discussed so widely now.

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By Frank Tang
Friday, November 14, 2008

NEW YORK -- Gold surged on Friday as world leaders gathered to battle the economic crisis, amid talk of a new Bretton Woods agreement to shore up the financial system, but calls to revisit the gold standard are unlikely.

The gold standard, a monetary system of fixed exchange rates in terms of gold, had been the cornerstone of Bretton Woods, which created the International Monetary Fund and the World Bank, until President Richard Nixon took the U.S. dollar off the standard in 1971.

Bullion, seen as a safe haven in market turmoil, has staged a $50 per ounce rally from Thursday's intraday low, as funds bought heavily ahead of this weekend's meeting, which includes leaders of the Group of 20 advanced and emerging economies.

"I think the anticipation of something from the G20 meeting is helping gold," said George Gero, vice president of RBC Capital Markets Global Futures.

World leaders, including British Prime Minister Gordon Brown and French President Nicolas Sarkozy, have recently vowed to change the international monetary system created at the Bretton Woods, New Hampshire conference in 1944, which helped draw up the post-war financial order.

Shaken investor confidence amid a bear stock market and the prospect of a protracted global recession have prompted some corners to call for a return to the gold standard.

The standard had been in place with minor modifications since Bretton Woods fixed the conversion rate for one troy ounce of gold at $35.

However, fund managers and commodity analysts said that the G20 meeting would not result in any agreement that resembles a new Bretton Woods agreement or the gold standard.

"That's basically a 19th century device that was repackaged in Bretton Woods, where the dollar was linked to a physical gold price," said James Steel, chief commodity analyst at HSBC.

"I don't think that's happening at all because the gold market is far too small to be able to play any role in that dimension. That is not to say, though, gold won't reflect changes in the economy and currency value," Steel said.

But it seems that central bankers and governments around the world have already put a stop on a comeback of the gold standard as they prefer monetary policies without being restrained by gold reserves.

In August, then presidential candidate Barack Obama said he did not think a return to the gold standard was a good idea and noted that the U.S. currency was strong in the 1990s, even though there was no gold standard.

Obama was speaking in response to a question about if he thought the country should return to the gold standard, given that the weak dollar is exacerbating the rise in oil prices.

"I don't think they want to do that. I think that would panic the world," said COMEX gold options floor trader Jonathan Jossen.

Jossen said that gold could receive a boost if news out of the G20 meeting would stem the dollar's resurgence.

"Everybody wants the dollar to be weakened. A lot of people think the dollar has moved way too fast," Jossen said.

Caesar Bryan, portfolio manager of the GAMCO Gold Fund, said that funds have bought gold to position for possible favorable outcomes from the G20 meeting.

"There has been some talk about the Far Eastern countries increasing their gold holding. We have that speculation from time to time," said Bryan, who manages $280 million in mutual fund assets.

Bryan, however, said that he did not expect any substantial agreement from the G20 meeting that was only prepared in weeks and without the participation of the U.S. president-elect.

"I have been positive on gold because of the extraordinary measures that central banks have been taking. I would expect gold to do better without any G20 meeting," Bryan said.

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