Protecting Our Financial Reserves

According to a Reuters report, in a speech made on Jan 5, Kansas City Federal Reserve Bank President Thomas Hoenig called the gold standard 'a very legitimate monetary system'. He was the second financial big-wig following World Bank President Robert Zoellick to call for a debate on the efficacy of using gold in the monetary system.

What I find interesting about this is that it would appear that there are signs that the US Establishment is starting to look at the gold standard issue. As a Singaporean, what concerns me is the extent to which Singapore is prepared for such a possibility. And looking at official IMF data, I would argue that there is cause for concern as Singapore only has 2.5% of its foreign reserves in gold, a paltry 127.4 tonnes. This is even lower than the Philippines, which has 175.9 tonnes of gold in its reserves.

Risk of Monetary Reset

From a monetary perspective, foreign currency reserves represent claims on other countries, and are thus in effect a form of unsettled debt. Under a gold standard, the gargantuan accumulation of foreign reserves amongst oil exporters and Asian countries would not have been possible since balance of payment accounts have to be settled in gold, which cannot be created by government fiat. Thus, when (not if!) the debts of the developed countries become unsustainable, there could be a reset of the global monetary system and in such an event, gold could play a pivotal role in the settling of accounts between nations. Should gold be re-introduced into the global system, then those countries that hold the most gold will obviously be the wealthiest in the new regime, since all asset classes will be revalued against gold as the new currency. The effect would be similar even if gold were used only as a component of the new currency system together with other fiat currencies (e.g. RMB). In such a scenario, we should not be surprised if we see Singapore suddenly becoming 'poorer'. Consider also what may happen to the value of our CPF savings.

Protecting Our National Wealth

In order to hedge against such an outcome, it is important that the government consider following in the footsteps of the People's Bank of China and other central banks in terms of quietly accumulating gold reserves without disturbing the market. (As an aside, if Dr. Goh Keng Swee were still Finance Minister, I would be very confident of this quiet accumulation of gold being done.)

To further enhance Singapore's position as a global financial centre, we may also want to consider partially backing the SGD with gold, something which the Swiss had done for years and which they had rather unwisely abandoned recently. The added benefit of backing the SGD with gold is that it will enforce financial discipline on the government in terms of restraining the latter from reckless deficit spending. This discipline will be a market-based one as the financial markets will be able to judge whether the country's financial position is under threat from the outflow of gold. Such an external monitoring mechanism is also far simpler to operate and more reliable than depending on the Elected President's good judgement in the exercise of his 'second key' discretion in unlocking our financial reserves.