Writing in the Financial Times, Zoellick called for a “Bretton Woods II” system of floating currencies as a successor to the Bretton Woods fixed-exchange rate regime that broke down in the early 1970s.

The former U.S. trade representative, who served in several Republican administrations, said such a move “is likely to need to involve the dollar, the euro, the yen, the pound and (a yuan) that moves toward internationalization and then an open capital account.

“The system should also consider employing gold as an international reference point of market expectations about inflation, deflation and future currency values,” he added.

Analysts were cautious. “Going forward that would be something that we could look toward, but it’s not going to happen within a short period of time,” said Ong Yi Ling, analyst at Phillip Futures in Singapore, adding that gold prices barely reacted to the comments.

Gold briefly hit a record high of $1,398.35 an ounce in early trade on Monday on concerns of a continued weakening dollar trend after the U.S. Federal Reserve last week acted to resume buying Treasuries.

SUMMIT ACRIMONY?

That policy has fed acrimony among leading economies in the Group of 20 in the run-up to their summit in Seoul on Wednesday and Thursday.

China and Germany, major exporting nations, have both decried the Fed’s quantitative easing — effectively printing money — which is weakening the dollar.

Investors are pumping dollars into emerging markets in search of higher yields, and the potentially destabilizing impact of this, along with big current account deficits and surpluses as well as China’s reluctance to let the yuan appreciate faster, are set to dominate the G20 debate.

France, which takes over the G20 chair after this week’s summit, says it plans to work on a new international monetary system to bring greater currency stability.

Beijing’s central bank chief has suggested an alternative monetary system based on using the International Monetary Fund’s Special Drawing Rights, a notional unit of value based on a basket of major currencies, instead of the dollar as the sole global reserve currency.

Zoellick was a senior official in the U.S. Treasury at the time of the 1985 Plaza and 1987 Louvre Accords on rebalancing currencies among major industrialized nations. He noted that that phase of currency coordination helped launch the Uruguay Round of world trade liberalization negotiations.

While his opinion article in the Financial Times did not represent either U.S. or World Bank policy, it may reflect a greater openness in Washington than in the last two decades to some form of international currency cooperation.

“The dollar is losing its relevance especially with the emergence of Asia economies, so a more neutral benchmark may be required. Gold, amid all the recent uncertainty, is proving its worth,” said ANZ’s senior commodity analyst Mark Pervan.

Gold retreated to around $1,390 an ounce by 1000 GMT as speculators booked profits.

Zoellick said a new monetary system would take time to develop and should be part of a package approach including possible changes in IMF rules to review capital as well as current account policies, and linking IMF monetary assessments to World Trade Organization obligations.

The dollar rose sharply on Monday as unwinding of dollar short positions that began with solid U.S. jobs data snowballed, pushing down the euro to its lowest level since the Fed embarked on fresh easing last week.

• The U.S. dollar is weakening. That makes the metal, typically denominated in dollars, cheaper to buy in other currencies. (Euro-denominated investors think gold still looks cheap.) Gold traditionally rallies as the dollar falls.
• Inflation fears. Only a few months ago, Bernanke was openly fretting about the possibility of higher inflation – and saying the Fed’s bias was toward tightening rates. Yet he has cut rates dramatically to lessen the credit crunch resulting from a meltdown in mortgage-based securities. Needless to say, the Fed’s action was inflationary. And gold is an excellent inflation hedge.
• The emergence of China and India. A flourishing middle class in both emerging giants is increasing the demand for gold. (Jewelry fabrication was up more than 50% in India alone last year.) People everywhere like gold watches, gold coins, and gold wedding bands.
• Supply constraints. Around the world, discovery rates are falling. Mines are being depleted and mining companies are producing lower grade base metals.
• Geopolitical instability. There are plenty of hotspots around the world today. But gold is viewed as a safe haven during times of political or economic calamity. (That’s one good reason we own it in our Oxford Anti-Terror Portfolio.
• The trend is your friend. Good traders know better than to fight the broad trend in an asset class – and clearly gold is on the rise right now. So it looks like an excellent time to own gold. But how?

Safe Ways to Invest In Gold

The physical metal – especially in the form of bullion or numismatic coins – is lovely to behold. But keeping a large quantity of the metal at hand is risky. If you store it safely, there are costs associated with that, too. Market Vectors is linked to the AMEX Gold Miners Index and owns all of the world’s leading gold and silver mining companies. That means you can capture the performance of the entire sector in a single, well-diversified investment.

As a result, many investors are turning to the safety and convenience of exchange-traded funds or ETFs. Two examples are StreetTRACKS Gold Shares (NYSE: GLD) and iShares Comex Gold Trust (AMEX: IAU). These funds hold, store and insure the physical metal. But the ETFs trade like stocks so they offer easy liquidity. (Both have relatively low expenses of .4% a year.)

The tax impact of these funds may surprise you, however. If you sell a gold ETF for a long-term gain, you won’t owe the bargain 15% tax rate you’d owe on a stock. You’d owe 28% on that gain. That’s because gold ETFs are taxed like collectibles, which have special rules.

Another alternative is to own gold shares in an ETF. Why? Historically, gold stock moves are three to five times as much (up or down) as the price of the metal itself.

That’s because gold-price movements create larger moves in the profitability of mining companies, due to their largely fixed costs.

Market Vectors Gold Miners (AMEX: GDX) are good choices.

The annual expense ratio is one half of one percent. The shares can be margined or sold short – and there are options available for traders who prefer to play gold more aggressively. The top 10 holdings include Newmont, Freeport McMoran, Barrick Gold, AngloGold, Harmony Gold, Kinross, Yamana, Gold Fields, and Agnico.

Don’t overdo it, of course. Gold is volatile and often trades unpredictably in the short term.  But the long-term trend is already in place. And there appears to be plenty of upside ahead.