Gordon Brown wasn’t a fan of gold. It sits in vaults doing nothing – you can’t make new medicine out of gold, you can’t grow more food with gold, or use it to fuel aircraft. Okay, you can actually use it to build some items of IT, because its peculiar properties make it ideal as a conductor of electricity, but as a general rule of thumb gold is a dead weight. It looks pretty, but that’s about it.
So when Gordon Brown quite literally sold the family gold a few years ago, just before it shot up in price, and cost the UK a tidy sum in the process – he was actually doing what many economists approved of.
Today, economists are not fans of gold. Last year, for example, Capital Economics often poured scorn on the idea that gold was set to rise in price as fears over the economy grew.
The truth is that gold’s position as a place of last refuge is illogical, in fact it’s purely down to psychology and history.
Sure, in the past, wars were fought over gold, it funded new empires, but there is something else that characterises that period in history when gold was the only true form of money. Economic growth was awful. Take as an example Western Europe from 1AD to 1820. According to Angus Maddison (the authority on these things), GDP per capita during that period just managed to double. Yet between 1950 and 2003 GDP per capita almost quadrupled.
How was it that growth suddenly started to accelerate – surely a factor behind this was the way money changed. In an economy that is seeing changes in technology, there is a danger that demand will lag behind supply – this is why major economic recessions have often followed periods of technical innovation.
And when growth did occur, it was often facilitated by new discoveries of gold. Karl Marx, for example, argued that the Industrial Revolution was funded by the discovery of gold in the new world. It would appear that economic growth needs an expansion of the money supply, or, in other words, economic success was held back simply because of the psychological power of a yellow metal. They say iron pyrites is fools gold – because it looks a little like it, but is in fact worthless. Well maybe the true fools gold is gold itself – and the day monetary policy was no longer determined by gold supplies was the day economies were freed up to enjoy their potential.
In 1980, gold hit $873 an ounce, a record that had remained unsurpassed until a few months ago. But it seemed as if gold’s day was over. During the recessions of the early ‘80s and early ‘90s, it stayed short of the previous peak – maybe at last its importance was gone – for good.
Actually, that argument is not completely contradicted by the current high price. Sure, gold has been hitting all-time highs with regularity, soaring past $1,000 an ounce last night – but then again, in real terms, that’s after allowing for inflation, gold’s price in 1980 is the equivalent of $2,170 today – so maybe gold hasn’t quite regained its former glitter.
It’s not that there aren’t solid reasons for the price of gold to go up – not only does it have applications in the world of IT, it is also especially popular as a form of jewellery in India – and so as the economy of the subcontinent grows, demand for gold goes up with it. But then lately, there has been anecdotal evidence that at its current price, many Indian families have been cashing in on their gold, with $1,000 dollars or so proving much more attractive than an ounce of gold.
So, why then is gold suddenly so high?
In part it is rising today because it went up yesterday. Investors are noting that gold has risen in price, and therefore they are buying more of it. This is, of course, the definition of a bubble, and can not continue indefinitely.
Others are investing in gold because they can’t think of anywhere else to put their money.
But there are other factors at work – presumably some countries are buying gold to replace dollars in their foreign reserves.
But finally, of course, gold is seen as a hedge against inflation, and a place of safety.
It is not logical that gold should be either of those things. It’s just the way it is perceived.
And whether it is logical or not, the fact that gold is so high shows how pessimistic speculators are. If history is any guide – then the high price of gold today is an indication of very tough times ahead and rising inflation.
Back in 2005 we ran a series of articles predicting future rises in the price of gold. That prediction seemed safe then – but will the yellow metal continue to rise?
It does seem that markets are still underestimating the seriousness of the current economic crisis – which would suggest gold has further to rise. But cut through that, is there a solid, rational reason for gold to be so high, and the answer is No.
The important point about gold is that its supply is not subject to the dishonesty of man. Sure, the discovery of a lot of gold can result in inflation in other prices or in the decline in its own price but it remains tangible and a source of confidence when other forms of money are being degraded. Printing money is all too often a dishonest act, a form of theft and so it is not unnatural nor unreasonable that gold becomes a store of value when other stores of value are being manipulated and degraded.
It is , always has been and always will be a protection against the dishonesty of man. Those times when the price of gold is soaring high are times of the incompetence and the dishonesty of economic management - such as today.