The insatiable rush for the barbarous relic

When there’s much wrong with the world, it must be the fault of either greedy speculators or that ‘barbarous relic’ called gold

The attempts of profligate governments to escape the strict discipline imposed by gold have often led to crises, which in turn have been used as excuses for further government intervention.

With the price of an ounce of gold rising from a low of about $250 to break past $1,900 in August 2011, the year 2001 marked the beginning of an exciting 10-year bull run for the metal. The massive jump in price led to tectonic changes in the international gold market. China’s huge, but until then dormant, gold mining industry was reinvigorated as both large mining corporations and amateur gold diggers stepped up efforts to mine gold to satisfy increasing demand. Huge demand from the Chinese central bank added further to the rush for gold. Mines in other parts of the world, which were gradually shut during the course of a previous 20-year secular bear market, were reopened for production.

Such clamour for gold was hardly a new tale though. Similar events played out in the 1970s when the price of gold shot up with the end of price manipulation under the Bretton Woods monetary system, giving a push to explorers and miners to pursue untapped gold mines.

Gold: The Race for the World’s Most Seductive Metal by Matthew Hart provides an engaging account of the dynamics of gold price through history, and its stimulatory effect on gold production—not to miss interesting tales of individual explorers and businessmen. But the more intriguing part of gold’s history, that has spanned over more than just a few centuries, has been the metal’s brush with the political class; which forms the other half of Hart’s narrative on gold.

For a metal that has been the market’s preferred medium of exchange, gold has never quite caught the favour of politicians. This should not be perplexing. For one, in the economic era prior to the 20th century a monetary system based on gold tied the hands of profligate governments trying to live beyond their means. Second, adjusting for the vagaries of short-term price fluctuations, the rising value of gold has constantly exposed the depreciating value of paper currencies; then, it is not without a reason that gold remains a major hedge against risk even today.

The attempts of profligate governments to escape the strict discipline imposed by gold have often led to crises, which in turn have been used as excuses for further government intervention.

Evidence of the same is documented by Hart through his account of important events in financial history, such as US banker John Pierpont Morgan bailing out the US government in 1895, US president Franklin D. Roosevelt confiscating Americans’ gold in 1933, and Richard Nixon reneging on his commitment to the rest of the world to redeem dollars for gold in 1971.

What is often ignored is, each of these crises followed attempts by the US government to live beyond its means by inflating the country’s monetary base well beyond the available stock of gold. Naturally, this led to a series of panic attacks that exposed the government’s insolvency. But for Hart, who acknowledges economist Barry Eichengreen for his “valuable observations” on the book’s manuscript, these do not count for fraud on part of governments, but for gold’s incompatibility with the demands of a modern economy.

To be fair to Hart, the view is shared by many economists who consider economic discipline a hindrance to macroeconomic policymaking.

Hart’s problems with gold extend further. To him, the huge demand for a metal like gold, that has little use value, should probably be irrational. The craze for gold that has led to troubles of nepotism in China, and price manipulation by London’s bankers is a major headache for the world. Not to forget, encouraging retail investment in gold has only added to price instability and risk. And finally, since there’s much wrong with the world, it must be the fault of either greedy speculators or that “barbarous relic” called gold.

Prashanth Perumal is Assistant Editor (Views) at Mint.

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