Satyajit Das: Are we all missing out on a new golden opportunity?

Economic View: Politicians and policy makers are unlikely to willingly cede the power that a paper money system gives them

The poet John Milton wrote: "Time will run back and fetch the age of gold." In the 19th and early 20th centuries gold played a key role in international monetary transactions. The gold standard was used to back currencies, the international value of currency was determined by its fixed relationship to gold and the precious metal was used to settle international accounts.

In the film Goldfinger, Colonel Smithers explained the monetary role of gold to James Bond succinctly: "Gold and currencies backed by gold are the foundation of international credit.… We can only tell what the true strength of the pound is … by knowing the amount of [gold] we have behind our currency."

The system operated more or less continuously until the early 1970s, when progressively the world moved to the era of floating currencies with no link to dollars or gold.

The 500 per cent increase in the gold price since April 2001 has prompted gold bugs to speculate about a new age of gold. Having earlier sold off their holding, some central banks are now re-building their gold reserves.

A weak US dollar and the questionable prospects of other major currencies, such as the euro and yen, have driven central bank demand for gold as de facto currency.

With a large portion of their reserves invested in currencies of developed nations which were losing value, the central banks sought to switch to gold as well as other real assets.

The revival of interest in gold is also underpinned by debate about a return to the gold standard. Advocates as varied as the libertarian US presidential candidate Ron Paul and the Islamic Liberation Party (Hizb ut-Tahrir) have argued that the gold standard is a solution to the deep problems of the global economy.

The gold standard, it is argued, would foster economic stability and prosperity, primarily by creating price stability, fixed exchange rates and placing limits on government deficit spending as well as trade imbalances. It would also limit credit-driven boom and bust cycles.

Opponents of the gold standard say it would limit the flexibility of governments and central banks in managing economies, restricting the ability to adjust money supply, government budgets and exchange rates. Opponents also point to the inflexibility of the gold standard which may have contributed to the severity and length of the Great Depression.

A return to the gold standard would also confer a natural financial advantage to countries that produce gold, such as the US, China, Russia, Australia and South Africa, although geo-political considerations and global competition make it unlikely.

There are also limits to supply. In all human history, only about 140,000 to 170,000 metric tonnes of gold have ever been extracted. Annual production is about 2,400 tons.

The world's existing stock of gold is equivalent to about two Olympic swimming pools. The value of this amount of gold is more than $6trn, roughly 10 per cent of everything that the world produces in a single year and a tiny fraction of global wealth.

Limited central bank holdings of gold constrain a return to the gold standard. The US, German and French central banks have gold stockpiles valued at 250 to 300 per cent of their reserves of foreign currencies. China, India, Russia, Brazil and South Korea hold between 0.5 and 10 per cent of their foreign reserves in gold.

If the central banks of China, India, Russia, Brazil and South Korea sought to increase their gold holdings to a mere 15 per cent of foreign reserves, they would need to purchase more than 10,000 tons of gold. The US, the world's largest gold holder, holds a little over 8,000 tons.

The state, through its monopoly over the printing presses, has almost total control of money and the economy. Money is now a matter of pure trust. Politicians and policy makers are unlikely to willingly cede the power that a paper money system provides.

As the metal's price rose, a Tuscan spa offered wealthy clients a treatment which entails the entire body being covered in 24-carat gold. Costing €420 (£355), the treatment, proponents claim, provides unverified benefits such as delaying the visible effects of age and boosting skin hydration and skin elasticity.

Having switched from traditional financial investments to gold to preserve their wealth, investors will be hoping for the health benefits of the gold treatment rather than another possible ending.

In Goldfinger, the character Jill Masterson, played by Jill Eaton, is murdered by being painted head-to-toe in gold paint – one of movie history's classic scenes.

Satyajit Das is a former banker and the author of "Extreme Money" and "Traders, Guns & Money"

Start your day with The Independent, sign up for daily news emails
ebooks
ebooksAn introduction to the ground rules of British democracy
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
SPONSORED FEATURES
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

Recruitment Genius: DBA Developer - SQL Server

£30000 - £35000 per annum: Recruitment Genius: This is an exciting opportunity...

Recruitment Genius: Customer Service Administrator

£13000 - £15000 per annum: Recruitment Genius: Are you passionate about custom...

Recruitment Genius: Dialler Administrator

£22000 - £25000 per annum: Recruitment Genius: Main purpose: Under the directi...

Ashdown Group: Contracts Manager - City of London

£35000 - £37000 per annum + benefits : Ashdown Group: Contracts Manager - City...

Day In a Page

Blairites be warned, this could be the moment Labour turns into Syriza

Andrew Grice: Inside Westminster

Blairites be warned, this could be the moment Labour turns into Syriza
HMS Victory: The mystery of Britain's worst naval disaster is finally solved - 271 years later

The mystery of Britain's worst naval disaster is finally solved - 271 years later

Exclusive: David Keys reveals the research that finally explains why HMS Victory went down with the loss of 1,100 lives
Survivors of the Nagasaki atomic bomb attack: Japan must not abandon its post-war pacifism

'I saw people so injured you couldn't tell if they were dead or alive'

Nagasaki survivors on why Japan must not abandon its post-war pacifism
Jon Stewart: The voice of Democrats who felt Obama had failed to deliver on his 'Yes We Can' slogan, and the voter he tried hardest to keep onside

The voter Obama tried hardest to keep onside

Outgoing The Daily Show host, Jon Stewart, became the voice of Democrats who felt the President had failed to deliver on his ‘Yes We Can’ slogan. Tim Walker charts the ups and downs of their 10-year relationship on screen
RuPaul interview: The drag star on being inspired by Bowie, never fitting in, and saying the first thing that comes into your head

RuPaul interview

The drag star on being inspired by Bowie, never fitting in, and saying the first thing that comes into your head
Secrets of comedy couples: What's it like when both you and your partner are stand-ups?

Secrets of comedy couples

What's it like when both you and your partner are stand-ups?
Satya Nadella: As Windows 10 is launched can he return Microsoft to its former glory?

Satya Nadella: The man to clean up for Windows?

While Microsoft's founders spend their billions, the once-invincible tech company's new boss is trying to save it
The best swimwear for men: From trunks to shorts, make a splash this summer

The best swimwear for men

From trunks to shorts, make a splash this summer
Mark Hix recipes: Our chef tries his hand at a spot of summer foraging

Mark Hix goes summer foraging

 A dinner party doesn't have to mean a trip to the supermarket
Ashes 2015: With an audacious flourish, home hero Ian Bell ends all debate

With an audacious flourish, the home hero ends all debate

Ian Bell advances to Trent Bridge next week almost as undroppable as Alastair Cook and Joe Root, a cornerstone of England's new thinking, says Kevin Garside
Aaron Ramsey interview: Wales midfielder determined to be centre of attention for Arsenal this season

Aaron Ramsey interview

Wales midfielder determined to be centre of attention for Arsenal this season
Community Shield: Arsene Wenger needs to strike first blow in rivalry with Jose Mourinho

Community Shield gives Wenger chance to strike first blow in rivalry with Mourinho

As long as the Arsenal manager's run of games without a win over his Chelsea counterpart continues it will continue to dominate the narrative around the two men
The unlikely rise of AFC Bournemouth - and what it says about English life

Unlikely rise of AFC Bournemouth

Bournemouth’s elevation to football’s top tier is one of the most improbable of recent times. But it’s illustrative of deeper and wider changes in English life
A Very British Coup, part two: New novel in pipeline as Jeremy Corbyn's rise inspires sequel

A Very British Coup, part two

New novel in pipeline as Jeremy Corbyn's rise inspires sequel
Philae lander data show comets could have brought 'building blocks of life' to Earth

Philae lander data show comets could have brought 'building blocks of life' to Earth

Icy dust layer holds organic compounds similar to those found in living organisms