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
News
ebooksAn unforgettable anthology of contemporary reportage
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

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

iJobs Job Widget
iJobs Money & Business

Recruitment Genius: Digital Optimisation Executive - Marketing

£30000 - £35000 per annum: Recruitment Genius: The UK's fastest growing, multi...

Recruitment Genius: Financial Reporting Manager

£70000 - £90000 per annum: Recruitment Genius: A Financial Reporting Manager i...

Recruitment Genius: Payments Operations Assistant

£23000 - £25000 per annum: Recruitment Genius: They win lots of awards for the...

Recruitment Genius: Telephone Debt Negotiator

£13500 - £20000 per annum: Recruitment Genius: This nationwide enforcement com...

Day In a Page

Sepp Blatter resignation: The beginning of Fifa's long road to reform?

Does Blatter's departure mean Fifa will automatically clean up its act?

Don't bet on it, says Tom Peck
Charles Kennedy: The baby of the House who grew into a Lib Dem giant

The baby of the House who grew into a Lib Dem giant

Charles Kennedy was consistently a man of the centre-left, dedicated to social justice, but was also a champion of liberty and an opponent of the nanny-state, says Baroness Williams
Syria civil war: The harrowing testament of a five-year-old victim of this endless conflict

The harrowing testament of a five-year-old victim of Syria's endless civil war

Sahar Qanbar lost her mother and brother as civilians and government soldiers fought side by side after being surrounded by brutal Islamist fighters. Robert Fisk visited her
The future of songwriting: How streaming is changing everything we know about making music

The future of songwriting

How streaming is changing everything we know about making music
William Shemin and Henry Johnson: Jewish and black soldiers receive World War I Medal of Honor amid claims of discrimination

Recognition at long last

Jewish and black soldiers who fought in WWI finally receive medals after claims of discrimination
Beating obesity: The new pacemaker which helps over-eaters

Beating obesity

The new pacemaker which helps over-eaters
9 best women's festival waterproofs

Ready for rain: 9 best women's festival waterproofs

These are the macs to keep your denim dry and your hair frizz-free(ish)
Cycling World Hour Record: Nervous Sir Bradley Wiggins ready for pain as he prepares to go distance

Wiggins worried

Nervous Sir Bradley ready for pain as he prepares to attempt cycling's World Hour Record
Liverpool close in on Milner signing

Liverpool close in on Milner signing

Reds baulk at Christian Benteke £32.5m release clause
On your feet! Spending at least two hours a day standing reduces the risk of heart attacks, cancer and diabetes, according to new research

On your feet!

Spending half the day standing 'reduces risk of heart attacks and cancer'
With scores of surgeries closing, what hope is there for the David Cameron's promise of 5,000 more GPs and a 24/7 NHS?

The big NHS question

Why are there so few new GPs when so many want to study medicine?
Big knickers are back: Thongs ain't what they used to be

Thongs ain't what they used to be

Big knickers are back
Thurston Moore interview

Thurston Moore interview

On living in London, Sonic Youth and musical memoirs
In full bloom

In full bloom

Floral print womenswear
From leading man to Elephant Man, Bradley Cooper is terrific

From leading man to Elephant Man

Bradley Cooper is terrific