Outlook: Is this the end of the gold bug dream?
Saturday 08 May 1999
In the markets, it is thought of as pretty much inevitable that the US, Germany and France will follow suit, probably rather sooner than later.
You can argue about the timing of the Treasury's decision, with the gold price at close to its twenty year low and with the IMF, Switzerland, Canada and Belgium all engaged in similar gold sales programmes. You can also argue about the manner of it - a publicly declared intention of sale which cannot but help drive down the price against the British taxpayer.
But the underlying logic is hard to fault. Gold has little if any place as a monetary instrument in today's world of massive electronic capital flows. It is costly to keep and move, and in any case, hardly anyone settles their international obligations in the stuff any longer.
Ah but the feel of it, the look of it, the mythology of the metal - as ancient and primeval as money itself. How can there be money without gold? Well actually there hasn't been much of a connection since 1971, when Richard Nixon formally abandoned the gold standard - under which the dollar was exchangeable for a fixed amount of gold - and devalued the dollar.
The great inflation that this action helped bring on led in later years the likes of Lord Rees-Mogg, former editor of the Times, to advocate a rediscovery of the principles of sound money, supported by a return to the gold standard. However, even he would these days admit that the fixed exchange rate system it gave rise to is inappropriate to the modern world and bound to be blow apart. We have since discovered that inflation is a complex and many headed thing, and it unlikely to be cured by the use of fixed exchange rates alone.
In any case, the problem we are faced with today is the reverse of that of the 1970s. Rather, it is one of low inflation, running in some parts of the world such as Japan to outright deflation. The upshot is that there is no point in countries holding gold as a reserve any longer.
Gold producers have been desperately trying to persuade central bankers and governments otherwise. Stung by complaints that it is impossible to earn an income out of gold, producers have devised ingenious schemes for extracting yield, chiefly by lending gold reserves to the market. All of them tend to be complex and hardly worth the candle.
The awful truth is that over the last twenty years, gold has been a shockingly poor investment for governments. The cost of storing and protecting it has also reached alarming proportions set against the minimal costs of financial assets.
These sales are bound to be criticised by some as a dangerous departure with tradition and history. How silly and short sighted of the Treasury to sell out at the bottom and reinvest the proceeds in US, Japanese and Euro bonds just as these investments are beginning to top out. Typical. Many will also continue to see gold as more than just another commodity. Its beauty, history and power to adorn should ensure it remains much more than that.
But there is none the less an inevitability about what is happening. Gold's position in the international monetary system has been on the wane for many years now. Today it is almost an irrelevance. It has even lost its traditional function as a reliable store of value. Pathetic though the returns have been, even a building society account would have done better than gold over the past two decades.
There will always be those who want gold. In many parts of the world its position and value is enshrined in cultural tradition. And while we in the West with our stable currencies, lenders of last resort and deposit protection schemes, regard gold as a spent force, it is easy to forget that in many emerging markets it has continued to play a valuable role as a hedge against financial turmoil. Even so, in the absence of world war three, it can be said with some certainty that the gold bug has finally been laid to rest - probably.
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