Outlook: Is this the end of the gold bug dream?

IT WAS originally in the 1930s that John Maynard Keynes described gold as a "barbarous relic". Central bankers and governments have taken their time in coming round to this point of view, but yesterday's announcement from the Treasury that it will be ditching more than half of Britain's gold reserves over the next five years seems to be the final nail in the coffin for gold as a monetary instrument.

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.

Start your day with The Independent, sign up for daily news emails
PROMOTED VIDEO
ebooks
ebooksA special investigation by Andy McSmith
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: Software Development Manager

£40000 - £50000 per annum: Recruitment Genius: This is an exciting opportunity...

Ashdown Group: Product Manager - (Product Marketing, Financial Services)

£30000 - £35000 per annum + Benefits: Ashdown Group: Marketing Manager - Marke...

Recruitment Genius: Compliance Assistant

£13000 per annum: Recruitment Genius: This Pension Specialist was established ...

Ashdown Group: Market Research Executive

£23000 - £26000 per annum + Benefits: Ashdown Group: Market Research Executive...

Day In a Page

Isis hostage crisis: The prisoner swap has only one purpose for the militants - recognition its Islamic State exists and that foreign nations acknowledge its power

Isis hostage crisis

The prisoner swap has only one purpose for the militants - recognition its Islamic State exists and that foreign nations acknowledge its power, says Robert Fisk
Missing salvage expert who found $50m of sunken treasure before disappearing, tracked down at last

The runaway buccaneers and the ship full of gold

Salvage expert Tommy Thompson found sunken treasure worth millions. Then he vanished... until now
Homeless Veterans appeal: ‘If you’re hard on the world you are hard on yourself’

Homeless Veterans appeal: ‘If you’re hard on the world you are hard on yourself’

Maverick artist Grayson Perry backs our campaign
Assisted Dying Bill: I want to be able to decide about my own death - I want to have control of my life

Assisted Dying Bill: 'I want control of my life'

This week the Assisted Dying Bill is debated in the Lords. Virginia Ironside, who has already made plans for her own self-deliverance, argues that it's time we allowed people a humane, compassionate death
Move over, kale - cabbage is the new rising star

Cabbage is king again

Sophie Morris banishes thoughts of soggy school dinners and turns over a new leaf
11 best winter skin treats

Give your moisturiser a helping hand: 11 best winter skin treats

Get an extra boost of nourishment from one of these hard-working products
Paul Scholes column: The more Jose Mourinho attempts to influence match officials, the more they are likely to ignore him

Paul Scholes column

The more Jose Mourinho attempts to influence match officials, the more they are likely to ignore him
Frank Warren column: No cigar, but pots of money: here come the Cubans

Frank Warren's Ringside

No cigar, but pots of money: here come the Cubans
Isis hostage crisis: Militant group stands strong as its numerous enemies fail to find a common plan to defeat it

Isis stands strong as its numerous enemies fail to find a common plan to defeat it

The jihadis are being squeezed militarily and economically, but there is no sign of an implosion, says Patrick Cockburn
Virtual reality thrusts viewers into the frontline of global events - and puts film-goers at the heart of the action

Virtual reality: Seeing is believing

Virtual reality thrusts viewers into the frontline of global events - and puts film-goers at the heart of the action
Homeless Veterans appeal: MP says Coalition ‘not doing enough’

Homeless Veterans appeal

MP says Coalition ‘not doing enough’ to help
Larry David, Steve Coogan and other comedians share stories of depression in new documentary

Comedians share stories of depression

The director of the new documentary, Kevin Pollak, tells Jessica Barrett how he got them to talk
Has The Archers lost the plot with it's spicy storylines?

Has The Archers lost the plot?

A growing number of listeners are voicing their discontent over the rural soap's spicy storylines; so loudly that even the BBC's director-general seems worried, says Simon Kelner
English Heritage adds 14 post-war office buildings to its protected lists

14 office buildings added to protected lists

Christopher Beanland explores the underrated appeal of these palaces of pen-pushing
Human skull discovery in Israel proves humans lived side-by-side with Neanderthals

Human skull discovery in Israel proves humans lived side-by-side with Neanderthals

Scientists unearthed the cranial fragments from Manot Cave in West Galilee