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If what you think depends on where you sit, then in early 2000, the Oxford historian Niall
Ferguson – like pretty much everyone else who pulled up a chair and
took a look – sat two decades into the final demise of gold as a
valuable asset.
He wasn’t to know, of course, that gold’s 20-year bear market was
about to hit rock-bottom…nor that his own TV and book-signing career
was about to take off as well, bringing him tenure at both Harvard University
and the Harvard Business School, plus a weekly column in the Los Angeles
Times.
But in studying 300 years of “money and power in the modern
world” as he subtitled his 2001 book, The Cash Nexus, Professor
Ferguson might have at least wondered whether tomorrow would bring something
different for gold from today.
The lesson of history, after all, is that nothing lasts forever…nothing, perhaps, except gold. Least
reactive of all metals, and impossible to destroy with anything other than
cyanide to dissolve it, gold had been used as a store of wealth across the
world for more than 3,500 years.
By the end of the 20th century, however, the more recent past read like an
obituary for the “barbarous relic” of ancient kings.
Hence the “Death of Gold” proclaimed by a Financial Times’
editorial in 1997, together with The Economist’s seemingly annual rant
against gold throughout that decade. Come October 1999, and BusinessWeek told its readers that “this ancient
form of wealth is less an international currency and stable store of value
than ever before.
“It’s just another commodity that swings to the global rhythm of
supply and demand.”
In short, “the twilight of gold appeared to have arrived,” agreed
Professor Ferguson, stepping out of the lecture hall and into his gypsy
fortune-teller’s painted caravan. “True, total blackout is still
some way off,” he forecast in his 2001 book, and “gold has a
future, of course, but mainly as jewellery.”
All the evidence he gathered together at the turn of this century pointed to
“the creeping demonetisation” of gold. First, the international
Gold Standard had collapsed at the start of World War One, after dominating
global finance for barely 13 years. The Gold Exchange system of world currencies
that followed it seemed only to spread and deepen the Great Depression. In
turn it collapsed, too, on the eve of World War II.
The United States
then ceased paying gold in exchange for US Dollars in 1971, finally
destroying the post-war Bretton Woods settlement
and severing all links between the world’s most important currency and
the “barbarous relic” of gold.
Funnily enough, the end of gold’s convertibility into Dollars
sparked a 24-fold spike in its Dollar-price by the start of 1980. But
“the surge in gold prices that occurred during the 1970s was
historically anomalous,” said Ferguson
as the 20th century drew to a close, “reflecting a sudden increase in
demand for gold…and the rapid depreciation of most Western currencies
relative to oil and other commodities.”
The “historical anomaly” of US$850 gold lasted just one day, in
fact – 21st Jan. 1980 – and from then on, gold’s role as a
monetary asset sank almost as fast as its price. By the end of 1999, the gold
price was languishing at a 20-year low. Then the British government, founder
and guardian of the international gold standard a century before, picked its
moment to sell half of its national gold reserves, swapping the metal for
Dollars, Euros and Yen to keep in the Bank of England’s vaults.
At the very same time, the Swiss National Bank – last of the
world’s central banks to abandon the Gold Standard in the 1930s –
sold half of its gold reserves, too. The sale required a change to the Swiss
constitution, and that required a national referendum of the Swiss people,
plus a re-writing of Switzerland’s
currency statutes! But the central banks of Argentina,
Austria, Australia, Belgium,
Canada, Luxembourg, the Czech
Republic and India were already selling gold
by this point.
So what had the Swiss people to fear? What comfort were they hoping to take
from gold bullion anyway? The changes were ratified, the legal link between
gold and the Swiss Franc was severed at last, and
the SNB began the sale of 1,300 tonnes of gold in a five-year program.
“From the point of view of investors in the West, where the possibility
(or at least the memory) of financial catastrophe has receded, the twilight
of gold makes some sense,” Ferguson
went on. “As an investment, gold has signally under-performed stocks
and government bonds in the United States
and Britain
in the past century.”
Surveying the world from the dreaming spires of Oxford, however, “gold also has a
future as a store of value in parts of the world with primitive or unstable
monetary and financial systems,” forecast the don.
“Gold will [also] continue to have an appeal as a store of value
anywhere where currencies or banking systems are fragile,” he added,
pointing to “the countries of the former Soviet
Union.”
But given
what’s happened to world gold prices since then, however, might
Professor Ferguson now want to review his opinion of Western currencies and
banking systems? Seeing the recent run on Northern Rock in Great Britain
– and the near-run on Countrywide Bank in California, an event which
Ferguson himself reported in a recent column for the L.A. Times – might
Western governments also want to reconsider their disdain for gold, that
barbarous relic of less enlightened times?
Fast forward to late 2007, and gold is now
approaching its seventh annual gain on the trot. Rising by nearly a quarter
against the Dollar over the last 12 months – and rising by 10% and more
against both the Euro and British Pound – the “anomaly” of
surging gold prices in the 1970s has made a comeback.
Put another way, the “Long Boom” enjoyed from 1982 to 2000 may
have discounted tech-stock earnings until A.D. 2146 on the Nasdaq index, but it failed to abolish the threat of
instability in Europe and the United
States. At least, that’s what the
gold market has been saying since the current surge got underway in mid-2005.
And just as the famous “End of History” proclaimed by Francis
Fukuyama in 1989 proved to be merely a weekend vacation during the
mid-to-late 1990s, so the “Death of Gold” announced by
historians, pundits and analysts at the very same time has proved somewhat
premature.
Of course, investors joining this bull market now should beware of repeating
their error. But if deciding to buy gold feels at all hard today, it might
suggest the top of this market remains a long way off yet.
And for as long as Bloomberg columnists argue that buying gold is like
“believing in the tooth fairy,” you might also take comfort in
the fact that mainstream consensus is still opposed to gold.
Just like it was at the turn of this century.
By : Adrian Ash
Head of Research
Bullionvault.com
City correspondent
for The Daily Reckoning in London, Adrian Ash is head of
research at www.BullionVault.com
– giving you direct access to investment gold, vaulted
in Zurich, on
$3 spreads and 0.8% dealing fees.
Current gold price, no delay | FAQ | Detailed outlook for 2007
Please
Note: This
article is to inform your thinking, not lead it. Only you can decide the best
place for your money, and any decision you make will put your money at risk.
Information or data included here may have already been overtaken by events
– and must be verified elsewhere – should you choose to act on
it.
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