Good friend and renown gold historian Tim Green has been researching and writing about gold for more than 40 years.  His latest book, The Ages of Gold, is the most comprehensive ever written on the history of mines, markets and the price over 6,000 years.  For those of us interested in gold today, there’s much wisdom to be learned from the long view — as you’ll discover from my recent conversation with Tim.

Jeff Nichols:  What struck you most in researching the 6,000 year history of gold?

Tim Green:  The stability of its price over long periods, often centuries, which built up its reputation as a benchmark and safe haven.

Jeff Nichols:  What’s the best example?

Tim Green:  The classic is the British gold standard which fixed the price from 1717 to 1931, with only minor hiccups in the Napoleonic Wars and World War One.

Jeff Nichols:  What happened next?

Tim Green:  President Roosevelt set a new fixed price for gold of $35 per ounce in 1934.  That price endured until 1968.

Jeff Nichols:  Why did that fail?

Tim Green:  During the 1960, as the United States became mired in the Vietnam War, the dollar was under threat:  a price set in 1934 no longer made sense.  Moreover, the growth of European and Asian economies created a growing demand for gold in jewellery and industry.  Gold was no longer a monetary metal absorbed primarily by coin or central bank reserves.

Jeff Nichols:  So how did the character of the gold market change?

Tim Green:  Essentially, the cornerstone became demand for fabrication in jewellery and, increasingly, in electronics.  Gold is a unique metal;  it does not corrode and is an excellent conductor of electricity, making it vital in our age of high technology.  Indeed, through the ages, its versatility has made it valued in different ways at different times.

Jeff Nichols:  Did investors’ perception of gold change?

Tim Green:  Yes.  Historically the prime reason for holding gold was protection of your assets.  Much of what we know of early gold coins comes from Greek or Roman hoards buried when danger threatened.  But once the gold price could float, after 1968, it became a moving target and the motive for buying was often profit, not protection.

Jeff Nichols:  So how did that influence the price?

Tim Green:  We saw massive speculation in gold (and silver) in the inflationary 1970s, when gold and oil became favored hedges.  That gave us the $800 gold price briefly in 1980.  By then no one was sure where the price should be, and we saw a bear market down to $250 by 1999.  A generation of investors almost deserted gold (though not gold shares, as mining boomed after the $800 price).

Jeff Nichols:  What brought recovery to the price?

Tim Green:  The 1999 Central Bank Agreement slowed a torrent of official sales over several years, notably the Bank of England’s auctioning of half of Britain’s gold reserves.  This was a major step in restoring market confidence.  The tragedies of 9/11 and the Iraq war also ushered in a new generation of investors worried their country, currency or even bank might come under siege.  The prosperity of this decade (until 2007) also sustained jewelery and electronics demand.  The price cocktail was thus a good mix of ‘bread and butter’ demand with investors adding some froth.

Jeff Nichols:  So where do we go from here?

Tim Green:  The crucial factor in 2008 was that the price reached $1,000, but did not overreach.  A runaway price could, as in 1980, disillusion investors with what its ballpark should be.  Most important, gold has established itself in a realistic trading range of $700-$1,000 and, in currencies such as the euro and sterling, has risen as they depreciated.

Jeff Nichols:  So gold has lived up to its historic role of safe haven?

Tim Green:  Yes, it is offering protection in an uneasy world.  And we see a generation of new buyers, especially in coins and small bars - purchases they may hold for a long time.  I am reminded of the 1930s, another dangerous period politically and economically, when investors in Europe, especially France, sought refuge for their savings in coins and bars, which many held for three decades.  When I first researched the market in l966 many French people still kept that gold under the bed or buried in the garden.  Today, buyers may also husband their gold for some years - keeping it off the market.  That helps give the price a floor.  But, of course, the debate, as always, is how high it can go?

Jeffrey Nichols

NicholsonGold.com

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Jeffrey Nichols, Managing Director of American Precious Metals Advisors, has been a leading gold and precious metals economist for over 25 years. His clients have included central banks, mining companies, national mints, investment funds, trading firms, jewelry manufacturers and others with an interest in precious metals markets. Please check his website and register to his free newsletter by clicking here.