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Why we still believe in gold The worthless asset has a mystical allure

'We want gold because we want it.' Credit: The Hobbit

'We want gold because we want it.' Credit: The Hobbit


May 21, 2024   6 mins

Gold, which John Maynard Keynes called the “barbarous relic”, has become so eagerly sought that even Costco has got in on the business. Perhaps this newfound fascination shouldn’t surprise us. For those looking to build nest-eggs, gold is easier to understand than stocks or bonds, since you can literally hold it in your hand. Moreover, of late, this most ancient of assets has been outperforming most other classes. Bonds have been tanking, real estate is sluggish and even the on-fire US stock market, up about 6% since the start of the year, falls short of the double-digit increase gold has managed in that time. Former British Chancellor Gordon Brown must surely regret, 25 years ago this month, selling off more than half the nation’s gold reserves at such a measly price.

And yet, gold’s enduring appeal may be less practical than mystical, something economists struggle to explain. Although in fairness to Keynes he was referring to the gold standard and not gold itself, there’s no shortage of sceptics who are bemused by gold’s popularity, since the metal is worthless as an asset. It produces nothing and unlike other precious metals, such as silver, it has virtually no industrial applications. Instead, its value derives from a tautology: we want gold because we want it, which is to say that because everyone wants it, we know it has value and therefore we want it.

Warren Buffett concluded that a Martian would be left scratching his head: humans will pay an army of people to dig up gold from beneath the earth and, after they resurface with the shiny ore, pay another army to dig a hole in the ground to bury it, whereupon we pay yet another army to stand guard over it and protect it. It’s as if, in a “disenchanted” world meant to have replaced mystery with reason, we still cling to irrational or romantic notions of beauty and value.

“We still cling to irrational or romantic notions of beauty and value.”

Certainly, our love of it has deep roots. Ancient civilisations from Asia to the Americas all held it in awe, a fascination that carried into the early modern age, the search for gold being a motivating factor in the age of exploration that opened the world to Europe’s empires. Equally, the flood of precious metals from the empires helped bring about the end of European feudalism and the rise of capitalism, since the resulting inflation both diminished land values — the basis of the nobility’s power — and drove up demand for industrial manufactures.

So it made sense that when modern monetary regimes emerged alongside the rise in global trade, the states of Europe would often underpin their currencies with precious metals. By holding them in their treasuries, central banks could then issue promissory notes that could be redeemed for the specified weight of gold or silver — the name “pound sterling” betraying its origins as a currency that was originally backed by silver (to be later replaced by gold). The comparative ease of moving paper as opposed to gold or silver facilitated trade on a vast scale and gave governments flexibility in issuing currency, since redemptions in exchange for the metal were relatively rare.

In fact, the more modern the world became, the more gold’s importance grew. It provided the undergirding of the world economy in the post-Second World War period, when the gold-backed dollar system created what amounted to a virtual global currency. In June 1944, as the war entered its final stages and delegates from the allied powers assembled in a small New Hampshire town to map out the post-war system, front of their minds was the way the collapse of international trade in the Thirties had deepened the Great Depression, enabling the rise of Nazism. Determined that it should never happen again, they set out to create a system in which trade would always flow freely. A key element of this would be a universally accepted currency.

After some bickering, they agreed that the US dollar would play that linchpin role in the Bretton Woods system, backed as it was by the vast store of gold the US had accumulated. In theory, any government holding a surplus of dollars from its international trade could, if it wished, exchange its dollars for gold held in the vaults of the Federal Reserve, cashing in at the fixed rate of $35 to the ounce. In practice, given that it was much easier for governments conducting business with one another to transfer dollar payments across the bank accounts they held in New York, hardly anyone ever bothered.

As a result, not only trade with the United States but virtually all international exchange was conducted in dollars. Since the greenback was universally accepted — even communist countries liked to hold dollars for their trade outside the Soviet bloc — everyone was willing to use it. As they piled them up for future use, the dollar at its peak accounted for nearly nine-tenths of all the foreign reserves held by the world’s central banks. Hardly any of them bothered holding much gold anymore.

But there was an obvious problem with this arrangement. It meant that the US could pay for all its imports simply by printing more dollars, which it did. Initially, this situation suited everyone since those dollars were buying their goods, keeping their economies growing. But by the late Sixties, when the volume of dollars in global circulation exceeded the gold available for redemption, the “dollar overhang” was becoming increasingly hard to ignore. To get ahead of the looming crisis, President Nixon abandoned the gold standard, and said the US dollar would henceforth trade freely on global currency markets.

This in turn shattered the social compact on which the Bretton Woods system was founded. And implicitly asked people to henceforth trust humans rather than nature to preserve the value of their money by containing its supply. In the short term, they didn’t. Currency volatility returned, and people turned to gold. The surge of inflation in the Seventies meant the value of currencies was falling. Gold became a popular safe haven not just for central banks but for ordinary folk, who could buy small amounts of it and stuff it in safe-deposit boxes or under their beds. In the course of the decade its price shot up to more than $800, as people sought to preserve what wealth they could amid the plunging power of their money.

In 1979, Paul Volcker took the helm of the US Federal Reserve with a determination to lance inflation and preserve the dollar’s value. He set out to underpin the currency by aligning the growth of money supply more closely with that of the economy, thereby ensuring it would be backed by new output. The strategy succeeded. By raising interest rates sharply he choked off borrowing, thereby reducing the money supply and creating a relative scarcity of money. As dollar stability returned, inflation came down. Other central banks followed suit and tightened their monetary policies. The next three decades would then become the era of “monetary dominance”, as central banks asserted their independence and used it to discipline governments that were too loose with their fiscal policies. Low inflation meant that money held its value, and gold diminished in popularity, its price steadily falling. In 2000, it finally bottomed out below $300.

But just as the US government had once abused the confidence the world placed in the dollar to print too many of them, central banks now did likewise. In particular, the “Fed put” provided an implicit guarantee to markets that should asset prices fall, they’d always print more money to juice them back up. With the assurance that asset prices would only ever rise, investors were thus free to inflate bubble after bubble, safe in the knowledge that when each one burst, the central bank would come to the rescue.

As the money supply mushroomed, the allure of gold returned once more. At first driven by sceptics who doubted this state of affairs could last, the barbarous relic entered its latest golden age. Since the turn of the millennium its value has marched steadily upwards, recently reaching new highs above $2,000 an ounce.

This state of affairs doesn’t look like it will end anytime soon. With the world entering an era of what the political economist Adam Tooze has called the “polycrisis”, geopolitical rivalry is fragmenting global supply chains and throwing up new barriers to trade. As the spectre of war looms once again over Europe and East Asia, China and Russia are drawing closer together and the US is withdrawing from the wider world into a circle of its closest allies. As it does so, it’s also using the ubiquity of the dollar to go after its foes, seizing their accounts and sanctioning their use of the currency. Meanwhile, despite inflation’s return, central banks are suggesting they’ll soon ease money again. The dollar no longer looks quite the safe haven it once did.

Amid all this uncertainty, central banks are joining their citizenries in accumulating larger stockpiles of gold. As trust among countries once more weakens, and as faith in our governments and central banks to preserve the value of our money diminishes, the timeless appeal of a shiny rock seems unlikely to dim. Unlike the “digital gold” some proponents of cryptocurrency claimed could rival it as an inflation hedge, supply of the real thing can’t be manipulated by humans: Bitcoin, with its fixed supply, was meant to prevent that, but the subsequent invention of all manner of other cryptocurrencies inflated the supply immensely. Besides, for those looking for solidity amid volatility, crypto’s ethereality doesn’t offer the same reassurance as a piece of metal from the earth. In uncertain times, it would appear, we will always cling to the same certainties our ancestors did long ago.


John Rapley is an author and academic who divides his time between London, Johannesburg and Ottawa. His books include Why Empires Fall: Rome, America and the Future of the West (with Peter Heather, Penguin, 2023) and Twilight of the Money Gods: Economics as a religion (Simon & Schuster, 2017).

jarapley

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J Bryant
J Bryant
1 month ago

Excellent article and a fine economics lesson.

Dennis Roberts
Dennis Roberts
1 month ago
Reply to  J Bryant

It is, and far too few people know this, especially the effect of the Greenspan Put.

Ethniciodo Rodenydo
Ethniciodo Rodenydo
1 month ago
Reply to  J Bryant

I said much the same in my comment

Martin M
Martin M
1 month ago

However little gold might be worth intrinsically, it has greater intrinsic value than Bitcoin.

Lancashire Lad
Lancashire Lad
1 month ago
Reply to  Martin M

Forged, along with other precious metals, by the unimaginable forces within supernovae and neutron stars, before being flung into the wider universe… i’d say so.

Martin M
Martin M
1 month ago
Reply to  Lancashire Lad

Exactly. Bitcoin, on the other hand, was forged (and the word is probably a good one) on a computer by a crook (or group of crooks).

Geoff W
Geoff W
1 month ago
Reply to  Martin M

And it’s used by crooks. And promoted by crooks.

UnHerd Reader
UnHerd Reader
1 month ago
Reply to  Martin M

When I first read about Bitcoin, in about 2012, I thought it was a clever and audacious idea that would make a great in-game currency for something like Second Life, which was popular at the time. I thought I would buy some to fool around with, but it was a bit of a hassle at the time. Hah, hindsight…

Martin M
Martin M
1 month ago
Reply to  UnHerd Reader

All the “early adopters” of Bitcoin I knew bought it to buy drugs on the now defunct website “Silk Road”.

2 plus 2 equals 4
2 plus 2 equals 4
1 month ago

Gold isn’t quite as worthless as a practical asset as the author claims. It is used in electronics as a conductor.
That aside, the question of its intrinsic value is more complex that its practical usefulness.
Beyond a certain point in their development all human societies value ceremony and decoration. These may not be a practical concern in the sense that an iron ploughshare is, but it appears to be universal and intrinsic to our species. Gold’s scarcity. malleability, and resistance to tarnishing make it ideal for these purposes.
So, yes. Gold is valuable because we all believe it is valuable, in contrast to something like iron which is valuable because we can make swords and scythes out of it. But believing that decorative things are valuable does itself appear to be something intrinsic to humanity.

Nell Clover
Nell Clover
1 month ago

Evolution has promoted some bizarre decorative but otherwise non-practical features and behaviours in many species. The male bowerbird for example builds highly decorative structures simply to woo mates. The male peacock is adorned with a decorative plumage that is conspicuous and quite an impediment to survival.

The value of this apparently unnecessary decorative waste is it is only possible if the individual is fit and healthy to gather the necessary resources to build or grow these decorations. The magnificence (or not) of the decoration is a proxy for the possession of genes that might be useful for survival, and natural selection winnows those less decorative individuals and their genes.

Of course, the “decorative” non-functional test of biological fitness varies by species. Nonetheless, some species value decorative effects that are similar to human sensibilities. Humans are naturally not exempt from biological selective pressure. The command of resources (be they people or material) is one factor humans use to choose a partner, and decorative effect (be it a fancy gold watch or a porsche) is a simple proxy for this.

UnHerd Reader
UnHerd Reader
1 month ago
Reply to  Nell Clover

This doesn’t really explain why gold is more extrinsically valuable than, say, a Lexus.

Dennis Roberts
Dennis Roberts
1 month ago

Yes, but it seems to only be gold that has its value questioned because it is mostly just decorativ. Precious gems, art, clothing beyond pure function, paint from the DIY store for your kitchen…

UnHerd Reader
UnHerd Reader
1 month ago

Gold’s valuable because it looks good against brown skin. That’s where the demand comes from. Industrial applications are negligible.

Matthew Powell
Matthew Powell
1 month ago

Gold was used for currency because of its practicalities.

Cultures have used numerous materials for currency but gold proved to be one of the best. It is both rare enough that production could be limited to prevent inflation but no so rare that there would be a scarcity of currency. It’s a very unreactive metal so does not degrade and can be stored safely for long periods of time, it preserves value and is more difficult to destroy than other mediums yet it’s light weight compared to more durable materials and so could be transported easily.

Gold was not money just because it was alluring to human eyes. It was money because it was an excellent material to use for money.

Nell Clover
Nell Clover
1 month ago
Reply to  Matthew Powell

In practice, gold is rather too valuable / rare to be a useful currency. For most day to day purchases, the amount of gold needed is tiny and alloying it sufficently dilutes the gold content so much as to make it essentially not gold. Consequently, silver has been the principal metal for currency and gold more commonly used for storing value.

From the Sumerians in 3000BC to the English in the 16th century, currency was struck in silver. The English penny was roughly 1g of silver. It was only with the emergence of modern Central banks, paper money, and disruptions to silver supplies in the 18th century that Europe – and thus the world – moved to a gold standard currency.

Ethniciodo Rodenydo
Ethniciodo Rodenydo
1 month ago

Well I understood the article and learned quite a bit from it

Martin Smith
Martin Smith
1 month ago

Ummm… BTC at $71k today… Just as all that glisters is not gold so all that is crypto is not bitcoin.

Martin M
Martin M
1 month ago
Reply to  Martin Smith

Bitcoin is the most crooked of the cryptos though.

UnHerd Reader
UnHerd Reader
1 month ago

This is not a great article, comments not great either. D minus all round. The old btc is outperforming everything, gold has already failed. Paper money will continue being printed to infinify. Meanwhile the developing world , Turkey, nigeria el salvadore get it . You all better wake up. The revolution will not be televised

UnHerd Reader
UnHerd Reader
1 month ago
Reply to  UnHerd Reader

BTC is great, as long as the powergrid stays on.

Cho Jinn
Cho Jinn
1 month ago
Reply to  UnHerd Reader

God bless coal!

Michael Layman
Michael Layman
1 month ago
Reply to  UnHerd Reader

If you can stand the volaility and sleep at night, which most can’t. BTC is prone to greater than 50% price drops and equally spectacular appreciation. Human nature causes most to buy high and sell low. Gold has traded sideways since 2011 until the recent breakout, so is not a particularly good long term investment. SPY will serve you better over the long haul. I prefer something tangible and though gold has appeal, companies that produce goods and services are a safer investment.

C D
C D
30 days ago
Reply to  UnHerd Reader

Crypto doesnt fullfill two good properties cash must have: 1.) be scare, 2.) low volatility.

Note: crypto is not really scarce. I can host my own crpyto and everyone can buy it (and drive its price). It only
gains value if people believe in it. Scharlatans everywhere.

Martin M
Martin M
27 days ago
Reply to  UnHerd Reader

Ah, Turkey, Nigeria and El Salvador. Those powerhouse economies that we all envy.

Pip G
Pip G
1 month ago

For a long time I never held Gold. That changed in c. 2016 with the possibility of a Corbyn government: while lowish risk it could have led to confiscation and exchange controls (we had them until c. 1976).
I view Gold as a protection against debasement of fiat currency, and a counterweight to stocks & bonds. Buy physical Gold stored in a safe overseas jurisdiction. Set & forget.
The excellent Lyn Alden published a book ‘Broken Money’ which explains the history of money and covers the use of Gold.

Martin M
Martin M
1 month ago
Reply to  Pip G

“….stored in a safe overseas jurisdiction“. Argentina?

Alex Lekas
Alex Lekas
1 month ago

Maybe people believe in gold because it has tangible value and always has. Fiat currency is a stand-in for value; gold stands all by itself.
As the money supply mushroomed, the allure of gold returned once more. 
Well, yes. The increased supply made existing money less valuable on a per-unit basis. Debasing the currency is an odd tactic to support but bank after bank went all-in and the foreseeable consequences are playing out.

Fafa Fafa
Fafa Fafa
1 month ago

I first read the title as “Why we still believe in GOD. The worthless asset has a mystical allure”. I was excited to jump into the fray. But gold, shmold, I had some, sold some, lost the tee shirt.

Jonathan Andrews
Jonathan Andrews
1 month ago

I don’t understand monetary theory and, sometimes, I wonder if anyone does

Jim M
Jim M
1 month ago

All experiments with paper money have failed. Gold is still gold after 5000 years in the ground or ocean. Keynes was an idiot who believed that government is god and a few smart Oxbridge men can run the world. What an arrogant idiot. The US dollar will be worthless in 100 years and maybe the state itself will collapse along with its morally bankrupt Marxist culture.

Martin M
Martin M
1 month ago
Reply to  Jim M

You can’t run a modern economy on a Gold Standard.

Alex Colchester
Alex Colchester
1 month ago

From the POV of the financial elite, Gold represents a constraint on debt creation and associated ‘cleverness’. The capitalist sausage machine relies on an endless putrid flow of minced debt. The ‘masters of the universe’ encase this odious paste with their thin prophylactic of respectability and sell it on to hungry suckers. But gold eventually calls time on this nonsense. It always does.

Christian Dorn
Christian Dorn
30 days ago

z

Mark V
Mark V
28 days ago

Keynes wasn’t an economist.