Gold, Value and Psychology

Chris Waller - 5th November 2021
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“Gold is money” – J Pierpont Morgan.

Keynes condemned it as ‘the barbarous relic’ but, even in these days of fiat currency and now cryptocurrencies, gold seems to retain its hold over us. Gold has a unique and alluring lustre. It has a very reassuring density. Men have been driven to the edge of madness to acquire it. It is the subject of myth – both ancient and modern. Why does it continue to hold us in its thrall?

To the chemist gold is a noble metal, that is, it does not corrode. It is proof against all acids save for that combination of concentrated hydrochloric and nitric acids known as aqua regia. It is a good, though not exceptional, conductor of electricity. Since it does not corrode it finds application in electronics to ensure good contact between signal-leads. Beyond that it has some uses but it is otherwise a soft metal, of no use in construction, largely ornamental.

For all that, even now by far the greatest amount of gold is to be found sitting in vaults as a store of value. Why do we regard it so highly? Wherein lies its value? There is no chemical analysis that can identify the value of gold. One can put it in a mass spectrometer and analyse its atomic structure but no sub-atomic particle can be found corresponding to value.

Gold is a very rare metal, not absolutely the rarest, but it occurs only at a concentration of about 3 parts per billion in the Earth’ crust. One would, on average, have to process one thousand tonnes of rock to produce 3 grammes of gold – less than one-tenth of a Troy ounce, currently worth about £140. Even the best ores contain only 7 grammes of gold per tonne and these have, in the main, been exhausted. Gold production globally stands currently at about 3,250 tonnes per annum. Total global gold stocks (above ground) are estimated at about 200,000 tonnes. This represents all the gold that has ever been mined throughout history. Current gold reserves still in the ground are estimated at 54,000 tonnes.

Gold commended itself in the past as a form of money because it did not corrode – who wants coinage that rusts away? - but mainly because it was so rare and thus so difficult to acquire. To own gold was to manifest one’s command over resources, hence it was hoarded by kings from Solomon, through Croesus of Lydia, to Atahualpa. It was a demonstration of their power over land and men. Thus visiting kings and emissaries would see this display of wealth and power and realise that to try to threaten its holder would be folly. It was the ancient equivalent of the military displays beloved of such as Stalin and dictators everywhere. Gold was valuable because it confirmed power. Gold is a positional good – it asserts the status of the owner.

Croesus of Lydia is believed to be the first king to issue gold coinage. People accepted it as being of value, even though it comprised just small discs of metal, because it was seen to come from the king. The king also agreed, at the end of the year, to take his gold coinage in payment of taxes, rather than bothering with all those inconvenient bushels of grain, jars of oil and amphorae of wine. This confirmed to the people that the king had faith in the value of his coinage. The circle was closed. Gold was valuable because the king owned lots of it and he was king because he owned lots of gold. The argument is circular.

Gold is valuable because we are agreed that it is valuable. This has been established by convention throughout history. Gold was, and to a large extent still is, an elite money. States hold gold reserves, partly as a hedge against the cold winds of economic downturns, but as a matter of national prestige. In the event of a sudden and significant drop in the value of sterling on the world markets, one can guarantee that the BBC will dispatch its economics correspondent to the Bank of England to interview the governor. The governor will open the vaults and show the racks of gold bars and assure the public that their money is safe because it is backed by gold. We can all sleep soundly in our beds. Of course, the notion that sterling is backed by gold is a fiction and has been for 50 years.

In 1990 gold was hovering around £250 pounds per ounce. During the global financial crisis of 2007/08 the price climbed, peaking at around £1,100 per ounce in 2012. Since then the price has fluctuated but is now in the region of £1,350 per ounce. Historically gold has been the ultimate hedge against economic downturn and the markets are now moving towards gold once again. This is telling us something.

The UK currently holds about $15 billion (£10.5 billion) in gold reserves. The US holds around $397 billion in gold. China currently holds about $95 billion and continues steadily to increase its reserves. Gold may well be the ‘barbarous relic’ but it has endured for millennia and may do so well into the future. Its value is unfathomable. It is valuable only because we believe it is. If gold fails then we will be, economically speaking, most definitely in uncharted waters

‘The Road to Ruin’ – James Rickards.
World Gold Council

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