Gold has regained its glitter for world's bankers
Friday, May 8, 2009 E-Mail this story Free Headline Alerts
John Metzler
UNITED NATIONS Ñ A decade ago BritainÕs Labor government decided to sell approximately half of the United KingdomÕs gold reserves causing barely a flutter in financial markets. Nor did the equally momentous if largely unnoticed decision by the Swiss to end the gold standard for their Franc. So had gold finally lost its glitter for button-down central bankers and Zurich gnomes? In 1999, yes, and with gold hovering at $282 per ounce, few winced. But what a difference a decade can make.
TodayÕs Financial Times of London headlines, ÒDecade of gold Sales has cost EuropeÕs Central Banks $40 billion.Ó With current gold prices over $900 per ounce, bankers are red faced, given their cumulative losses.
A decade ago when the Bank of England auctioned-off 300 tons of the precious metal, central banks from France, Switzerland, the Netherlands and Portugal followed like lemmings, to cut loose what was often called the Ôbarbarous metal. Prices crashed. Rationalizations being what they were, during the Òhigh water mark of anti-gold sentimentÓ people were assured that in the 1990Õs boom stock markets something as static and staid as gold really has no place.
Back in May 1999, even the Financial Times of London only offered few tears for the British sell off stating candidly Ò The problem with gold as an asset is that its returns have been very poor. Since the late 1980Õs the price has slowly declined from about $500 an ounce to less than $300. Recent financial market turmoil in Asia, Russia and Latin America failed to lift the price and so damaged goldÕs status as a safe haven.Ó
The Financial Times added editorially, ÒCentral Banks everywhere are seeking to improve the return on their reserves...gold generates no income.Ó In 1999, the gold price dipped to $250 per ounce, creating a self-fulfilling prophesy.
As this column opined in May 1999, ÒWe were assured with the economy surging forward that things are Ôfundamentally soundÕ and Ôcan only improve.Õ Such sentiments could have easily have come from the bridge of the Titanic. In the midst of meteoric financial markets and dizzying stock prices Ñ topics like life boats didnÕt make for pleasant conversation in the midst of a lavish party at sea.Ó
European banks eventually sold 3,800 tons of gold; Swiss sales comprised about half the total. The United States to its credit did not join the paper party a decade ago and today boasts the largest global gold reserves at 8,000 tons. Germany is EuropeÕs largest holder with 3,400 tons, followed by France with 3,200 tons.
Not surprisingly, the PeopleÕs Republic of China has more than doubled its gold reserves between 2003 and 2008. With just over 1,000 tons in the vaults, Beijing is buying bullion as fast as it can mine or purchase it. China is prudent enough to appreciate goldÕs enduring value, and add it to its bulging foreign reserve basket.
While the U.S., France and Germany hold the worldÕs largest gold reserves and happily have not, at least until now, tinkered with them, the reality remains that governments cannot resist the temptation to play with money supply.
In A Humane Economy, the great German economist Wilhelm Ropke wrote, ÒIt is no exaggeration to say that hardly any government every possesses absolute power over money without misusing it for inflation, and in our age of mass democracy the probability of such misuse if is greater than ever before. To wrest this power from government and to make the monetary system independent of their arbitrariness, ignorance or weaknesses was one of the essential functions of the gold standard. Having so withdrawn money from politics, the other and equally important function of the gold standard was to create a truly international currency system.Ó
ÒRopke adds, ÒNever has it been more essential to keep money out of politics as in our age of mass democracy.Ó Given its political smugness, the Obama Administration is not expected to take such sage advice from a half century ago.
At its zenith, gold backed sixty currencies, including the U.S. dollar. With the Swiss decision to de link gold from the franc, barely a handful of countries have kept the tie.
The Obama AdministrationÕs policy decisions to massively borrow and spend their way out of the current recession by quadrupling the national debt and setting the stage for inflation, will sadly lead to a deterioration in the standard of living. Gold will glisten.
As I wrote in May 1999, ÒNonetheless unforeseen events Ñ financial or political Ñ or as likely emotions Ñ rational or irrational Ñ could just as quickly put the glitter back in gold.Ó Indeed gold has returned to have the last laugh.