Don't count gold out just yet

May 23, 1999

UNITED NATIONS - The recent decision by Britain's Labor government to sell approximately half of the United Kingdom's gold reserves caused barely a flutter in financial markets. Nor did the equally momentous if largely unnoticed decision by the Swiss to end the gold standard from the Franc. So has gold finally lost its glitter for button-down central bankers and Zurich gnomes?

Officially yes. When the Bank of England auctions off 300 tons of the precious metal over the next few years, it will be joining central banks in Argentina, Australia, Belgium, and Canada to name a few to cut loose what was often called the "barbarous metal." Rationalizations being what they are, we are assured that in today's boom markets something as static and staid as gold really has no place.

Even the Financial Times of London only offered few tears for the British selloff stating candidly " The problem with gold as an asset is that its returns have been very poor. Since the late 1980's 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 gold's status as a safe haven."

Surprisingly these mega crises--not to mention the Balkan war, which should have sparked soaring gold prices, have done little to move them.

The Financial Times adds editorially, "Central Banks everywhere are seeking to improve the return on their reserves...gold generates no income."

We are assured with the economy surging forward that things are "fundamentally sound" and "can only improve." Such sentiments which could have easily have come from the bridge of the Titanic, are the morning mantra of people who do know better.

So a simple - if scary - question? In the midst of meteoric financial markets and dizzying stock prices which recall the old Dutch tulip craze - why then would a few unenthusiastic descriptive adjectives from Fed Chairman Allan Greenspan send the entire economy onto the rocks? Perceptions. Topics like insurance or life boats don't make for pleasant conversation in the midst of a lavish party at sea.

Yet looking beyond the hubris, financial icebergs or a Y2K hysteria could suddenly appear on the horizon like a unannounced storm.

While the U.S., France and Germany have the world's largest gold reserves and happily have not had the temptation to tinker 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, "It is no exaggeration to say that hardly any government ever possesses absolute power over money without misusing it for inflation, and in our age of mass democracy the probability of such misuse 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."

"Ropke adds, "Never has it been more essential to keep money out of politics as in our age of mass democracy."

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 faith - notably in the Baltic states.

Today Britain's financial sovereignty is seduced by the continental EURO, and Germany has foolishly put its revered Deutsch Mark on the altar of the European Central Bank. The European Union's flagship EURO, after its bumpy start, should be precisely the right currency to favor a wider gold backing beyond the planned fifteen percent of reserves. Such a move, while prudent, remains unlikely given political smugness.

Nonetheless unforseen events - financial or political - or as likely emotions - rational or irrational - could just as quickly put the glitter back in gold.

John J. Metzler is a U.N. correspondent covering diplomatic and defense issues who writes weekly for World Tribune.com.