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Satyajit Das: Return of the Age of Gold


In economic chaos, war, or collapse, gold reappears, reasserting it grip on humanity.

In reality, the rise was driven by fear. The depth of the financial crisis, concern about the security of other assets including once risk-free governments bonds, and a fragile banking system prompted a flight to gold as a safe haven. The monetary policies of governments and central banks, emphasizing low interest rates and printing money to restart the global economy, also underpinned the gold price.

Germans wanted the return of their deutsche mark, now replaced by the euro, pining for when "Mark gelich mark – paper or gold, a mark is a mark." The nightmare of Weimar, the erosion of the value of money, hovered in background. As governments borrowed ever larger sums, ordinary citizens feared that even gilt-edged government securities would become worthless.

A weak US dollar and the questionable prospects of other major currencies, such as the euro and yen, also drove demand for gold, as de facto currency.

David Einhorn of Greenlight Capital (NASDAQ:GLRE), a hedge fund, summarized the demand for gold:

Gold does well when monetary and fiscal policies are poor and does poorly when they appear sensible. ... When I watch Chairman Bernanke, Secretary Geithner and Mr. Summers on TV, read speeches written by the Fed Governors, observe the "stimulus" black hole, and think about our short-termism and lack of fiscal discipline and political will, my instinct is to want to short the dollar. But then I look at the other major currencies. The euro, the yen, and the British pound might be worse. So, I conclude that picking one these currencies is like choosing my favorite dental procedure. And I decide holding gold is better than holding cash, especially now, where both earn no yield.

Like other investors, central banks, especially in emerging nations such as China and India, increased holdings of gold. With a large portion of their reserves invested in currencies of developed nations which were losing value, the central banks sought to switch to gold as well as other real assets. In 2009, China announced that over the preceding seven years, it had acquired 454 tons of gold. It seemed that central banks had remembered J.P. Morgan's words to Congress in 1912: "Gold is money. Everything else is credit."

This fear of reduction in the value of paper money has haunted the system of fiat or paper money from inception. John Maynard Keynes recognized the risk of governments and politicians determining the value of money: "By a continuing process of inflation, government can confiscate, secretly and unobserved, an important part of the wealth of their citizens."

Former US Federal Reserve Chairman Alan Greenspan once flirted with this problem:

Under the gold standard, a free banking system stands as the protector of an economy's stability and balanced growth... The abandonment of the gold standard made it possible for the welfare statists to use the banking system as a means to an unlimited expansion of credit... In the absence of the gold standard, there is no way to protect savings from confiscation through inflation.

Ironically, during his tenure in charge of the US Federal Reserve system, Greenspan would use the banking system to expand credit in an unsustainable way that was to lay the foundation for the global financial crisis of 2007.

In his study of the human unconscious, Sigmund Freud noticed a striking association between money and excrement: "I read one day that the gold which the devil gave his victims regularly turned into excrement." Many people now find the prospect of governments pursuing policies that would turn money into excrement a disturbing, real risk, forcing them to turn back to gold.
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