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Satyajit Das: Return of the Age of Gold

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

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The decision to sell around 400 tons of gold at the low point in the price cycle cost the UK tax payer up to £10 billion or around £600 per UK family (depending on the gold price used). Commentators have compared it to the cost of £3.3 billion to UK taxpayers on Black Wednesday 1992 when the UK was forced to withdraw from the European Exchange Rate Mechanism after a failed attempt by the Treasury and Bank of England to defend the pound.

Any investor who purchased the gold sold by the financial astute UK Chancellor would have made a substantial profit.

But gold is not itself a great store of value, at least over long time periods.

Gold bugs excitedly speculate about gold prices reaching $2,300. But even at that price gold would merely match its January 1980 peak price after adjusting for inflation; in other words, the holder had earned nothing on the investment over almost 30 years!

The gold price adjusted for inflation is the same as the price in the middle ages. Dylan Grice of Société Générale summed up the case for gold as a store of value in the following terms:

A 15th century gold bug who'd stored all his wealth in bullion, bequeathed it to his children, and required them to do the same would be more than a little miffed when gazing down from his celestial place of rest to see the real wealth of his lineage decline by nearly 90% over the next 500 years.

The gold price can also be very volatile. In late 2011, after reaching record levels, the gold price fell nearly 20% very quickly.

Warren Buffet observed that if stock investors are driven by optimism about prospects then "what motivates most gold purchasers is their belief that the ranks of the fearful will grow." Harry "Rabbit" Angstrom, the central character in John Updike's 1970s novels about American suburban life, spends $11,000 on the purchase of 30 gold Kruggerrands (a South African minted gold coin). Rabbit explains the purchase to his wife: "The beauty of gold is, it loves bad news."

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

Back to the Future

The revival of interest in gold is also underpinned by debate of a return to the gold standard. Advocates as varied as Libertarian US presidential candidate Ron Paul and the Islamic Liberation Party (Hizb ut-Tahrir) have argued that the gold standard is a solution to the deep problems of the global economy.

The gold standard, it is argued, would foster economic stability and prosperity, primarily by creating price stability, fixed exchange rates, and placing limits government deficit spending as well as trade imbalances. It will also limit credit driven boom bust cycles through constraints on the supply of money.

The gold standard, opponents argue, would limit the flexibility of governments and central banks in managing economies, restricting the ability to adjust money supply, government budgets, and exchange rates. Opponents also point to the inflexibility of the gold standard which may have contributed to the severity and length of the Great Depression.

A return to the gold standard would also confer a natural financial advantage to countries that product gold, such as the US, China, Russia, Australia, and South Africa. Geopolitical considerations and global competition make this unlikely.

There are also limits to supply. In all human history, only about 160,000 to 170,000 metric tons of gold have ever being extracted. Annual production is somewhere around 2,400-28,000 tons of gold.
No positions in stocks mentioned.

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