Does the rise of gold herald barbaric times?

A “barbarian relic,” was what renowned economist John Maynard Keynes called gold in 1924. He was mainly talking about the Gold Standard, the idea that the money in circulation should be backed by gold in the vaults of the central bank. It was no longer modern at the time. The very fact that money was a matter of trust, and that it did not have to be backed one-to-one with deposits in a bank vault, was the basis of the financial and economic revolution that began in the late Renaissance. And the days when coins were worth their weight of the gold and silver they were made of were also long gone – even Roman emperors shook hands with them now and then.

But on an international level, gold didn’t “disappear” until the 1930s – a decade after Keynes’ statement. During the Great Depression, countries finally let go of the strict link between their currency and gold, and the competitive devaluations of all those currencies subsequently almost destroyed the international trading system.

After World War II, gold once again became the anchor of an international monetary system that was more or less imposed on the rest of the world by the Americans at a conference in Bretton Woods, USA. Everyone’s currency was given a fixed exchange rate with the dollar, and that dollar was backed by a huge amount of gold. But when in the 1960s some countries – France first, but later also the Netherlands – began to keep America to its promise that they would always receive dollars for their own currency, and that those dollars could always be converted into gold, it was fast happened. The US gold supply shrank rapidly, and in 1973 President Nixon ended the Bretton Woods system.

From then on, the dollar became a ‘floating’ currency, which fluctuated freely in relation to all other currencies. The European currencies all suddenly floated too, and of all the attempts to glue them together, the euro is the latest experiment.

Gold has since gone out. There was still a lot of it in all the safes and storage places, especially in the UK, the US and Switzerland. During the heyday of Bretton Woods, more than 70 percent of monetary reserves consisted of gold. But central banks of many countries began selling it en masse in the 1990s, when the euro took shape and the world looked eternally peaceful.

De Nederlandsche Bank was one of the biggest sellers and saw its stock shrink from 1,700 tons in the early 1990s to just over 600 tons now. In the late 1990s, agreements were even made between central banks about who sold how much and when, because the price of gold collapsed due to so much supply.

That’s over now. In 2019, the World Gold Council, which monitors the gold market, announced that more and more gold was being bought by central banks. But why? Economists Serkan Arslanalp, Chima Simpson-Bell and currency expert and Berkeley professor Barry Eichengreen recently published a study on this. Since the financial crisis, central bank gold reserves have been swelling again. But it is not the industrialized countries that are buying. It is precisely the central banks of the rest of the world that are taking a big hit.

The three economists compiled a top ten of largest buyers since 1999. Mexico is in tenth place, followed by Poland, Thailand, Saudi Arabia, Uzbekistan, and Kazakhstan. The top four largest buyers are the most interesting. India, with 12.7 million troy ounces (31.1 grams). Turkey, with 17.4 million, China with a whopping 49.9 million, and Russia at the top with 60.7 million. The latter Russian number corresponds to just under 1,900 tons of gold.

It is remarkable that the top four consists of countries that want to, or will, play a major role in the multipolar world order that is currently rapidly manifesting itself. The research by the three economists indicates that there are two main reasons for the return of gold to the reserves of emerging countries. The first is that gold is apparently once again seen as a safe haven in times of economic, financial and geopolitical uncertainty. That is telling: gold has not yet lost its appeal as a secure asset. The second reason is even more political: the researchers find a connection between the financial sanctions imposed by the West – recently against Russia – and a growing share of gold in the reserves of non-Western countries. In other words, the rest of the world is arming itself with gold against future punishments.

But what use is all that gold? It apparently provides political security, but it yields no interest, and only costs money to store. Now all those purchases, certainly also by investors, have a price-pushing effect. The price of gold is doing fine: adjusted for inflation, it is already worth almost three times as much in dollars as it was at the turn of the century, and almost four times as much in euros.

Gold indeed appears to protect against inflation. That seems beneficial. But turn it around. If the value of gold rises in both dollars and euros, then the value of euros and dollars – by far the most important world currencies – vis-à-vis gold will logically fall as well. A small extra reason to see the advance of gold as a sign of the beginning of the erosion of the current international monetary system. And the beginning of barbaric times.

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