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From The Times

February 25, 2008

The dollar versus gold? No contest

Why China and India have always been heavy-metal fans

William Rees-Mogg

In the early 1950s I was reading history at Balliol College, Oxford. I learnt a good deal from my tutors, whom I remember with gratitude, but even more from my contemporaries, such as Dick Taverne or Bernard Williams, the philosopher. There was, even then, no doubt who was the most erudite undergraduate, with, as it seemed, total recall of the whole corpus of European literature. It was George Steiner, the polymath whose encyclopaedic learning has been creating envy in academic circles ever since.

In the mid-1960s, I was visiting New York and met George's father, a quiet Jewish banker, who, like the great Siegmund Warburg, had been trained in the tradition of European banking of the pre-Nazi era.

He had already reached Paris when George was born in 1929. George once told me that he had been brought into the world by an American obstetrician, who later achieved fame by shooting the American populist, Huey Long, in the atrium of the Louisiana State Capital in Baton Rouge. Neither Governor Long nor the obstetrician survived.

Dr Steiner, like most good European bankers of his generation, believed in gold as the ultimate reality of the world's financial system. He told me of Franklin Roosevelt's arbitrary decision to fix the dollar price for gold at $35 an ounce, at which the official price then still stood. Dr Steiner also observed that the free market for gold, which some people still regarded as a “black market”, was at a premium to the official price. He forecast that the official price would come into line with the free market eventually.

His forecast was proved correct in 1971, when President Nixon, who had no real idea what he was doing, brought dollar convertibility into gold to an end. The gold price rose from $35 an ounce to more than $800 in the next decade.

I have been interested in the story of gold ever since. Victorian economists, writing in the period of the gold standard, used to define the functions of money. Two of these classic functions were money as a “medium of exchange” and money as a “store of value”.

As a medium of exchange, money needs to have convertibility and liquidity. Paper currencies have these qualities, so does gold. To add to the store of value, money needs to retain its value over long periods.

Gold has retained its value, though with fluctuations, over centuries. Even now its purchasing power in terms of physical assets is not far distant from 300 years ago, before Isaac Newton's recoinage of 1717. Most paper currencies lost more

than 98 per cent of their purchasing power in the 20th century alone.

My conversation with Dr Steiner was a prelude to a friendship with Professor Roy Jastram, whose book, The Golden Constant, proves statistically the long-term stability of the purchasing power of gold. I have also written or edited two books on the case for gold myself. For some years I have been forecasting that gold would rise in price to $1,000 an ounce. Last week it reached $950 an ounce. We are getting very close. I also forecast that oil would go to $100 a barrel; it has.

Why is this process happening? What does it tell us? This is happening because the world has been losing confidence in all the currencies issued by central banks, but particularly in the dollar. The last Chairman of the US Federal Reserve Board to care about the dollar as a store of value was Paul Volcker, who was the chairman of the Fed from 1979 to 1987.

He saved the dollar from collapse in the early 1980s and with the dollar he saved the world's financial system. However, Alan Greenspan, his successor, was a more political chairman of the Federal Reserve. He wanted to keep the White House happy. On the whole he succeeded in that task, at the expense of the dollar.

One can detect the decline of confidence in every part of the world. The world's two largest developing economies, economic superpowers of the future, are China and India. Both countries have a long tradition of hoarding gold, often in the form of jewellery, as a form of personal saving. The Chinese and Indian central banks already have more dollars in their reserve than they can possibly want. They know that the dollar is likely to depreciate over time.

They suspect that the American people will elect an inflationary president and Congress next November; as there is no remaining presidential candidate who stands for sound money, that seems the safe assumption. The euro may currently be a better currency than the dollar because it is still being run on sound German principles, though by a Frenchman. Gordon Brown has already undermined the pound by selling half the United Kingdom's gold reserves at about a third of the present price.

There are also supply problems likely to effect the mining of South African gold. South Africa is short of electrical power because the necessary new power stations have not been built and the maintenance work has not been done. Supplies of power to Zimbabwe have had to be halted and supplies to the goldmines have been curtailed. As a result, China is overtaking South Africa as the world's largest gold producer - which gives China an incentive to raise the gold price.

The dollar price of gold has been moving in a long cycle, up from 1965 to 1981, down from 1981 to 1999, up from 2000 to 2008. I do not expect this cycle to peak at $1,000 an ounce, though the credit crunch may give it pause. Gold is a defence against inflation. In November the Americans will elect another inflationary president.

That will be good for gold, but bad for the dollar.

The foremost authority on the issue of gold and gold currency in the world today is the Basque scholar Umar Ibrahim Vadillo, and anyone who is truly interested in the matter should read him. As for the article at hand by Rees-Mogg, it is much appreciated and recognised as an inportant contribution. Much thanks.

Abdullah Luongo, Cape Town, Western Cape

Real money is inflation proof. Whether gold is $35 or $3000, it has the same buying power today as it had 20, 50, or 200 years ago. Not if, but when the next depression happens, which will a person want? A piece of paper, or a piece of metal. I kind of remember seeing some pictures of people burning fiat money to cook and stay warm in the past hmmm..... Metal will always have value no matter what happens in the world. Paper is fiat, nothing but an I owe you. And how do we intend to pay it, if there is nothing backing it but a bunch of untrustworthy words from political sharks who run our countries? Who gets stuck with the bills and the responsibility to pay them? I agree with the terms of never putting all your eggs in one basket, but anyone who is not buying some gold and silver right now is loosing out on a big winner.

Jason, Sierra Madre, USA, CA

If the dollar had been a pure gold coin, presumably there wouldn't have been a problem with "the price of gold in dollars".

Martin, London,

What a brilliant coup it was for our Great Leader to sell off our gold reserves at the bottom of the market

John Ledbury, Kings Lynn, England

Gold is not supposed to be an investment; increasing in value, but rather a store of value. The whole point is you do not make or lose anything holding it.

Mickey Klein, Berkeley, California, United States

Johny, you said that, "if you had bought gold with Euros a year ago, gold hasn't gone up as much as the media makes out."

Hogwash. Gold has risen against the Euro by around 30% over the last 12 months. Furthermore it has just set a new all time high in Euros, which is very bullish.

Get your fact right.

John East, Scunthorpe, UK

And the country who owns the largest gold reserves is.....Answer:The US with 8,133.5 tonnes of gold in 2007. Germany is a distant 2nd with 3,417.4 tonnes of gold in 2007. China came in a very distant 10th.

Ann, Pasadena, CA

Try doing the math -

$35 @ 8% for 46 years (1972 to 2008) = 1,206.59 -

The reality of owning gold is that you have to insure it, then store it in a secure place alarmed and guarded. It is actually costing you money to keep it. All around a poor investment.

michael wilson, london, uk

I agree that both China and India, the rising super powers of the 21 st Century, have a long tradition of nearly worshiping gold as the ultimate insurance policy as well as the store of value.

China, as a significant producer, wants to push up the price of Gold and will incresingly divercify its Forex Reserves away from the US dollar gradually.

India has been usually the largest importer of Gold over the years both for domestic demand as well as export of jewellery.

Since October 07, Indian imports have been reduces by over 50 per cent compared to last year, as Indians are recycling old
Gold due its very high price.

Indians will revert to importing huge quantity of Gold only after the price goes down by about 15 per cent from the current level.

So the Gold Bulls should be on their guard.

Mr Vipul Thakore, London, UK

Journalists sometimes seem to be the least well-informed and most out-of-touch professional group in the country! (Kind of the opposite of what they're supposed to be!) The number of articles on gold has ballooned now that it's quadrupled in price. It's a bit late to be waffling on about it now!

How about an article calculating the cost to the UK of Gordon Brown's decision to sell half the Bank of England's gold reserves at $285 per ounce? (And to buy dollars with the proceeds, no doubt!) How come no journalist considers this worth talking about? Surely that would be more interesting than jumping on the gold bandwagon after a 300% rise?!

No doubt you have been forecasting the rise in the gold price for years, Mr Rees-Mogg - but not in these pages. And by now it's a bit late. This story is very old news.

David Space, London, UK

'Nor is gold "always a good investment" as many nowadays claim.'

Correct. But it's been a pretty good investment over the last five years, and if you haven't already got some in your portfolio, I'd still recommend it, even at the current record prices: some crazy stuff is going to happen in the markets as this year progresses, and everyone should have some safe haven holdings.

Phil, Vancouver,

Does no one take into consideration that there are many marginal gold mines at $ 350 an ounce that will come on stream, pumping out water filled shafts and refurbishing the mills at anything over $ 600? What has happened to the good old laws of Supply and Demand. Gold is not an uncommon metal and occurs in many formations and can be extracted relatively cheaply with current technology from ,many sources. Good prices will also unlock the hoards of gold held in India and China - the result is a flood of gold onto markets Take care gold buffs - I certainly will never be one but I only work in the industry.

EFH. New Zealand

Giles Nixon, Auckland, New Zealand

Personally, I'm investing in tulips :-) !

Steve Cox, Pattaya, Thailand

Gold is money, at least according to the ISO: http://en.wikipedia.org/wiki/ISO_4217

Paper money pays a negative carry - UK IRs are only about 5%, whereas the extra supply of paper money into the economy, M4, is running at about 14%. The pound looses roughly 10% of it's purchasing power each year. Unless you swallow the CPI stats and believe your cost of living is increasing at 2% a year!

Richard, Berne, Switzerland

I remember an impassioned, and very long, editorial by William Rees-Mogg in The Times in the 1970's, exhorting us to return to the gold standard. Does he still think this a good idea?

Dave, Wrexham,

It certainly is true that Ron Paul is the only candidate who stands for honest money, so he will not be the next president. One cannot argue much with the historic record: gold is money, so is silver, paper is fiat and always will be.

Rick Friedl, Edwards, USA/California

I think there are several issues to be considered when discussing the gold price...
The depreciation of the dollar does mean that the the gold price hasen't risen in 'real terms' as much as it appears... but having said that, there is one immutable fact about gold that no other currency has... that's to say, an ounce of gold is always an ounce of gold... irrespective of the decline or rise of currency prices...
If the price of gold falls, it's becuase the value of the currency has increased...
The bottom line is that demand oustrips supply by at least 1500 tonnes per annum... and up until now, this hole has been systematically plugged by the central banking system via massive and increased de-hoarding of their own physical reserves...
The reason they do this is to maintain their own FIAT-based 'funny money'...
The last thing the central banks want is for gold to reach its true value... if this happens currencies are in real trouble, but the end game is near, they're running out!!!

Beckett, London,

Gold has gone up but not as much in real terms.
The value of gold is valued in dollars. The dollar has depreciated against the Euro by more than 25% so if you had bought gold with Euros a yaer ago, gold hasn't gone up as much as the media makes out.

Johny, Kings Langley, England

An excellent article by Lord Rees Mogg. I also like the scepticism of the comments here. That means they do noy buy his story and presumably have not bought or own gold. As a contrarian that gives me great comfort. These same sceptics will be buying when gold reaches the old inflation adjusted highs around $2000 and that could be the time to trim holdings.

Gold is not a get rich quick game, it is an insurance policy and portfolio stabiser against financial and political disasters and, as such,has a small variable bedrock position in portfolios. It has been around for thousands of years and will be around for thousands more.

oldasiahand, Guildford, UK

William Rees-Mogg states that "there is no remaining presidential candidate who stands for sound money."

I believe that Dr Ron Paul, though not a front runner, remains a candidate for the Republican nomination and he certainly stands for sound money.

Dr Robert Welham, Bristol, England

Michael Llewellyn, Bridgetown, Barbados

Diamonds are worthless, they are not divisible, they do not have a market and they have no real price.
You cant melt down a kilogram of diamonds for sale on the market, you can with gold.
Silver is just as tradeable as gold, except for that pesky VAT charge on it.
Same goes for tin and coal, although again, much more likely to suffer price fluctuations, and due to size are much harder to store

Dominic, Manchester, UK

Gold hit a peak in the mid $800 range about 27 years ago. It crashed and it has taken a long time to reach its previous high. Inflation adjusted, it is thousands of dollars away from its earlier high. Gold accordingly stands as among the worst long term investments ever. And no, its not different this time. The cycle cannot be beaten.

R. Istbear, Stratford on Avon,

"Most paper currencies lost more than 98 per cent of their purchasing power in the 20th century alone. " I assume you are not considering the interest paid on cash? Gold of course does not pay interest, indeed insurance and storage costs mean it has a negative carry. These kinds of omissions would seem to indicate less of a desire to enlighten your readers as oppossed to impress them with presience of your long partiality for gold, not good traits in a journalist.

Stephen Wilson, Belfast, Northern Ireland

Indians and most Asians buy gold and silver because there was no other place to put money. Until very recently they had no access to banks and if they had they had nothing but fear of the banks going down. Anyone who has ever spent any time there should realize this.

P Garey, Grants Pass, USA

The price of gold (and silver, and rubber, sugar, oil, timber and most commodities) will always rise against paper currencies--not just the dollar--as long as there is inflation. This is no great surprise, particularly when compounding is considered, and $1,000 per ounce gold should be seen in this context. Nor is gold "always a good investment" as many nowadays claim.

David, London, England

If you'd bought gold at it's peak in January of 1980, to break even today with inflation it would have to sell for well over $2000 an ounce. No thanks. It's a commodity

r.burns, Tampa, USA

But what is gold good for apart from dentistry and electronics?Might as well hoard diamonds, silver, tin, coal, or orchids.

Michael Llewellyn, Bridgetown, Barbados

I no longer had confidence in paper money when the Italians issued 50 year government bonds at 5% yield. And they actually sold them!

Peter, reading, berks

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William Rees-Mogg

William Rees-Mogg has had a distinguished career with The Times and The Sunday Times. He was Deputy Editor of The Sunday Times before becoming Editor of The Times in 1967, a position he held until 1981. He was made a life peer in 1988. Since 1992 he has been a columnist for The Times, writing on a variety of issues. He has also been chairman of the Broadcast Standards Council and British Arts Council