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The end of history never came in the '90s, and the death of gold has
failed to hit this decade, too. What you think depends on where you sit.
And in early 2000, the Oxford
historian Niall Ferguson – like pretty much everyone else who pulled up
a chair to watch – sat two decades into the final death-throes of gold
as a valuable asset.
Professor Ferguson wasn't to know, of course, that the 20-year bear market in
Gold Prices was about to hit rock-bottom. Nor could he be sure that his own
TV and book-signing career was about to take off as well, bringing him tenure
at both Harvard University and the Harvard Business
School, plus a weekly
column in the Los Angeles Times.
But in studying 300 years of "money and power in the modern world"
as he subtitled his 2001 book, The Cash Nexus, he might have at least
wondered whether tomorrow would bring something different for gold from
today.
The lesson of history, after all, is that nothing lasts forever...nothing,
perhaps, except gold itself. Least reactive of all metals, and impossible to
destroy with anything other than cyanide to dissolve it, gold had been used
as a store of wealth across the world for more than 3,500 years. By the end
of the 20th century, however, the more recent past read like an obituary for
the "barbarous relic" of ancient kings.
Hence the "Death of Gold" proclaimed by a Financial Times'
editorial in 1997, together with The Economist's seemingly annual rant
against gold throughout that decade. Come October 1999, and BusinessWeek told its readers that "this ancient
form of wealth is less an international currency and stable store of value
than ever before.
"It's just another commodity that swings to the global rhythm of supply
and demand."
In short, "the twilight of gold appeared to have arrived," agreed
Professor Ferguson, stepping out of the lecture hall and into his gypsy
fortune-teller's circus tent. "True, total blackout is still some way
off," he forecast in The Cash Nexus, and "gold has a future, of
course, but mainly as jewellery."
All the evidence he gathered together at the turn of this century pointed to
"the creeping demonetization" of gold. First, the international
Gold Standard had collapsed at the start of World War One, after dominating
global finance for barely 13 years. The Gold Exchange system of world
currencies that followed it seemed only to spread and deepen the Great
Depression. In turn it collapsed, too, on the eve of World War II.
The United States
then ceased paying gold in exchange for US Dollars in 1971, finally
destroying the post-war Bretton Woods settlement
and severing all links between the world's most important currency and the
"barbarous relic" of gold.
Funnily enough, the end of gold's convertibility into Dollars sparked a
24-fold spike in Dollar Gold Prices by the start of 1980. But "the surge
in Gold Prices that occurred during the 1970s was historically
anomalous," said Ferguson
as the 20th century drew to a close, "reflecting a sudden increase in
demand for gold...and the rapid depreciation of most Western currencies
relative to oil and other commodities."
The "historical anomaly" of $850 gold lasted just one day, in fact
– 21st Jan. 1980 – and from then on, gold's role as a monetary
asset sank almost as fast as its price. By the end of 1999, the Gold Price
was languishing at a 20-year low. Then the British government, founder and
guardian of the international Gold Standard a century before, picked its
moment to sell half of its national gold reserves, swapping the metal for
Dollars, Euros and Yen to keep in the Bank of England's vaults.
At the very same time, the Swiss National Bank – last of the world's
central banks to abandon the Gold Standard in the 1930s – sold half of
its gold reserves, too. The sale required a change to the Swiss constitution,
and that required a national referendum of the Swiss people, plus a
re-writing of Switzerland's
currency statutes! But the central banks of Argentina,
Austria, Australia, Belgium,
Canada, Luxembourg, the Czech
Republic and India were already selling gold
by this point.
So what had the Swiss people to fear? What comfort were they hoping to take
from gold bullion anyway? The changes were ratified...the legal link between
gold and the Swiss Franc was severed at last...and so the SNB began the sale
of 1,300 tonnes of gold in a five-year program.
"From the point of view of investors in the West, where the possibility
(or at least the memory) of financial catastrophe has receded, the twilight
of gold makes some sense," Ferguson
went on. "As an investment, gold has signally under-performed stocks and
government bonds in the United States
and Britain
in the past century."
Surveying the world from the dreaming spires of Oxford, however, "gold also has a
future as a store of value in parts of the world with primitive or unstable
monetary and financial systems," forecast the don.
"Gold will [also] continue to have an appeal as a store of value
anywhere where currencies or banking systems are fragile," he added,
pointing to "the countries of the former Soviet
Union."
But given what's happened to the world's Gold Market since then, however,
might Professor Ferguson now want to review his opinion of Western currencies
and banking systems? Seeing the recent run on Northern Rock in Great Britain
– and the near-run on Countrywide Bank in California, an event which
Ferguson himself reported in a recent column for the L.A. Times – might
Western governments also want to reconsider their disdain for gold, that
barbarous relic of less enlightened times?
Fast forward to late 2007, and gold is now
approaching its seventh annual gain on the trot. Rising by nearly a quarter
against the Dollar over the last 12 months – and rising by 10% and more
against both the Euro and British Pound – the "anomaly" of
surging Gold Prices in the 1970s has made a comeback.
Put another way, the Western world enjoyed a "Long Boom" from 1982
to 2000. It was announced by yet another extrapolation of the present far
into the future in a book of that name by Peter Schwartz and Peter Leyden
published in 1997 (and it seems to have petered out before their 2020
deadline). At its peak, this boom discounted tech-stock earnings until A.D.
2146 on the Nasdaq index, but it failed to abolish the threat of financial
instability in Europe and the United
States.
At least, that's what the Gold Market has been saying since its current surge
got underway. Gold's resurgence really picked up speed in mid-2005...just as
the US
housing bubble was nearing its top.
And just as the famous "End of History" proclaimed by Francis
Fukuyama in 1989 proved to be merely a weekend vacation during the
mid-to-late 1990s, so the "Death of Gold" announced by historians,
pundits and analysts at the very same time has proved somewhat premature.
Full Disclosure: Of course, investors joining this bull market now should
beware of repeating their error. Sitting here at BullionVault might just
color our view a little, too!
But if deciding to Buy Gold feels at all hard today, it might suggest the top
of this market remains a long way off yet. And for as long as Bloomberg
columnists argue that buying gold is like "believing in the tooth
fairy", as Michael Sesit did this week, you might also take comfort in
the fact that mainstream consensus is still opposed to gold.
Just like it was at the turn of this century.
By : Adrian Ash
Head of Research
Bullionvault.com
City
correspondent for The Daily Reckoning in London,
Adrian Ash
is head of research at www.BullionVault.com
– giving you direct access to investment gold, vaulted
in Zurich, on
$3 spreads and 0.8% dealing fees.
Current gold price, no delay | FAQ | Detailed outlook for 2007
Please
Note: This
article is to inform your thinking, not lead it. Only you can decide the best
place for your money, and any decision you make will put your money at risk.
Information or data included here may have already been overtaken by events
– and must be verified elsewhere – should you choose to act on
it.
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