Goldfields is one of the oldest and most pre-eminent gold companies in the world. Based in South Africa it was a founding member of the World Gold Council and has done more than any other company to keep gold relevant in the age of specie and paper money. Once a year the company publishes “The Gold Book” a massive tome that tries to make sense of gold as a commodity, subject to supply and demand equations, as are other precious metals such as silver and platinum.The attempt works somewhat but falls far short in explaining the rise and fall of gold values over time expressed in the major currencies of the World
The reason for this is that gold is not, and never has been, merely a commodity. Rather, it remains primarily an international reserve currency, albeit not one that is accepted as legal tender in everyday trade.
The great bulk of gold in the World is held in vaults as bullion that never sees the light of day. Annual gold production of a little less than 700 tons, (22 million ounces) is small enough so as to make very little difference to demand that comes mainly from jewellery manufacturers (India, SE Asia, and China), central banks, and the Communications Industry
Because of the very small float gold prices on the London Exchange tend to be very volatile in the short-term frequently moving more than 2% in a trading session. A much better gauge of relative gold values is the COMEX Futures Exchange in New York where all the players meet, including those engaged in arbitrage of gold and the dollar as freely trading currencies. In the simple terms, if fund managers believe there will be continued debasement of the dollar by means of printing more specie, they will short the dollar and go long gold. They achieve this by executing forward contracts in dollars in exchange for gold on COMEX (usually thirty to ninety days out). This is the institutional method of hedging against currency devaluation in the short-term. It is not suitable for Individual savers and investors since the market has no stops (limits to changes in price during a trading session)
Longer term the likelihood of continued currency devaluation presents a much greater challenge for those who do not wish to suffer the resulting reduction in their standard of living. The reason for this, can, once again, be found through history.
The Romans showed us how to mint specie tied to the value of gold. Unfortunately they also showed us how to screw up , by minting too many brass and copper coins, thereby debasing or devaluing the central currency and destroying the Empire. Through the ions of time the practice has continued in one form or another, to the extent it can almost be predicted, when, not if, there will be further devaluation of currency in terms of the rate of conversion into gold. In this equation gold is the constant and the various forms of specie are the variable.
Wars are a great equalizer, as are depressions and panics. In these circumstances the central governing bodies, fearing retribution from an angry populace, choose the easy way out and print more specie, as opposed to paying for their folly. It seems as though this undeniable fact is recognized by about half the population of the World. These are the inhabitants of Asia and India who have a healthy distrust of governments and their ability, or willingness to take care of them when things go wrong. No surprisingly these people are the biggest buyers of gold. Take for instance the inhabitants of the Island of Formosa or Taiwan. They fear, rightly, that, given half a chance the Monster of Peking will take back its’ lost Island’ and they will be left to fend for themselves. It is estimated that Taiwanese own gold to the extent of four times all of the currency in circulation. Under normal circumstances this would destroy the local currency, as ‘good money always drives out bad money’. Not so in this case since the Taiwanese are also the World’s greatest savers.
The other half of the citizens of the World appear willing to take their chances, believing that the omnipotence of central governments in the form of the welfare State will take care of them in their needs.
It is this great divide that sets up the dichotomy that exists in the treatment of gold in the major markets of the World.
It is an open secret that Monetarists ( The Chicago School) who now hold sway over the policy dictates of Central Bankers would like to get rid of gold. altogether. But they face at least two very large problems. They cannot control the elected representatives who give rise to the printing of the specie that is at the heart of the problem. Instead they are left to warn and cajole law makers of the dangers of uncontrolled spending while they try to devise new methods of controlling the ever-increasing money supply. And, they face an almost insurmountable challenge of convincing the rest of the World, all those who save more than they spend, that they really can control the money supply and thus prevent further devaluation.
So it appears likely that the millions of tons of gold bullion in national vaults will stay put for a while longer. What is much more likely is that gold will be further marginalized by legislation.
In 1935 President Roosevelt, who apparently had a visceral dislike of Bankers, along with the New Deal Democrats passed into law “The Gold Reserve Act”. The Act fixed the price of gold at $35 an ounce, (a 90% devaluation of the dollar), outlawed the use of gold as legal tender, and forbade American Citizens from owning large amounts of gold bullion or coinage. Surprisingly this draconian act omitted gold Jewelry leaving the door open for a small portion of gold producers to survive.
The effect of the ‘Great Gold Fix’ was the issuance of nearly $40 billion in specie ($6 trillion in today’s money) in exchange for nearly 650 million ounces of gold all held in great secrecy at the United States Mint at Fort Knox in Kentucky.
If this appears vaguely familiar simply substitute US Treasury Bonds for gold and you have the answer.(Quantitive Easing) The whole exercise was designed create inflation as opposed to dis-inflation or depression. We will never know if this grand ruse worked because the Second World War started and fiscal controls were put in place to help the ‘War Effort’ (stop Inflation)
Much the same thing happened in France during the depression following the Second World War. The French Governments of the day (there were many) was forced to continually devalue the Franc because of the continuing war with Algeria and the fixed exchange rates dictated by the Breton Woods Agreement. Then along came President de Gaulle who put a stop to the useless war and issued ‘New Francs’ in return for gold held by French Citizens. The result was much the same as with Fort Knox, the second largest hoard of gold in the World and finally monetary stability.
Chances are very great that history will repeat, because monetary realignment, anywhere in the world cannot succeed unless gold is taken out of the equation or at least marginalized. Gold has a two thousand-year history as the best currency and will drive out specie unless this occurs.