A Golden Future? Inflation Fear Underlies Global Rise in Gold
Bars of gold (Photo: Wiki Commons)
Gold’s power is enduring.
The price has risen from an average $300 an ounce in 2002, to an average of $1,600 last year, peaking a shade under $2,000.
The change has surprised many economists. Gold was seen as “a kind of historical artifact” in the 1990s, according to Matthew Bishop. Bishop is New York Bureau Chief for the Economist, and co-author of a new book, “In Gold We Trust: The Future of Money in an Age of Uncertainty”.
Bishop argues that something big has changed.
He says investors have lost confidence in money, or more specifically in the promises of governments: promises which form the basis of money, since the end of the gold standard.
Bishop says he wrote the book to let people know just how tempting it is for governments to simply print money to lower the value of their debts.
He says the downside for the public of allowing that kind of inflation is that they will lose their savings.
“Now this may be the moment when history doesn’t repeat itself,” he says, “but I think a lot of people are buying gold because they think that what’s always happened in the past will happen again.”
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Marco Werman: The enduring appeal of gold is reflected in the markets every day. It’s what many investors turn to in times of economic uncertainty. That’s lead some like Republican presidential candidate Ron Paul to suggest a return to the gold standard for determining the value of money. It’s issues like that that prompted Matthew Bishop to put pen to paper. Bishop is New York Bureau Chief of the Economist, and coauthor of In Gold We Trust: The Future of Money in an Age of Uncertainty. There is something magical about gold that conveys a sense of wealth and solidity. Where does that come from and why don’t like silver, or diamonds or platinum have the same kind of magic?
Matthew Bishop: Well, I think it was one of the things we looked at in In Gold We Trust. We looked at the history of money and go back to the dawns of civilization, and people like Croesus, and the phrase, “as rich as Croesus” and I guess you have the early myths like King Midas and how he wanted to turn everything into gold, and then discovered it wasn’t such a bright idea. All the way through to really in the last 300 years where gold became much more centered with the economic system. And that was actually almost a historical accident where Sir Isaac Newton, who we all remember best for the apple falling on his head and he grabbed it, and the laws of gravity. He was actually in charge of the British currency at the time and had to decide what the exchange rate would be between gold and silver (because silver was the other common form of money). And the way he actually calculated it meant that it was a slightly better bet to use gold as the currency than silver, and so people took money out of the money supply and just spent, just relied on the use of gold. Then America copied Britain and went down the system of the gold standard as well, so even though silver probably had a longer track record as being regular money, gold became fixed in people’s minds as the purest form of money.
Werman: So it’s not just the apple that goes up and must come down, I guess the price of gold must go up and also come down too.
Bishop: Yeah, I just think he was very lucky he didn’t get hit on the head with a gold bar because maybe he wouldn’t have come up with such a brilliant theory.
Werman: But is that rise in the price per ounce of gold sustainable? I mean all previous gold boons have ended in a bubble, right?
Bishop: Well, I think what we try to get at in In Gold We Trust is why the gold price has gone up and what is it that brought gold back into fashion? And to do that we looked at the whole history of gold and particularly its role as money because I think one of the things that’s going on in the moment is that investors, the smartest investors, the people who saw the big crash coming a couple of years ago, those investors, people like George Soros, people like Ray Talione, John Paulson, who’ve made billions personally by correctly predicting the economic problems that we’re in in the moment, they’ve been buying gold and they’re doing it because they’ve lost faith in traditional money. They’ve lost faith in the dollar. They’ve lost faith in the euro and they think that those currencies are very weak and they’re probably going to get weaker. And gold with its long history as a money is a better bet than the paper currencies.
Werman: Is the US dollar still as good as gold?
Bishop: Well, no, I think this is the worry. I think what we’ve seen is we’re in this unprecedented period as we as In Gold We Trust, we’re in this period where we’re really experimenting with macro economic policy, with printing money on a level that’s never been printed before. So the Federal Reserve’s response to the financial crash of 2008 has been to pump more and more money into print lots and lots of money. And now the European Central Bank is also doing that, and history has said that every time that’s happened in the past that has resulted in inflation in the real value of the paper currency falling substantially. Now, this may be the thing at the moment when history doesn’t repeat itself, but I think a lot of people are buying gold because they think well, chances are what’s always happened in the past is gonna happen again, and that we’re gonna see a much weaker dollar, and we’re gonna see all currencies, all paper currencies get weaker relative to gold.
Werman: Speaking with us from New York, Matthew Bishop of the Economist magazine, coauthor of In Gold We Trust. Matthew, thanks a lot.
Bishop: Thank you.
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