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Gold not glitter any more [The Fiji Times, 25 Aug 1999] (hah hah hah, how wrong I was!)

29/03/2012

The power of gold

  For thousands of years, people the world over, have wanted gold, have prayed to golden images,  have wanted to be like gold, have sold themselves for gold, and killed for gold.

Continents were conquered and civilisations destroyed, for gold. Central banks and economies collapsed when their reserve banks ran out of gold to back their currencies.

For centuries, millions of people in India, China and the Middle East, not trusting their national currencies, have invested in gold jewelry and gold bars.

And thousands of Fiji Indian families have spent hundreds of millions of dollars on gold jewelry for daughters, sisters, wives, and mothers;  and also on rings, bracelets and chains for fashion conscious men.

But is gold going out of fashion? 

But a few recent news items (not noticed much in Fiji), must be sending shivers down the spines of all who hold large amounts of gold.

Reserve banks the world over (including the Bank of England), no longer wish to hold gold stocks to support their currencies.  Gold producing countries (like Australia and the former USSR) have already sold large amounts, and plan to sell more.

Gold, which was valued at more than US$500 per ounce thirty years ago, is now priced at US$250 per ounce, and is unlikely to recover.  It may even fall further.

$1,000 invested thirty years ago at only 3% interest, would be worth $2,400 today.    The same $1,000 of gold in jewelry or bars would be barely worth $500, a real loss of more than three quarters in value.

For Fiji’s Indian families alone, the total loss of value in their gold jewelry holdings would amount to tens of millions of dollars.

 Origins of fascination with gold

Economists have all kinds of fascinating explanations for the monetary role of gold.  Gold is scarce, shiny, doesn’t corrode, can be easily made into coins.  Civilisations had access to gold supplies, by accident or otherwise.

But the value of gold (and silver and jewels) for humans, probably has a more basic explanation.

For primitive man and woman in the Ice Age, primeval fears of demons and deathly bitter cold would descend with the darkness of night.  Warmth, plants, animals, and human life itself, came from the golden sun.  The darkness of the night would be partly banished by the moon and the stars.

People everywhere have made gods and goddesses out of the sun, moon and stars. The linguistic origins of the Indian word for gold, sona  (not the Fijian word) is close to solar;  silver is chaandi, while the moon is chaand; sitaara (star), and tiara of jewels.

Images of deities use gold, silver and jewels: the Sun God of the Incas; the golden images in ancient Hindu temples.

 Gold as Money

Tributes by ordinary citizens to temples would be paid in gold, silver (and other means of payment, including crops, animals and daughters).  Somewhere, the dividing lines between rulers and religious leaders would be blurred.

Rulers began to use the gold (and silver supplies) in trade, in bars and ingots.  Then uniform pieces of gold, silver and bronze (now called coins) began to be struck with images of rulers, to provide guarantees of purity.   The Chinese had their chop on coins, and the Indians had their chaap. (known as “chop” by Chinese)

For centuries, all kinds of money circulated, not forgetting cowrie shells, shell necklaces, stone rings, mats, and tabua in the Pacific. But gold and silver dominated amongst most countries, west and east.

Britain’s sterling system was originally based on silver (shillings and pound), but with her colonial gold, eventually began to coin gold guineas and sovereigns.

Two centuries ago, Britain’s bankers quietly (and eventually formally) adopted the gold standard, with the value of the pound sterling backed by gold reserves held at the Bank of England and other banks.

The English pound (and the financiers of the City of London) conquered the world, not just because modern industrialisation started in Britain, but because the world believed that any person could present a sterling piece of paper money in London, and receive the equivalent in gold.

Bitter battles between silver and gold: but gold won

Towards the end of the last century, there were bitter international monetary battles (and conferences) in the western world between those who wanted to retain silver as an international currency (in addition to gold) and those who wanted only gold.

Crudely, on one side were industrialists and agriculturalists who thought that silver money was important for monetary expansion and economic growth.   On the other side were the bankers and financiers, who wanted the more restrictive gold standard.  In United States, presidential elections were fought over the “Cross of Gold” which American bankers were allegedly crucifying American farmers on.

By the 1890s, the western world adopted the gold standard, storing large amounts of gold in their central banks, to back their national currencies.

Silver dumped on colonies

The demonetised silver was banished as an ordinary metal commodity, to be forced as money on India, China and other British colonies.

But for decades, Britain made sure that its colonies (including India, Hong Kong, Malaysia, and Fiji), while using silver money,  kept their gold reserves in London, to be used by the London bankers as backing for pound sterling, and funding of British Government expenditure.

But for all of this century, India, China, and the Middle East have continued to absorb gold (and silver), through exports of food crops (sometimes while their populations starved), raw materials, and minerals.   They still hold the largest proportion of the world’s gold, in  the form of bullion and jewellery.

 The End of Gold?

Economists have always thought that it was stupid to dig up gold from holes in the ground all over the world, merely  to store it in other holes below the central banks of the world.  And why allow the supply of gold to control the supply of money?

Eventually, most countries did go off the gold standard, in the 1930s.  With the growth of the US economy and the rise of New York as the world’s financial centre, US dollars (which remained convertible into gold) began to be used as international reserves and means of payment.  It was only in 1968, that the US dollar was cut from gold.

But, many Central Banks continued to hold gold as part of their monetary reserves. National currencies were not trusted because irresponsible governments could “print paper money”, to get themselves out of fiscal holes.  Gold could not be “printed”.

But now there is more faith in some national currencies.  In addition to the ubiquitous US dollar, there is also the Euro (and its components), yen, sterling, and securities in global stock markets, all earning income (unlike gold).

Hence the use and value of gold as money, and as reserve backing for money by banks and countries, seems to be finally coming to an end, after three thousand years.  Central banks are now selling their monetary gold reserves.  If all countries follow suit, the price of gold will fall further.

The value of gold will in future, depend only on the fabrication (including jewelry) demand for gold, not as backing for money.

Fiji’s gold?

But what of the Fiji Indians’ large purchases of gold jewelry, a practice really derived from India?

Fiji Indians seem to have forgotten that in India, purchase of jewelry was also an act of saving.  In a rural India where there were no banks, monetary savings in the form of coins or ingots could be easily stolen, with ownership difficult to establish.

Not so with jewelry.  An entire caste of people (sonars) existed in every village, converting gold and silver bullion, into unique identifiable jewelry pieces.

What is also forgotten now, is that Indians had the legal right to take their gold and silver bullion and jewelry to the State Mint, for conversion into legal tender coins.   Jewelry was not just cultural, but a saving, which could be reconverted into money.

Today,  money spent on gold jewelry is unlikely to come back as money, except at a significant monetary loss.  The jewelry purchases will no doubt continue (and keep our jewelers in business), but not as savings or investment.

Those who buy gold (including gold jewelry) for investment purposes, will have to rethink.   And gold mines (including those in Fiji and Papua New Guinea) must be extremely nervous about their future.

Gold has given rise to great metaphors for the ideals in life: the heart of gold; the golden age; the golden handshake; “all that glitters is not gold”.  But the human race may have to rethink their metaphors.

For gold has finally lost its monetary glitter.

[Author’s note at this posting, 29 March 2012:   My prediction in 1999 was totally wrong! This topic needs another article, soon].

 

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