Gold and the End of History's Holiday

"The 1990s failed to mark the end of history. It just took a short holiday, instead — and at the very same time, historians and pundits alike announced the ‘death of gold’, too."

IF WHAT YOU THINK depends on where you sit, then in early 2000, Oxford historian Niall Ferguson — like pretty much everyone else who pulled up a chair and took a look — sat two decades into the final demise of gold as a valuable asset.

How was he to know that gold’s 20-year bear market was about to hit rock bottom, or that his own TV and book-signing career was about to take off, as well? He would soon earn tenure at 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 , professor Ferguson 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. 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, "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 painted caravan. "True, total blackout is still some way off," he forecast in his 2001 book, and "Gold has a future, of course, but mainly as jewelry."

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 I, 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 ceased paying gold in exchange for U.S. 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 its dollar price 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 — Jan. 21, 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 — the 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 rewriting 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 the SNB began the sale of 1,300 tons 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 underperformed 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 world gold prices 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 Los Angeles 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 "long boom" enjoyed from 1982-2000 may have discounted tech-stock earnings until A.D. 2146 on the NASDAQ index, but it failed to abolish the threat of instability in Europe and the United States. At least, that’s what the gold market has been saying since the current surge got under way in mid-2005. 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.

Of course, investors joining this bull market now should beware of repeating their error. 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," you might also take comfort in the fact that the mainstream consensus is still opposed to gold.

Just like it was at the turn of this century.

Adrian Ash

October 24, 2007