The Lure of Bullion

Gold has always had a value to human beings well before it was money. The “Gold of Troy” treasure hoard was found in Turkey and dated back to 2456–2000 BC. It was highly valued, owned by the powerful and made into objects of worship. But it had not yet become money, although as far back as 3100 BC there is evidence of a gold/silver value ratio in the code of Menes, the founder of the first Egyptian dynasty. It stated that one part of gold is equal to two and one half parts of silver in value. The first use of gold as money occurred around 635 BC, when Lydian merchants produced the first coins. These were simply lumps of a mixture of gold and silver and helped Lydians in their wide trading activities. Croesus was the King of Lydia from 570–546 BC and amassed an enormous hoard of gold. Even today people speak of the wealthy being as “rich as Croesus.”

Because of that revolutionary act in Lydia around 635 BC, gold money was invented and the story of gold in human affairs became the story of how to manage commerce between countries. With the inflow of gold the continental economy expanded and the cumbersome exchange of coinage led to the introduction of paper money backed by gold or silver. Gold’s place eventually settled into a system called the gold standard. The British pound was created, as was the Spanish dollar, and in 1785 the United States adopted a dollar as its currency—based on the Spanish dollar. The Americans also fixed the price of gold at $19.3939 an ounce, and silver at $1.2929.

New discoveries changed the scene and the 1848 California Gold Rush outstripped Spain’s production by five times. However, the American Civil War used up almost the entire federal gold stock and the U.S. suspended gold redemptions and issued a paper note—the famous “greenback”—only to reinstate gold convertibility in 1879.

In Matthew Hart’s new book, Gold: The Race for the World’s Most Seductive Metal, he questions the infallibility of the gold standard as a guarantee of financial stability because in practice it was exactly the opposite. He then sets the stage for gold’s last moment at the centre of monetary life: the Great Depression and the 1932 election of Franklin D. Roosevelt, who prohibited the hoarding of gold coin, bullion and certificates. Owners of gold were paid $20.67 an ounce and this, together with European fears of war, increased bullion flow into the United States. In 1940 the U.S. Treasury had 21,000 tons or two thirds of all the world’s gold in its deep storage vaults at Fort Knox. An all-powerful America then organized the Bretton Woods conference in 1944, only weeks after the Allies had defeated Germany, and 44 countries agreed that instead of returning to the gold standard they would instead peg their currencies to the U.S. dollar—which would be convertible into gold. This enshrined the U.S. dollar as the world’s reserve currency, giving it all the advantages it still enjoys.

But then in the 1950s the U.S. share of the world output dropped alarmingly and American spending on the Vietnam War caused the Treasury to be drained of half its gold. Foreigners’ holdings of U.S. debt doubled. Eight countries formed a cartel to fix the gold price at $35 an ounce but, inevitably, in March 1968, the cartel folded. In less than a year the price of gold was $43 an ounce. Money continued pouring out of the United States to fund the Vietnam War, when Richard Nixon came to office in 1969 and it was obvious that a run on the dollar would mean chaos everywhere. The Bank of England went to the U.S. Treasury and asked for the redemption of $3 billion into gold. The moment of gold’s final days as money had arrived and the decision to take the dollar off the gold standard changed how the world worked forever. In a single stroke, the U.S. dollar had changed from a drawing right on gold to a paper note whose value would therefore be only a matter of public faith.

What happened to gold is really what Matthew Hart’s book is all about. It was no longer hard currency, but had become a phantom currency of the imagination. There continue to be gold discoveries and exploration, but the introduction of the “Spider” and the mad gold bazaar that followed it has revolutionized the history of gold. The Spider is an exchange-traded fund, an investment composed of a basket of assets that trades with the ease of trading an ordinary stock. The nickname comes from the fund’s full name, SPDR Gold Shares, and it was created by the World Gold Council. The Spider destabilized the gold price in two ways. It made it easy to buy and sell large amounts of bullion, and it contributed to volatility and instability. The Spider and other ETFs have marketed gold to the masses and this, ominously, could and did create a bubble. In August 2011 gold hit a high of $1,917.90 an ounce. Then in September 2011 it fell and continued to fall to $1,600. Today the price is much lower: as this article goes to press, the price is just under $1,400. Hedge funds further increased the sell-off because they had to raise cash to cover redemptions or to increase collateral demands.

Incredibly, the volume of gold coming to market today is more than 1,600 times what it was in the 16th century. In 2011 the total value of mined gold was about $143 billion; yet the value traded in one three-month period alone—11 billion ounces of gold worth $15 trillion—changed hands. In volume terms this figure represented 125 times what the world produced in a year, or twice as much gold as has been mined in all of history. In effect what this means is that gold no longer behaved like any kind of safe haven: it had become just another derivative—lost in a maze of secrecy, deception and manipulation.

Sadly, too, despite the excellence of Hart’s book, there is no mention of the Klondike Gold Rush, which lured 100,000 prospectors to the Klondike region of northwestern Canada between 1896 and 1899, with only about 30,000 souls surviving the cold, high prices and epidemics of Dawson City. There is no mention either of the rags-to-riches story of Harry Oakes, who left medical school and made his way to Alaska at the height of the Klondike Gold Rush before striking the western hemisphere’s largest producing mine in Kirkland Lake in Northern Ontario. His brutal murder in the Bahamas in 1943 was never solved.

These, and the heartbreaking poems of Robert Service, were all part of the Canadian dream. Some­how today that magic has all but disappeared.