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Tuesday, December 9, 2014

The Golden Age

By Alan Feuer, NY Times, Dec. 6, 2014

You would have thought by now—43 years after President Richard M. Nixon scrapped the gold standard—that gold’s role as an economic instrument was over. After all, the mighty metal that once held sway over the global monetary system was supposed to have, by this point, finally been reduced to just another asset peddled on the Internet.

But in fact in recent weeks, gold has experienced a renaissance of sorts, quietly re-emerging as the centerpiece of a handful of initiatives in Europe, Asia and the Middle East. On Dec. 1, voters in Switzerland considered—and eventually rejected—a populist plan to force its central bank to buy gold in a controversial bid to stabilize its currency. Russia and China both made headlines by snapping up enormous stores of gold. In late November, Marine Le Pen of France, a nationalist politician, called on her government to start amassing gold, and the Netherlands followed suit, revealing that same week that it had repatriated $5 billion of its own gold from a vault in New York City owned by the Federal Reserve.

Even the Islamic State, it appears, has become intrigued by gold. Declaring last month that it wanted to avoid “the tyrant’s financial system,” the group released a statement announcing that it was planning to produce a line of custom-made gold coins.

What’s going on here? Like almost everything concerning gold, the experts don’t agree. Some have interpreted the metal’s mini-comeback as an indication that financial Armageddon, in the guise of runaway inflation, is approaching. Others have read the recent moves as a symbolic way for central banks and governments to make a show of strength in nervously uncertain economic times.

“Holding gold, for people and for governments, reflects our anxieties about the future,” said Michael Bordo, a professor of economics at Rutgers University who specializes in monetary history and policy. “Even though it might seem somewhat retrograde, to many investors, having it on hand is something safe.”

At a time when central banks around the globe have tried to foster growth by aggressively printing money—which can in theory devalue sovereign currencies—moves by countries to recall their stores of gold can help create a “culture of stability,” Professor Bordo said. But then again, to simply stockpile gold doesn’t guarantee the health of an economy, and some analysts have said that such notions of stability are often more psychological than actual.

The Swiss proposal, for example, called for the central bank to hold at least 20 percent of its national reserves in gold. While the referendum was designed in part to reassure Swiss citizens concerned about the solvency of their money, some historians have argued that, even had it passed, it would have had no palpable effect on the value of the franc.

There remains the question of why gold has traditionally served as the economy’s equivalent of comfort food. According to Professor Bordo, it is, for one thing, a highly liquid asset that is easily exchanged for other currencies.

Furthermore, he added, when it was used as part of the gold standard, its controlled supply served to limit central banks from printing money and put a lid on profligate government spending.

Needless to say, in an era when the balance sheets of many central banks have expanded to unprecedented scope, there has been plenty of discussion of those last two trends, causing a pessimistic sect of economic experts to augur pending doom in the repatriation schemes and the shopping sprees by Moscow and Beijing.

“By purchasing gold, China and Russia have indicated that they understand how fragile things are and that they’re getting ready for the demise of the dollar,” said James G. Rickards, author of “The Death of Money: The Coming Collapse of the International Monetary System.” “At the same time, other countries have been watching what they’re doing and are saying to themselves, ‘If things are really that bad, then we better get our gold back,’ possession being nine-tenths of the law.”

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