The eternal value of gold

Gold has been a means of protecting wealth throughout history. Because of the role it has held for centuries there is now renewed interest in owning the precious metal as the long-term security of banks, currencies, and the property market are brought into question. Ed Pearce, Managing Director of Douglas-based gold bullion depository and trading company IMGold, charts the economic history of the most precious of precious metals.

Around 5,000 years ago the Egyptians found a way to separate gold from ore. At that time it was considered to be the skin or flesh of the gods, and only kings were allowed to wear or own it. From that moment on gold has always been the most prized and valued of all precious metals. Throughout human history, in every civilisation since ancient Egypt, it has symbolised wealth and power. By 2,600BC gold was being used to make jewellery and by 1223BC artisans were able to create the incredibly ornate death mask for the Egyptian Pharaoh Tutankhamun.

Gold’s role as a form of international currency began around 564BC during the reign of King Croesus, the last king of Lydia (which is now part of Turkey). Advances in gold refining techniques allowed the manufacture of the world’s first standardised gold currency called ‘Croesids’. They soon became recognised and trusted around the world and were traded for goods. The king became renowned for his affluence which gave rise to the phrase ‘as rich as Croessus’, which survives to this day as an expression to describe someone’s wealth.

In the centuries that followed, a nation’s wealth became increasingly linked to the amount of gold it held, and the drive to secure the precious metal was a major factor behind Spain’s expeditions and conquests in South America in the 14th century as the Aztec and Inca civilisations were plundered for their stores of precious metal. King Ferdinand is reported to have told adventurers setting sail for the Americas: “Get gold, humanely if you can, but at all hazards get gold!”

As feudalism was replaced by the industrial age in the 18th century, the role of gold continued but this time with the use of the ‘Gold Standard’. The UK first defined sterling’s value in relation to the price of gold in 1717, but it was not until the latter part of the 19th century that the Gold Standard was widely adopted by leading economic nations. Currencies had to be backed by a reserve of gold and this helped to establish exchange rates between different currencies. During the 20th century many of the world’s leading economies moved away from the Gold Standard. In the USA, the dollar was backed by federal bullion reserves up until 1971 when the Nixon administration announced that the US Government would no longer trade US dollars for gold. The end of the Gold Standard meant that Governments were not limited in regard to how much paper money they could print to manage the economy – but it also opened the door to hyper-inflation.

It’s interesting to note that today the US dollar is worth around two dimes in buying power compared to the pre-Nixon dollar. In the 1960s an ounce of gold would be worth around US$35 – about the same value as a hand-made suit. That ounce of gold would still buy you a suit of equal quality at today’s prices – around $1,260 at the time of writing. The $35 that the suit cost to buy in the 1960s would probably cover the costs of a cheap pair of cufflinks today! The £500 that a kilo of gold would cost you in the 1960s would have brought you a brand new mini back then. For anyone who was a fan of The Professionals TV show in the 1980s that same kilo would allow them to follow the trend set by Bodie and Doyle and buy a gleaming Ford Capri. Today, that same gold bar would see you sitting behind the wheel of a £24,500 BMW. These stats are just a few examples of why gold retains its appeal as a form of wealth protection today. After all, if you had kept that £500 in cash under your mattress in the 1960s, what kind of car could you get for that amount right now? And how much is a brand new BMW going to cost in 10, 20 or 30 years’ time? Many more people may become ‘millionaires’ in in the next few decades – but what you will be able to buy for £1million or $1million will change dramatically.

The ability of gold to hold its relative value is the main reason why it has played a role in protecting private wealth for centuries, and particularly in times when confidence in alternatives has been damaged by economic crises. Personal ownership of gold increased significantly in the USA in the aftermath of the Wall Street Crash in 1929, and the global economic crisis which began in 2008 has prompted renewed interest in gold in the last few years. The rarity of the precious metal is the cornerstone of its enduring value. Thomson Reuters GFMS, a leading organisation in precious and industrial metals markets research, estimates that all the gold in the world which has so far been mined amounts to 171,300 tonnes – as a comparison the same amount of steel is produced every few hours in the USA alone. There is no likelihood of significant new sources of gold being discovered, so the eternal allure of gold is likely to continue in this generation and the next one – just as it has done for thousands of years.