The Golden Compass

The Golden Compass

The news items on this page represent the most relevant “the golden compass” headlines. Alzheimer’s forum to be held in Hopkinton
Gold bulls around the world were given a massive boost during the weekend of 6/7 November by Robert Zoellick, president of the World Bank, when he wrote an opinion piece in the Financial Times suggesting some sort of return to a gold standard.

In fact, Zoellick’s language was very carefully constructed when referring to gold—“The system should also consider employing gold as an international reference point of market expectations about inflation, deflation and future currency values. Although textbooks may view gold as the old money, markets are using gold as an alternative monetary asset today.”—but it didn’t matter; the gold bulls leapt on his words and pushed the price to a new record high of over $1420/ounce.

In early 1980, gold hit an intra-day peak of $850 per ounce. If we assume that global inflation has averaged 3% per year since then, the gold price should currently be trading at around $2 000 per ounce now. Gold bulls are nothing if not persistent however. During most of the 1990s, when the gold price was languishing around $350/oz, the bull’s ardour was not dampened. Bulls always talked fondly of how the looming global financial crisis would come to their aid and that gold would eventually reach many thousands of dollars per ounce. Probably the main reason is that there is a growing lack of faith in fiat currencies generally and the dollar specifically, as it is currently not just the world’s main reserve currency but it is also the world’s monetary standard, having usurped gold’s mantle in 1971, when the convertibility link between the dollar and gold was broken.

On closer inspection, Zoellick’s remarks in fact suggest that a new monetary standard be established, comprising the US dollar, the Euro, the British Pound, Japanese Yen, the Chinese Yuan and gold. At no time did he ever suggest that the world should return to a system of fixed exchange rates based on the gold standard. There’s an awful lot of gold around. Assuming that the average amount of gold mined annually since then is approximately 2 500 tons, the cumulative figure is now approximately 167 000 tons. This is very much in line with the World Gold Council’s estimate of 165 000 tons.

Working on the basis of 2 240 pounds in a ton and 16 ounces in a pound (conveniently ignoring the difference between a Troy ounce and an avoirdupois ounce), that works out at 5.985 billion ounces. At the current gold price of $1 400 per ounce, the total value of gold on the planet is thus around $8.4 trillion. The problem, of course, is that this total figure for gold’s value doesn’t relate purely to gold held in bank vaults around the world;

it is widely dispersed in the form of gold bars, coins, jewellery, printed circuit boards and other forms. The World Gold Council estimates that approximately 52% of total world gold holdings reside in jewellery and only about 18% in central banks’ holdings, which are usually kept in bank vaults. In very round numbers, this equates to about 30 000 tons of gold held by central banks.

Long ago, when gold was the global monetary standard, only central bank gold holdings were of any consequence, as countries’ currencies were physically backed by gold in those days. In other words, there were physical shipments of gold bars between countries to satisfy foreign exchange dealings. For as long as uncertainty stalks global financial markets and certain countries teeter on the brink of default, the debate about gold’s future position as a type of global currency will probably gather momentum.