Gold - the “green metal for the twenty-first century”
Among the players in the gold market, perhaps central banks are not as important as we have thought – and the gold standard is nothing new.
Posted: Tuesday , 13 May 2008
Timothy Green is arguably the man with more knowledge about the whereabouts of more ounces of gold in the world than any of the rest of us. After forty years in the gold market, and with a vast amount of experience including acting as consultant to almost three decades'-worth of the Consolidated Gold fields (now GFMS) Gold Surveys, he also has a list of books to his name, the most recent of which is "The Ages of Gold", published by GFMS Limited, which looks at gold's history from as far back as 4,000 BC and comes right up to the present day. We are taken from the first goldsmiths to the graveyards of Mesopotamia including the 2,500-year-old Royal Graves at Ur on the banks of the Euphrates, all the way through to the importance today of the hedge funds and day traders through ETFs and options or in Over-the-Counter derivatives, along with gold's importance in high-technology including spacecraft and space stations, and its increasing importance for nanotechnology.
There is a hint of irony in the fact that the author of this book lives under the name of Green, as one of the publications' concluding comments (from Dr. Chris Corti of COReGold Technology), refers to gold's chemical characteristics as follows: "The properties of gold on the nanoscale and its chemical properties are important for the future... these include catalysts for pollution control and energy generation, along with use of gold compounds and nanotechnology for medical diagnostics and treatment. Gold is a "green" metal for the 21st century".
Mr. Green argues that among those elements that are "constantly shaken to stir the price", central banks are modest team players, taking something of a back seat to the shorter term traders listed above, who constantly seek price movement. The central banks were only sporadically in the gold market following the sales from the IMF and the US treasury in the late 1970s, until the bullion banks, thirsty for borrowed gold in order to underwrite mining projects, tempted the official sector back into the market and over the late 1980s and 1990s. Over sixty central banks became involved, lending over 4,500 tonnes into the market, equivalent to almost 15% of all official holdings. As we have seen from the recent Société Générale/GFMS hedge book survey, the book stood at 835 tonnes at end-December 2007, the lowest since 1992 - and AngloGold-Ashanti's announcement reveals a further reduction of 135 tonnes in that company's book alone during the first quarter of this year.
Mr. Green argues that "from earning a little income through loans, it was a short step to central banks selling their reserves. The loans got central bankers talking to bullion bankers, who explained that a little gold could be sold discreetly over several months, or even years, without the market being aware of what was going on, or at least, knowing who was selling... the central banks' arrival as regular sellers just as the gold mining boom was delivering more output every year changed the dynamics of the market.. [and that] the final blow was ... the decision of Gordon Brown, the [UK] Chancellor of the Exchequer" to sell half of Britain's gold reserves.
This, Mr. Green argues (and he is by no means alone in this) "sent a terrible signal to the market. The Bank of England had set Britain on the gold standard in the 18th century; it had nursed the gold market for three hundred years".
With respect to the Central Bank Gold Agreement, Mr. Green assets that "at least [the official sector has] learned to live with the new world of gold, although the question of the stock of over 8,000 tonnes still held by the United States has not been addressed. The Europeans, with over 13,000 tonnes in their vault, can now be regarded as the stakeholders in the future of the gold market, even if it will be primarily as sellers". He notes that a scattering of politically isolated States, including Iran, have bought gold and taken it home, and that, in this dangerous world that strategy may continue. The quantities, however, are unlikely to match the level of sales.
The central banks may have been back in the market over the last twenty years after a decade or so of limited activity, but gold's role in government goes back an awful lot longer than the Bank of England's gold standard of the eighteenth century. The city of Babylon was effectively on a gold standard for a period after 1,400 BC; and, after taking us through the Ancient world, to the empires of China and Rome, the book brings us to Byzantium. The Emperor Constantine declared the former city of Byzantium as his capital in AD330, renaming it Constantinople and then, for the next 150 years or so, though to the death of "the last truly Roman western emperor, Romulus" in AD476 and latterly the accession of Anastasius in AD 491, civilisation could be regarded as being in a period of transition. Rome (and subsequently Ravenna) and Constantinople effectively ran in parallel, with common gold coinage, which the book suggests "might be called an early gold standard". The Roman empire was by then struggling under the erosion of its military power and German tribes were constantly being bribed in gold to try and keep them out - in AD422 the annual "subsidy" was 680 kg,- equivalent to 5,208 ounces which in today's money (a.m. fix May 13th at $877.00) would be $4.6 million.
Constantinople, meanwhile, was collecting gold in taxes, melting all such collected coin into ingots and the Emperor Theodosius II held gold reserves in the first half of the fifth century of 32.4 tonnes, comprising 7.2 million solidi or numismata, as they came to be called. By the sixth century the currency was receiving widespread acceptance, with the influence spreading far. Burgundian kings in France, for example, started accepting these coins, adding their own monograms struck at the mint in Lyon. This section of the book goes on to describe how the Empires flourished and changed, with the weight of coins coming to be expressed in carats, which was the ubiquitous measure of weight in the eastern Mediterranean, based on the carob seed.. One solidus weighed 24 carats.
In modern-day parlance, of course, gold caratage refers to fineness - although in the diamond market it remains a term of weight.
The Byzantine empire effectively went into terminal decline with the Crusaders' capture of Constantinople in 1204, thus more or less bringing to an end a gold standard that lasted almost a thousand years.
This fascinating book covers considerably more than just gold's role in coinage and government; it looks at how gold influenced the course of history (the Spanish foray into America, for example) as well as celebrating the mining industry and gold craftsmanship through the ages.
It also serves to remind us that the gold standard was not an invention of modern man. One wonders quite how far back J.M. Keynes was looking when he referred to the gold standard (not gold itself, note) as a "barbarous relic".