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  • Jerry Schuitema

“In gold we trust”. 2019 Report

Recent thoughts on restoring the metal as the core of money.

Very few South Africans have not been affected in some way or another by mining, specifically gold mining. Many of my generation were intimately tied to gold mining: families migrating from one site to another in the heady gold boom days of the 50’s and 60’s when new shafts were being sunk; new towns being formed; moving from school to school; snapshots and anecdotes being added to the scrapbook of the mind; gold mining flowing through the veins of young and old and a mining sub-culture taking shape in a large part of the population: a camaraderie forged from a nomadic lifestyle and dangerous work.

Sadly few of us really understood the metal itself. Its role as a store of value and a means of exchange, or money, was a given in a controlled international monetary system. For the rest, the connection was seldom made between the lustre of the metal in personal adornments and the deep shafts and tons of rock from whence they came. It’s a moot point whether gold mining will ever return as the dominant contributor to South Africa’s economic welfare, but the current discussions and developments in the gold market are highly significant for the country.

While the U.S. had cut ties between the dollar and gold way back in 1933, a new era dawned in 1971 when it also ended convertibility and refused to exchange dollars for gold at the ruling official price of about $40 per ounce. Supported by Keynes’s belief that the “gold standard was a barbarous relic”, money switched to a fiat system based solely on debt expansion, and gold was mostly tradable only on the open market.

But it never truly lost its status as a store of value or a monetary asset. Gold has remained a reserve asset in the most important central bank balance sheets and more recently we have witnessed the highest gold purchases by central banks since 1971 and an ongoing trend to repatriate gold reserves. In the last ten years countries such as Russia, China, India, Kazakhstan and Turkey have increased their reserves by a whopping 3641 tons -- more than a combined trebling.

Good journalism is not so much about knowing everything, but in simply asking the right questions. My last Moneyweb column “Losing our marbles” attracted some very informed and insightful comments from readers making me wonder whether the media generally and even most of our orthodox economists are simply not interrogating enough what is happening to our world money system. For example, denying market manipulation in all markets, especially commodities, is contradicted by the U.S. charging three JP Morgan metals traders for manipulating markets over an eight year period. Cracks continue to appear in global finance virtually weekly. The latest being the crunch in the American repo market, where bonds are traded for cash usually overnight, and which the Federal Reserve had to top up by more than $100 billion dollars in recent weeks.

This takes me back to one of my earlier articles for Moneyweb in June 2016, called “Crypto coins and pieces of eight” in which I wrote: “We have three potential forms of money, each with their own element of fiction. If you strip gold of its ancient allure, its historic backing of paper currencies and its investment and adornment image, you could certainly posit the Keynes view that it is a ‘barbarous relic’. If you interrogate Crypto currencies’ mysterious and anonymous founding, creation structure and block chain security, you could equally have some qualms. But both do not come near the degree of fiction that permeates fiat currencies. Debt is a fiction. It is nothing more than a promise to pay sometime in an ever-delayed future – a very empty promise considering the increasing extent to which the gap between debt creation and the means to pay is beyond redemption.”

Yet on the surface, faith in the U.S. dollar as the leading “safe-haven” asset appears intact. Much of this column, including the title itself, has been gleaned from a widely researched publication by the Lichtenstein based asset management group, Incrementum. This year’s 334 page “In Gold We Trust” report, while obviously strongly pro-gold, extensively covers the current monetary malaise and much more.

“In our opinion”, it says, “the currently high trust granted into the skills of central bankers and the supposed strength of the US economy are the main reasons for the somewhat weak development of the yellow metal. If the omnipotence of the central banks or the credit-driven record upswing are called into question by the markets, this will herald a fundamental change in global patterns of thinking and help gold to old honour and new heights.”

“Why Gold?” one of my readers asked. To which another replied: “It can be anything that is trusted.” Therein lies the ultimate answer. As the Incrementum report puts it: “Popular trust in the idea that monetary policies can sustain growth and employment and that central banks have inflation under control will be seriously tested in the next recession. The spread of the loss of trust to other pillars of the Western world, such as the media, the financial system, and the judiciary could have devastating consequences.”

It then reflects on this quote by Oliver Wendell Holmes:

“Put not your trust in money, but put your money in trust.”

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