William Rees-Mogg: In times of crisis, never forget the value of gold
[William Rees-Mogg has had a distinguished career with The Times and The Sunday Times.]
Last week was a bad one for bank shares; after the HBOS £8.5 billion loss, Lloyds shares fell by a third and other bank shares fell as well. Yet it was a very good week for the gold price, which closed on Friday at $935 an ounce, after reaching what was nearly a seven-month high of $953.30 on Wednesday.
Barclays Capital commented that gold prices were resuming their long-run bull trend after eight consecutive years of gains. For longer than the past eight years I have been arguing that investment in gold is an essential insurance against financial shocks. Last week was a classic example. Respectable British bank shares have now fallen by up to 90 per cent, while the gold price has risen by more than 200 per cent since Gordon Brown began selling the Bank of England's gold reserve.
I have been following the gold price since I published The Reigning Error, a short book on inflation, in 1974. I have not consistently advised people to buy gold - like all other assets, gold can become significantly overvalued, as it did in 1980. However, I have found that the movements of the gold price are one of the most useful pieces of evidence about the health of the world economy. Mr Brown's sale of gold was an avoidable error. My friend the MP Peter Tapsell repeatedly warned him in Parliament not to do it.
People buy gold when they are nervous about the economy, and they are right to do so because gold is a unique commodity. It has to a high degree two qualities that are seldom found together: liquidity and reality. It has strong liquidity; it can almost always be bought, sold or exchanged. There are other liquid assets, of which the US dollar is probably supreme, but they lack gold's quality of real value.
Dollars do not constitute a real asset, such as property or “real estate”. The dollar is simply a piece of paper. Gold has been a much better store of value than the dollar.
In 1873 one of the leading British economists, William Stanley Jevons, published a short book, Money and the Mechanism of Exchange. By 1887 it had reached its eighth edition. Unfortunately, there are few modern economists who do not suffer from the delusion that new truths make old ones obsolete.
Great mistakes could have been avoided in 2008 if bankers and politicians had studied Jevons, even though his little book was written 136 years ago. Jevons quotes Herbert Spencer as observing that “it is the grave misfortune of the moral and political sciences that they are continually discussed by those who have never laboured at the elementary grammar or the simple arithmetic of the subject”. That was true then, and it is true now. Indeed, there are still some people who believe that poverty can be abolished by the issue of printed bits of paper...
Read entire article at Times (UK)
Last week was a bad one for bank shares; after the HBOS £8.5 billion loss, Lloyds shares fell by a third and other bank shares fell as well. Yet it was a very good week for the gold price, which closed on Friday at $935 an ounce, after reaching what was nearly a seven-month high of $953.30 on Wednesday.
Barclays Capital commented that gold prices were resuming their long-run bull trend after eight consecutive years of gains. For longer than the past eight years I have been arguing that investment in gold is an essential insurance against financial shocks. Last week was a classic example. Respectable British bank shares have now fallen by up to 90 per cent, while the gold price has risen by more than 200 per cent since Gordon Brown began selling the Bank of England's gold reserve.
I have been following the gold price since I published The Reigning Error, a short book on inflation, in 1974. I have not consistently advised people to buy gold - like all other assets, gold can become significantly overvalued, as it did in 1980. However, I have found that the movements of the gold price are one of the most useful pieces of evidence about the health of the world economy. Mr Brown's sale of gold was an avoidable error. My friend the MP Peter Tapsell repeatedly warned him in Parliament not to do it.
People buy gold when they are nervous about the economy, and they are right to do so because gold is a unique commodity. It has to a high degree two qualities that are seldom found together: liquidity and reality. It has strong liquidity; it can almost always be bought, sold or exchanged. There are other liquid assets, of which the US dollar is probably supreme, but they lack gold's quality of real value.
Dollars do not constitute a real asset, such as property or “real estate”. The dollar is simply a piece of paper. Gold has been a much better store of value than the dollar.
In 1873 one of the leading British economists, William Stanley Jevons, published a short book, Money and the Mechanism of Exchange. By 1887 it had reached its eighth edition. Unfortunately, there are few modern economists who do not suffer from the delusion that new truths make old ones obsolete.
Great mistakes could have been avoided in 2008 if bankers and politicians had studied Jevons, even though his little book was written 136 years ago. Jevons quotes Herbert Spencer as observing that “it is the grave misfortune of the moral and political sciences that they are continually discussed by those who have never laboured at the elementary grammar or the simple arithmetic of the subject”. That was true then, and it is true now. Indeed, there are still some people who believe that poverty can be abolished by the issue of printed bits of paper...