If all that Glitters Is Suddenly Sold

Relic
THE BULLION RUN It’s over now... at least until the next set of economic convulsions

Will gold recover? Or should one blow torch that old vault and sell anything that glitters while there’s still time? The metal has tanked in a global ‘market panic’, its price dropping faster than one canname the capital of Cyprus, the possibility of whose reserves—all of 14 tonnes— being offloaded has been cited by traders as the day’s big scare. As with any such phenomenon, acting on reflex is inadvisable. To get back into reflective mode, it may be worthwhile to read(or re-read) Peter Bernstein’s The Power of Gold: The History of an Obsession, followed by his classic Against the Gods: The Remarkable Story of Risk.

If that’s too heavy, try, for a start, John Donne’s poetry:

I, when I value gold,/ may think upon / The ductileness,/ the application,/ The wholsomeness,/ the ingenuity,/ From rust, from soil, from fire ever free;/ But if I love it, ‘tis because ‘tis made / By our new nature the soul of trade.

Donne was no economist. He was a metaphysical poet of the 16th century, and in Love’s Progress—about his quest for ‘India’—he seems to wax anatomical in comparing gold with that ‘one thing’ in a woman that’s ‘least subject to disguise’. Whatever the poet was getting at, and he was one helluva cunning linguist by any reckoning, his gold analogy offers a hint of enduring relevance: that it’s a matter of basic instinct. Ruled by fear as much as lust, gold still defies rational analysis as a market some 400 years on.

Thankfully, facts do play something of a role. So here’s my take: the ‘panic’ ofthe story is not the current crash, but the gold rush of the Great Recession; post-2008, investors fled to gold in fear of the dollarised world’s doom, a fear compounded by the US Fed’s dollar dispersal policy. It sent gold soaring.

That panic appears to have eased and investor attention has shifted to the Eurozone’s financial crisis. And here’s the nub: if it makes sense for Cyprus to encash its bullion, why not other countries?

Good question. Italy alone has over 2,440 tonnes of gold, a left over of its olden era of utility in world trade, that’s best dumped.

All factors considered, gold seems set for a slump that could last years and years. Will it recover? It could—given half a decade or so. If cheap dollars of the early zips warped assets and caused the Great Panic, who knows what super cheap dollars of greater recency will yield?