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James Turk: Gold is always the safest haven

Section: Daily Dispatches

By James Turk
Daily Mail, London
Sunday, September 6, 2009

As the price of gold nears $1,000 per Troy ounce, it is safe to say that precious metal has been one of this decade's best performing assets, rising on average by 15 per cent per year.

Analysts in the City ascribe the latest surge in the price of bank vault bullion bars, coins, and jewellery to the threat of inflation.

The billions of pounds used to refloat the world economy have raised the spectre of 1970s-style runaway inflation, sending investors fleeing for this safest of safe-haven assets -- just as they did when equities began to tank in late 2007.

But there is a more fundamental story behind the current value of gold, one that has pushed the price from $275 when Gordon Brown so foolishly disposed of 395 tonnes of bullion seven years ago, to $989 today.

The reason for this feat is clear: The pound has been terribly mismanaged.

With the invention of the gold standard 300 years ago, gold and the pound became irrevocably linked. Their relationship was complimentary during the first 200 years. An ounce of gold, or more precisely, the Guinea, provided the unit of measure by which all things were given a price.

At the beginning of 1817 the Gold Sovereign coin was introduced, weighing 0.2354 Troy ounces.

Being freely redeemable into the precious metal upon demand, the pound was as good as gold, and this attribute was carefully guarded by the perennial sound monetary policy faithfully pursued by the Bank of England.

It was sound money. And sound money and Empire went hand in hand. While it may have been the British navy that secured the Empire, the pound -- or more precisely, gold -- expanded it.

It was gold that encouraged commerce because 0.2354 Troy ounces was an unchanging measure. Like a foot or a pint, there was no confusion as to what a pound meant.

But after 1914 the relationship between the pound and gold changed. The two became competitors, with gold in an antagonistic role and often blurting out unpleasant truths that the government would rather not hear.

The attempt in 1925 by then-Chancellor Winston Churchill to return to the pre-war exchange rate is but one example.

The pound had become so debased during the war years from over-issuance that the return to the prewar parity of L1 per 0.2354 ounces created a deflationary contraction.

There was not sufficient wealth (that is, gold) to support the huge amount of pound currency that had been created. In short, 0.2354 ounces was worth more than L1.

Today gold's rising price is still blurting out truths the government would rather not hear. The pound has become one of the weakest currencies of the major Western countries, as it has lost significant ground to both the euro and the dollar.

Pointedly, last year the pound lost nearly half its value against gold. More appreciation in gold is likely, and the government's forced reduction in interest rates is a major reason.

Interest income is the return one earns for taking the risk of holding pounds instead of gold.

Interest income should be high enough to offset the loss of purchasing power from inflation and the risk of say the collapse of the institution where your pounds are deposited.

While customers of Northern Rock and HBOS have been spared the pain that accompanies the collapse of a bank, the creditors of Lehman Brothers in the United States have not been so fortunate.

In today's uncertain monetary environment the risk averse are fleeing to safe havens, which explains why gold is moving back to centre stage.

Gold protects against inflation by preserving purchasing power. It is not dependent on the health, or otherwise, of the financial system. It certainly doesn't need the guarantee of a state that might be as bankrupt as its banks.

And the value it delivers is based on thousands of years of experience that gold is money. More and more people are realising the advantages of owning sound money, and that means owning gold.


James Turk is the founder and chairman of and co-author of "The Collapse of the Dollar."

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