PRINCETON – Gold has returned to the international monetary system. Over 50 years ago, US President Richard Nixon “closed the gold window” (ended the dollar’s fixed-rate convertibility into gold), and the world moved on from its obsession with precious metals. A new era of fiat currency had begun. But now, fiat money is being challenged by fiscal worries and new technology (blockchains/distributed ledgers), and the price of gold has reached all-time highs above $2,400 per ounce.
Goldbugs, of course, argue that the metal remains an ideal investment for preserving value over the long term. But it is a mistake to believe that gold is uniquely stable. On the contrary, its price measures a fever curve of discord, with spikes indicating a rush for assurance in a world where other values are endangered. The price slumped in the 1990s, when the end of the Cold War – and the “end of history” – had instilled a new sense of peace and stability. At the turn of the millennium, the price was under $300 per ounce, and its rise since the 1970s was below the general rate of inflation. But the price surged after the 2008 financial crisis and after the outbreak of the COVID-19 pandemic; and it has done so again this year.
Much of the heightened demand for gold is driven by central banks. China, which had relatively small gold reserves of 395 tons in 2000, now has 2,260 tons. Notably, it increased its stock of gold substantially in 2009 and 2015, which we now know to be watershed years for a world that was becoming more skeptical about globalization. Russia and Turkey, too, started building up massive war chests after 2015, and the same trend is also evident more recently in the European Union, where the Czech Republic and Poland have both been augmenting their reserves.
Security concerns are at the heart of the new politics of gold. When the Czech Republic joined NATO in March 1999, it immediately sold almost its entire gold stock. The message could not have been clearer: a reliable security guarantee obviated any need for a monetary defense. Yet in the last quarter of 2023, the Czech National Bank bought 19 tons, and it has signaled its intention to get that figure up to 100 tons. The message this time is equally clear: NATO membership is not enough. And with its closer proximity Russia, Poland has also made its motivations clear, so much so that the central bank building currently features a giant poster announcing that it holds 360 tons of gold.
The association of gold with security has deep historical underpinnings in Poland, where it was fundamental to the original idea of statehood. When Poland was reestablished after World War I – following the destruction of the Austrian, German, and Russian empires – its new currency took as its name the Polish word for “golden” (złoty). Then, in September 1939, Poland conducted a dramatic operation to evacuate its gold to France, by way of Romania, Turkey, and Lebanon. That sent the message that Poland still existed, despite the German invasion.
But the most remarkable use of gold as a source of stability was the Soviet experiment in 1922. Pushed by the most prominent Polish Bolshevik leader, Felix Dzerzhinsky, the chief of the secret police, the state issued chervonets (“red gold” coins) to ward off inflation.
When the gold standard emerged as the basis of monetary order in the early 1870s, it ushered in a new international political system. One country after another – including the United States, Germany, and Italy – wanted to stabilize its currency in the wake of destructive civil wars. At the same time, the previous monetary standard, silver, was receding, following France’s defeat in the Franco-Prussian War. The French had previously run a joint gold and silver system, but they were obliged to pay a costly reparations bill in silver coins. Silver flooded the market, and its price collapsed. Gold was all that was left.
The abandonment of a parallel silver currency system in the 1870s might be a precedent for the world of 2024. After all, there is rampant speculation about the imminent dethronement of the dollar, which would be the modern equivalent of the demonetization of silver. Since 2020, the US government has been amassing large fiscal deficits, and now one must consider the risk that a new Trump administration would try to devalue the dollar in order to destroy foreign competitors and create more American jobs. Moreover, one also must worry about the stability of the financial system, and about US rivals’ own efforts to replace the dollar.
The search for golden stability is thus a response to a world in flux. It reflects a growing belief that a new political order is emerging. The Shanghai-based New Development Bank (or “BRICS bank”) is actively pursuing a substitute for the dollar in the form of a synthetic currency, and more and more countries are trying to join the BRICS grouping (Brazil, Russia, India, China, South Africa, plus Egypt Ethiopia, Iran, Saudi Arabia, and the United Arab Emirates). They regard the greenback today as the equivalent of silver in the late nineteenth century: an outdated monetary hegemon.
A century ago, as the world was going back to the gold standard after WWI, John Maynard Keynes described the metal as a “barbarous relic,” because it was the currency of conflict. When political stability returns, the gold price will fall. In the meantime, governments and central banks that have invested in gold will have bought themselves a hedge in an insecure world.
