Gold Always Wins

Back in 1930, Time magazine was really worried about gold or, at least, the newsmagazine reported that bankers and economists were. ‘Australian gold fields are almost exhausted. U. S. production has fallen steadily (from $101,000,000 in 1915 to $45,000,000 in 1928),’ it reported. But while bankers and economists were worried, ‘metallurgists agree that the discovery of extensive new gold deposits … is unlikely’.

Well, that would not be the first time the ‘experts’ got it wrong about the yellow metal, would it? Sure, since 1930 there have never again been gold rushes like those of the nineteenth century in California, New Zealand, the Yukon and the Australian state of Victoria, but since 1930 quite a lot of gold has been found; just think of West Africa and the huge deposits identified along the Birimian Greenstone Belt.

And what about that declining gold supply? In 1915, the year mentioned above, world gold production was 585 tonnes. In 2014, the world’s mines produced 3,133 tonnes, and that represented the sixth successive year of rising output of the metal. Mind you, the gold market in total (that means gold trading of both physical gold and gold derivatives) is many times larger than the amount of physical gold that is poured each year by mining companies and then refined. The London Bullion Market Association members in 2014 traded 157,000 tonnes of gold. When you consider that it is estimated by London-based Thomson Reuters GFMS that 183,000 tonnes of gold has been mined in human history, that gives you some idea of the trading in a metal that is always being written off. In fact, if you take the entire world derivatives plus physical trade, that amounts to $22 trillion a year or 188 times annual gold mine production.

In 1930, too, the Soviet Union was stepping up gold exploration (and would use Gulag prisoners to mine much of it). Tsarist Russia had been big into gold mining but, after the 1917 Communist revolution, the precious metal was initially considered just another manifestation of detested capitalism. Indeed, in 1921 Lenin proclaimed: ‘When we are victorious on a world-wide scale we will make public toilets out of gold on the streets of the world’s largest cities’. He was not proposing the equivalent of burning $100 bills as a demonstration of wealth destruction; no, Lenin thought gold would become worthless and there would be no better use for it than giving a bit of glint and gleam to public conveniences. According to Nikita Khrushchev’s memoirs, Lenin had argued that, at a certain stage of human society’s development, gold would lose its value. In the meantime, Lenin said to keep the gold; when full communism had been established, gold would no longer be a means of exchange and the metal could be used to decorate public toilets.

It took just six years for that attitude to go out the window in the Union of Socialist Soviet Republics. By 1927 Joseph Stalin was pushing expansion of gold mining in order to pay for imports needed for his industrialization program, and to help pay off Soviet debts. A slump in soft commodities meant Russian export income from timber and grain had collapsed. And, by 1943, The Economist was quoting a leading Soviet government figure, Alexander Serebrovsky, arguing for a return to the gold standard by which time, the magazine reported, the U.S.S.R was the second largest gold producer in the world. (Serebrovsky would four years later fall a victim of the purges, being shot on the trumped up charge of sending gold bars to Leon Trotsky, Stalin’s arch-enemy.)

Indeed, in 1934 Serebrovsky, who had been charged by Stalin with the task of reviving gold production, vowed that the U.S.S.R would soon overtake the Transvaal as a producer, making it the largest in the world

Gold: written off a century ago, still demeaned by the anti-gold crowd today. They never learn.

And here is another little slice of history pertinent at a time when China is the world’s leading gold producer (and consumer). At one stage it was widely believed China did not possess any great mineral wealth. In 1872 the then eminent geologist, Baron Ferdinand von Richthofen (incidentally, he was the uncle of the ‘Red Baron’ World War I flying ace, Manfred von Richthofen) who had made several trips to China, told the Shanghai Chamber of Commerce: ‘The great number of places in which gold is washed from the river sand in China, far from furnishing proof of the wealth of the country, is clear evidence of the superabundance of human labour, prevalence of low wages, and the poverty of the individuals engaged in the search’.

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Why do we pay so much attention to what analysts have to say about gold? I have not kept count, but all the way through the 2001 to 2011 gold bull market you could always find some market watchers predicting imminent doom for the yellow metal. Much of the commentary in the mainstream media when it comes to gold was vapid, ill informed and, well, dopey.

Don’t agree? Then read these items from just one week back in July 2011:

* Tuesday’s news: ‘Money managers have slashed their net long, or bullish, positioning in U.S. gold futures and options to the lowest level in more than four months and in silver to the lowest level in more than a year, according to the most recent data from the Commodity Futures Trading Commission.’

* Wednesday’s news: ‘Gold rallied strongly on debt concerns, says HSBC. The bank cites a Standard & Poor’s announcement that it may lower its rating on Greece to selective default if a plan by banks to roll over Greek debt holdings is implemented. Also, gold benefited from a Moody’s warning that China may have understated local government debt, as well as the U.S. deficit-ceiling impasse.’ (That was the night that gold rose $US30/oz.)

* 
Thursday’s news: ‘Gold futures closed at their highest level in two weeks Wednesday, with global debt troubles helping it tally a two-session win of nearly $47 an ounce’.

So, what would it be tomorrow, I asked at the time? If gold’s price went down, then I warned that readers could expect news reports the following morning to say something along the lines of ‘investors sold gold as fears of European default eased’ — or whatever the crisis de jour may be.
 Investors, financial commentators, analysts — very few of them show any depth of understanding when it comes to gold.
Back in 2011 one yearned to read a news report that said gold had risen/fallen by whatever amount, but that ‘this has to be seen against what is an impressive trend over ten years of an accumulating gold price and now the emergence of net central bank buying, not to mention China seemingly trying to corner the gold market’, or something like that?

One longs today for more insightful treatment of gold in the mainstream media.

(This is an extract from Robin Bromby’s e-book, Gold Always Wins: How the Yellow Metal Defies its Critics, available via Amazon).

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