The View from England: Gold at 550-year high

At the third time of asking, gold seems set to break decisively through the psychologically important barrier of US$2,000 ($2,686) per ounce. More importantly, the precious metal has matched an inflation-adjusted 550-year high when measured in sterling.

Gold recently achieved an all-time nominal high of £1,593 ($2,600) per ounce in the U.K. but, in real terms, we’ve been here once before, in 1470. Much of the recent price increase is due, of course, to sterling’s worsening exchange rate with the U.S. dollar in the face of an economic recession and mushrooming labour unrest as wages fall behind inflation.

Our currency has suffered a long decline. A pound sterling is currently trading at US$1.20, whereas for most of World War II it was worth US$4. Until decimalisation in 1971, our ‘half-crown’ coin, first issued in 1549, was worth 2s 6d, with eight in a pound (there were 12 pence, ‘d’, in a shilling, and 20 shillings in a pound). It was nicknamed ‘half dollar’.

Even in dollars, gold is performing well. Recent price rises follow record demand of 1,337 tonnes for the metal in the final three month of last year. This demand was helped in December by China increasing its gold reserves for a second straight month. The People’s Bank of China raised its holdings by 30 tonnes (after November’s addition of 32 tonnes), which brought the nation’s year-end stocks to 2,010 tonnes.

The World Gold Council reported that Central Banks globally added 1,136 tonnes last year to their official gold reserves, which is the highest level of buying in more than five decades. Indeed, 2022 saw the strongest gold demand overall for a decade, with global purchases (excluding over-the-counter trade) jumping 18% to 4,741 tonnes. In addition to the huge buying by Central Banks there was buoyant bar and coin investment.

The gold price was supported by only a modest growth in mined production last year, with output remaining below the 2018 peak.

Gold has previously achieved US$2,000 per ounce, albeit only briefly, in August 2020 and March 2022. In the U.K., gold was over £1,500 on both those dates, plus in September last year (coinciding with Liz Truss’s short-lived administration). Measured in sterling, the precious metal has boomed since the turn of the millennium (gold was valued at just £170 per oz. at the end of 1999), which rivals the price-multiple performance of the 1970s.

There was a comparable gold-price rise in the 14th and 15th centuries. We know the real price of gold back to 1270 courtesy of annual inflation figures from the Bank of England (£1 then was worth some £830 in today’s money). In real terms, gold peaked at around £1,600 in 1470. This was 19 years before the Royal Mint issued the first £1 sovereign, with the coin containing 0.5 oz. of 23 carat gold, ie 95.8% pure (‘crown’ gold was devalued to 22 carats in 1545 by Henry VIII).

The 16th and 17th centuries were dire for the gold price, with the precious metal flooding into Europe following Spanish conquests in Central and South America. By the start of the 18th century, gold was worth less than £250 per ounce (in 2022 money).

Since 1601, a troy pound (containing 12 troy oz.) of silver had been coined into £3 2s 0d, valuing an ounce of silver at 5s 2d. At the official gold-silver conversion rate of 14.35, gold was valued at £3 14s per ounce. New £1 gold coins were struck in 1663, and called guineas because they were made out of gold from the Guinea coast of Africa.

Gold-price stability was established in 1717 thanks to the Master of the Royal Mint, Sir Isaac Newton, who was an English mathematician, physicist, astronomer and author. His Principia book, published in 1687, established classical mechanics and is considered one of the most important works in science.

Although most famous for discovering the law of gravity, Sir Isaac was also a practising alchemist and, although he never managed to turn lead into gold, Sir Isaac did launch the world’s first gold standard. It worked; gold was stable, at around £350 per oz. (2022 money), for the next 200 years.

In 1717, Sir Isaac changed the gold-silver conversion rate to 15.2, and set the ‘crown’, 22 carat, gold price at £3 17s (£3.89; making 24 carat, fine, gold worth £4.25). He also lifted the value of the guinea to 21s by proclamation (the gold content remained the same). In 1816, at the end of the Napoleonic wars, a new coin was introduced that contained 95% of the gold in a guinea, thus making it worth one pound sterling.

This history is a worry. The real price of gold in a local currency is apparently a measure of national risk. If so, the U.K. is now in a much worse position than during the Black Death of 1348-9 (which killed 50% of the country’s population) and the Great Plague of 1665-6 (which killed 25% of Londoners). In terms of 2022 money, gold was valued at £890 during that first catastrophe and at £550 during the second. Struth.

Dr. Chris Hinde is a mining engineer and the director of Pick and Pen Ltd., a U.K.-based consulting firm. He previously worked for S&P Global Market Intelligence’s Metals and Mining division.