COMMENTARY — Gold little understood

Almost everything we hear or read about gold’s downward price trend these days points to its failure to react to perceived political crises and ongoing sales of gold by some central banks. The unmistakable conclusion is that gold is no longer money but merely a glittering commodity. This attitude reflects a narrow understanding of gold that comes as a result of looking only at the past 20 years.

For starters, gold is still the only store of value for most of Asia, which is why half of today’s mined gold is sold in India, China and Southeast Asia. The latest round of currency depreciation, which saw the Thai baht, Korean wan and other Southeast Asian money depreciate by about 35%, can only reinforce the value of gold to people in those countries.

More importantly, however, the price of gold is a reflection of the soundness of currencies and economies of the world. In the early 1980s, we saw a gold price of US$800 per oz. and an 18% short-term interest rate.

Today, we have a price of US$300 per oz. and a 3% short-term rate. Roy Jastrum coined the expression “the golden constant” to illustrate that it is not gold that fluctuates but the currencies in which it is bought and sold.

That central banks are selling some or all of their gold has nothing and everything to do with gold as money. Their motivation is simple: Governments need cash now. Canada sold 90% of its gold reserves to help bridge the deficit gap. We are now heading into a surplus situation, and the time will come to top up those gold reserves.

For gold to play a role in the monetary system of the 21st century, it has to have all the attributes of money, including liquidity. A bigger, more liquid gold market, where central banks can lend or borrow gold, is essential in order for gold to be perceived as an asset class by the central banks’ portfolio managers, who are held accountable by politicians for their return on investment. We should welcome the actions of Germany, Switzerland and other countries, which are fulfilling this role by lending portions of their gold reserves.

As an industry, however, we have not done a great job of studying, understanding and communicating the financial value and role of gold, as well as that of central banks, to the financial community. We’ve spent all of our efforts on the consumption or commodity side of gold, but almost none on either its role as money or on the holders of 30% of the world’s gold — the central banks.

Gold is still the only money that is not someone else’s debt, and will remain so forever. Its paper value will always reflect the economic times in which we live.

— The author is president of both Franco-Nevada Mining and Euro-Nevada Mining.