New research identifies gold for fools

Colossal pandemic spending by governments worldwide over the past 18 months has meant inflation is back in the news, as is gold […]
Pouring gold bars at Kinross Gold’s Fort Knox project in Alaska. Credit: Kinross Gold.

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Colossal pandemic spending by governments worldwide over the past 18 months has meant inflation is back in the news, as is gold contained in pyrite following publication of academic research in Australia.

Most prices rise over time. Inflation has been especially destructive in the U.K. over the past 750 years, with the Bank of England calculating that £1 in 1270 had a purchasing-power equivalent of over £1,350 in 2020.

Gold enthusiasts abound at the moment, citing it as an investment vehicle for the inflationary times ahead. Unfortunately for these gurus the precious metal's attributes have not always been borne out historically. Admittedly, an ounce of gold in 1500 would have cost only £2, compared with £1,300 per oz. at the moment, but (measured in British pounds) gold has been a horrible investment for much of the past 500 years.

The purchasing power of gold suffered particularly badly in sterling during the 16th and 17th centuries. Between 1489 (when the Royal Mint issued the first Sovereign coin, fixing £1 at 0.5 oz.) and 1717 (when Isaac Newton fixed £1 at 0.235 oz.), gold's nominal value more than doubled to £4.26 per ounce. During the intervening 228 years, however, the real (inflation adjusted) value had slumped from over £1,200/oz. (measured in current money) to barely £200 per ounce.  

Much of the reason for this slump in purchasing power was the influx of gold to Europe from Spanish conquests across South America. One Englishman to benefit from the shipment of precious metal across the Atlantic was Sir Francis Drake (1540-1596), who is best remembered for robbing Spanish galleons. He was also, however, the first Englishman to see the Pacific Ocean (1573) and then sail across it as part of his circumnavigation of the globe (1577-1580).

Drake's exploits against Spanish treasure ships made him a hero to the English, and Queen Elizabeth I's half-share of the cargo in 1580 surpassed the rest of the crown's income for that entire year. Unsurprisingly, he was considered a pirate by the Spanish, who put a price of 20,000 ducats on his head (worth over US$4 million in current dollars). This Venetian 'Duke's Coin', introduced in 1284, contained 3.55 grams of 99.5% pure gold, and was the world's most popular coin for five centuries.

During the 18th and 19th centuries, and most of the 20th, gold maintained a stable real price (from a British perspective), trading at around £300/oz. in current money. It is only during the relatively recent past (since the U.S. came off the gold standard in 1973) that gold has been more than just a store of wealth, and outpaced inflation.

Continue reading at The Northern Miner.

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