By Mark Rogers

The recent drop in the price of gold has had commentators mocking those who hold gold to be a safe haven: the collapse in the price to something like it was over two years ago, it is held, shows that gold is no safer than other types of investment. There have also been digs that this sort of price instability, if that is what this recent fall actually amounts to, also makes a mockery of those of us who call for a return to the gold standard.

And some are pointing at people like John Paulson, who reputedly has lost just under one billion on his gold investments. This, though, would only be true if he actually sold his gold. As it is, he started investing in gold in 2009, when gold was at around $950 an ounce. In other words the reputed “loss” is being measured at a notional value in terms of recent prices. As the story linked to goes on to report: “Sources at Paulson said that the hedge fund group had started investing in gold four years ago when the gold was around $950 an ounce, so the funds are still in profit.”

Dirty Work at Comex and in Cyprus

But what has caused such a large drop in the price? There are several possibilities, but one of the most obvious ought to be noted immediately: there is a great deal of confusion in pricing gold because of the admixture of paper gold, the exchange-traded funds (ETFs) that are not actually physical gold and whose relationship to the precious metal is tenuous to say the least. One of the problematical effects of paper gold has been to suppress the price of gold: without the paper clogging the market, the price of gold, physical gold, ought to have been much higher. And it is the paper gold that has been dumped, thus pulling the price of all gold down, true gold and paper gold. Indeed, it is reported that “investors have fled gold exchange-traded funds. Holdings of major global gold ETFs are at their lowest since late 2011.”

Reports here and here of how the price of gold was forced down in an artificial manner. And rumours of the possibility of Cyprus selling off all or part of its reserves to patch up its banking crisis cannot be discounted as causing the price drop: the situation in Cyprus is serious, and dumping its gold into the market, as Gordon Brown did with British reserves, is an entirely plausible escape route for the Cypriots. Gold is, amongst other things, a commodity, and would respond to an expansion of its availability in the same way any other commodity would.

Gold Not Just a Commodity

Of course, gold is not just a commodity like any other: it is also a store and backer of value such as no other commodity is or can be. And one of the consequences of the recent collapse in the price has been a surge in the purchase of physical gold – and in particular gold coins:

“Buying took off on Monday when 35,500 ounces of coins were sold – that’s more than 10 times the daily average at 3,250 ounces in the first three months of 2013 – and accelerated on Tuesday with 42,000 ounces sold. If the pace of buying continues, April’s sales are likely to beat January’s total of 150,000 ounces, which was the highest in three years. Collectors typically snap up the newest mint in the first month of the year, but dealers also said lower prices had attracted buyers earlier this year. American Eagle silver coin sales was at 503,000 ounces on Monday, nearly three times higher than the daily average in the first quarter.” (This is from the report linked to above which describes the flight from gold exchange-traded funds.)

The Gold Standard and the Price of Gold

Some of the silliest comments referred to the dashing of the hopes of those who champion the return to the gold standard. For they forget that, in the strictest sense, a gold standard has nothing to do with the price of gold. The purpose of the gold standard is to facilitate international trade and hold governments to account in keeping currency stable. Whatever the current price of gold, it will always have those functions as a standard.

James Turk, who always has sensible things to say about gold as a safe haven, is particularly illuminating on this function of value as distinct from price: read his article “What’s next for gold?” here.

For the raison d’être of these articles on read: GOLDCOIN.ORG: MIXING POLITICS AND NUMISMATICS

For background on the writer: CONFESSIONS OF A LAW AND ORDER ANARCHIST

For a series of articles on the pernicious effects of progressive tax regimes: THE MORAL DILEMMA AT THE HEART OF TAXATION

For a review of one of the most important books on the financial crisis published last year: THE MESS WE’RE IN: WHY POLITICIANS CAN’T FIX FINANCIAL CRISES

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"For a mountaineer, the important things are the effort, the posture and the muscles. The rope that holds him serves no purpose when everything works but it gives him a sense of security. In the same way, all gold does is ensure confidence; it's a safe haven."