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The Golden Constant - The English and American Experience 1560-2007

Roy W Jastram with updated material by Jill Leyland, Edward Elgar, 1977, revised edition 2009, 336 pages, £71.96 on-line.

Why gold?
As I write this, I read a headline from The China Post alerting me to the fact that gold may be headed back to $1,000/ounce. An observer - the perennial Martian - might well ask what it is with gold that so fascinates humans. Because gold may well be the only - certainly one of the few - items that fulfils so many roles: its beauty, durability and malleability makes it ideal for jewellery. But those same factors (perhaps not the beauty) also make it ideal as a store of value. Or, at least, so the story goes. For among the many myths surrounding gold, one is that it is a store of value and so a hedge against inflation. Another is that the gold standard ensured price stability over longer periods (eg, the claim that UK prices in 1914 were the same as in 1814, US prices in 1914 were the same as in 1865).

There is some truth in this - but much less than is generally acknowledged. A timely update of Roy Jastram's 1977 book, The Golden Constant - The English and American Experience 1560-2007, with updated material from Jill Leyland, latterly of the Gold Council, provides a fascinating insight into the price and purchasing power of gold over the past close to 450 years.

Jastram's original book only covers the period up to 1976 and, as is clear from the title, only the UK and the US. The period and the countries were necessarily chosen on the basis of available data. Nevertheless, it is a pity that the book could not have started somewhat earlier in order to catch more of the effect of the inflow of American gold on European prices. Jill Leyland has done sterling work in expanding the geographical coverage to France, Germany, Japan and Switzerland, as well as bringing the book up to date. The latter point is crucial. Because one of the (many) conclusions one draws from this slim volume, is that the behaviour of both the price and the purchasing power of gold is very different under a gold standard from under a system of fiat money with no monetary role for the yellow metal.

What Jastram shows is that under a gold standard, the price of gold varies considerably, as does its purchasing power. For example, UK prices in 1914 were actually half their level of 1814, so the purchasing power of gold had risen over the period. However, contrary to the general perception, it turns out that gold was historically a bad inflation hedge - although a good hedge against deflation - but has been a much better hedge against inflation since the end of Bretton Woods, although even this was not a given. Both when the UK went off gold in 1797 and when the US did the same in 1861, the value of gold fell. But even under the current system, gold is not a particularly good hedge against year-to-year movements.

Over the very long term, gold does revert to its long-run average. And the price of gold has not fallen below its 1700 level. But waiting for decades for an investment to recoup its value may be too long a time. Jastram also clearly outlines why gold cannot again become the base for the world's monetary system, fond hopes to the contrary from some quarters notwithstanding. So the question remains, why gold? It has some advantages - but, ultimately, in today's world, it is an investment like any other.

Gabriel Stein
Director, Lombard Street Research Ltd

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