A decade ago, when I was running the FT in America, I used to joke to colleagues that the word "gold" was like Kim Kardashian for financial geeks. For whenever we used it in a headline, the page views would soar; it was like clickbait for FT readers.
Now, doubly so. In the last couple of years, the gold price has soared dramatically, breaking above $4,000 an ounce, as central banks and other investors have rushed to buy the yellow metal. More recently, the price has tumbled, along with that of silver, which soared even more dramatically last year. But the fascination with gold and silver has not disappeared: whenever it leaps into view, in the mainstream media, it sparks another hubbub of interest - and newspaper clicks.
In many ways, this is peculiar, if not bizarre. We live, after all, in a cyber saturated age where the public - and financiers - are agog with the joys of digital innovation. Indeed, modern finance is mostly focused on extraordinary, cutting-edge new products that draw on all the latest inventions in cyberspace. Meanwhile, most markets have soared in value in the last year, delivering outside returns.
Gold, however, serves as a store of value. And, most striking of all, if somebody wants to buy ‘just’ a store of value, there is a 21st century option on offer: bitcoin, the digital asset which was once described as “digital gold”, because the supply of bitcoin, like the yellow metal, is constrained, and thus has scarcity value.
When faith in money falters
So what explains this strange state of affairs? One short term factor is that faith in governments is crumbling. More specifically, the value of fiat currency today rests on the public trusting in the government which has issued it - and, above all else, in their determination and ability to maintain the value of that currency over time. With debt levels soaring among advanced economies, and political strife undermining many governments, this trust seems increasingly insecure. Worse still, America has been alienating its foes and friends alike in recent years, causing many non-Americans to have less confidence in the role of the dollar as a reserve currency.
This has not generated a crisis - yet. Global investors keep buying dollar assets and using it for global transactions since the US economy is booming and the dollar is a convenient unit of account and central for global payments systems. But the fact that central banks have been gobbling up gold - to a point where those holdings now exceed their allocation to US treasury bonds - shows the level of incipient unease. So does the fact that central banks like the Banque de France have insisted on repatriating the stocks of gold that they used to store with the US Federal Reserve; nobody quite trusts America or the dollar-based financial system to the degree they did a few decades ago. Hence the appeal of gold.
The uneasy future of fiat
However, there is a second point about the allure of gold: it also reveals some of the contradictions afoot in our own vision of money. For modern economists, this is heavily shaped by a framework that Adam Smith, the 18th century English intellectual, sketched out 250 years ago in relation to financial history. Smith assumed that in pre-modern days - say, the era of hunter gatherers or subsistence farmers - human society used barter to organise the exchanges which drove everyday life. Then, as societies became more advanced, they invented money to make those transactions more efficient. Swapping coins, after all, is more efficient than just exchanging skins for fruit.
Then, as societies moved towards the era that Smith knew, they also developed credit, in the form of bank loans and (subsequently) prototypes of bonds. And this vision of credit has subsequently exploded, creating the world we know today that is saturated with credit products, mortgages, derivatives and so on.
This vision of human development sounds plausible, if not seductive; after all, it helps to explain why we have this leverage-addled financial world today. However, it is partly wrong. One reason, as anthropologist David Graeber has noted, is that credit did not get invented just a few centuries ago. Far from it. Forms of social credit have always shaped pre-modern societies, in the sense that somebody might swap their milk from a cow for a pledge of grain at a later stage. Indeed, one of the world’s first examples of writing come from Mesopotamia, where the Babylonian society had developed extensive systems of credit between merchants and others, which were recorded on clay tablets - without using money. (And it seems one reason why we have the modern phrase “wiping the slate clean” is that these debts were periodically forgiven to avoid social unrest when loans become too crushing.)
Similarly, the concept of barter does not quite match Smith’s vision, since it did not disappear with the advent of money. On the contrary, barter is arguably more dominant in our modern world than at any point during human history, as Koray Calisker, another anthropologist, argues, since it is the bedrock for our 21st century tech world. That is because most of the transactions which occur on digital platforms today are not actually mediated by money, but occur because users essentially swap their data for services. We describe the transactions as taking place “for free” because we do not have easy words to use when talking about non-monetary exchanges.
The hidden barter economy
But they might be considered as a new form of barter, albeit without the explicit haggling that has sometimes taken place around barter trades in the past. And while few Silicon Valley techies like the idea that their cutting-edge economy might have links to the pre-modern world, the hard fact is that non-monetary exchanges now shape a vast swathe of our current life. More striking still, when consumer platforms have emerged in the past and offered people a chance to avoid these non-monetary exchanges by being explicitly paid for their data (and paying for services), they have not proved to be popular. The reason is that digital platforms have made barter so convenient that it is lower friction than before; modernity and ancient impulses are mixing in a peculiar way.
Even the concept of money is blurred. We often say that money makes the world go around - and that is indeed largely true when we look at how our global economy operates. But money can come in several forms: paper or digital; fiat (ie resting on government decree) or backed by a tangible asset. The latter form of money has appeared to decline in popularity in recent years, since President Richard Nixon took the dollar off the gold standard half a century ago. But the loss of trust in governments is sparking some calls for a return to a tangible peg for money - even as money leaps into ever-more digital spheres, and the payment rails get detached from the physical world. Insofar as people “pay” for items today with just a swipe of their phone - or, in China, a flash of their face at a camera - it seems that money is increasingly most valued as a unit of account, albeit one that not everybody trusts.
Why trust still has a golden standard
This does not mean that money is about to disappear; far from it. Nor does it mean that we are about to return to an explicit gold standard; that would extremely hard to organise today. But these paradoxes help to explain the ongoing fascination with gold, as investors not only fret about the state of governments and governments in our modern era - but also instinctively sense that finance is not operating quite as they once assumed it should. Adam Smith might spin in his grave; or perhaps celebrate the fact that humanity is constantly evolving, sometimes in surprising ways.
