The eternal lure of gold

Gold! Gold! Gold! Gold! Bright and yellow, hard and cold. Molten, graven, hammered and rolled. Heavy to get and light to hold. Hoarded, bartered, bought and sold. Stolen, borrowed, squandered and doled. Spurned by the young but hugged by the old to the very edge of the churchyard mould. Gold! Gold! Gold! Gold! Thomas Hood (1799 – 1845)

Gold! The very word conjures up visions of beauty, wealth, and power. Throughout history, men and women have withstood severe hardship to get their hands on gold. They fought wars for it, married, divorced, left home, lied, and even died for it. All for a hard yellow metal with no direct survival value. Gold cannot feed the hungry, quench the thirsty, or warm the cold on a winter's night. Although small amounts are used for industrial and medical purposes, most of the world's gold collects dust in bank vaults or is displayed on fingers, wrists, and necks as jewellery. Despite its relative lack of practical utility, the human desire to own and wear gold gives the shiny metal the indirect power to provide all the necessities and luxuries of life. Gold, which has been universally valued for thousands of years, can be traded for almost anything. In a fundamental sense, gold is wealth.

Why is gold so prized? Sigmund Freud devoted years of study to the subject, concluding that the desire for gold is an unconscious compulsion resulting from harsh toileting. For sceptics who find the connection between gold and toileting somewhat forced, Freud reserved another explanation for gold's appeal, namely sex. He noted that from prehistoric times to the present, gold had been beaten into jewellery to adorn both male and female bodies. Why should people do this? According to Freud, we believe that gold jewellery will bring us love or (he was a bit equivocal here) at least respect. But sexual attractiveness is not the only quality attributed to those who possess gold. It has also been credited with supernatural qualities and has even been thought to hold the secret to immortality. The latter may have been on the minds of the ancient Egyptian pharaohs who, denying the maxim, "You can't take it with you," had their gold jewellery buried with them.

Immortality was also the motivating force behind the work of the ancient alchemists. Ko-Hung, the Chinese philosopher, wrote, "Yellow gold if melted 100 times, will not be spoiled." He was referring to one of gold's cardinal properties. It is impervious to corrosive treatments. No matter what is done to it, gold endures. Today we value goal because it is rare and beautiful, but to the ancient alchemists, gold was prized for its indestructibility. Alchemists urged patients to drink from gold cups and included gold among their medicines because, to them, gold held the power of eternal life. It represented permanence in a transient world.

Whatever the reason (and all explanations may turn out to be at least partly correct), gold's attraction is undoubtedly psychological and pervasive. Over the years, the word "gold" has become imbued with many virtuous properties. The adjective "golden" means excellent, precious, and joyous in English. Folklore, religion, and literature are filled with references to gold. Jack climbed the beanstalk and returned with the goose that laid golden eggs. Jason and the Argonauts rescued the Golden Fleece. The Bible tells the story of the Golden Calf. Children are taught that silence is golden and, when they are on their best behaviour, they are said to be as good as gold. When they reach their golden years, lucky adults celebrate their golden wedding anniversaries. The Gold Coast is a popular holiday destination in Australia. McDonald's is known worldwide for its golden arches. Whether we live by the golden rule, attempt to achieve the golden mean, eat Golden Delicious apples, own a goldfish, or worry about gold diggers, it is clear that gold has a pervasive influence on our language and our lives.

Our world looks the way it does partly because of the massive demographic shifts spurred by the "gold rushes" of the nineteenth and twentieth centuries. Prospectors flocked to Alaska, California, South Africa, and Australia. In a period of only 20 years, the Australian population quadrupled. The country would never again see such rapid population growth.

For Australian "diggers," gold was money. It served as a medium of exchange for buying goods and services, a reserve of wealth, and a way of comparing prices. Even after paper money became ubiquitous, banknotes and government currency could still be exchanged for gold at a fixed price. This system, known as the gold standard, constrained governments from manipulating currency values. To mint more money, they had to find more gold. As financier JP Morgan once quipped, "Gold is money; everything else is credit."

There was a downside, however. Under the gold standard, the government could do little to stimulate the economy during the inevitable slowdowns. For this reason, influential economists such as John Maynard (Lord) Keynes viewed the gold exchange mechanism as a "barbarous relic" that needed to be dumped. And it was. Once gold was demonetised, it became just another commodity with a price determined by market forces. Yet, many investors and advisers still consider it special-a store of value in a turbulent world.

In 2022, after a long hiatus, inflation returned to the world's economies. Like a Saharan sirocco, the hot wind of inflation awakened a swarm of bugs from their slumber. Bitten by the gold bug, speculators developed a fever for possessing more gold. Their demand pushed up the gold price. Newspapers began to publish columns on gold investment, and the metal became a topic of dinner party conversations. As we enter 2023, gold fever shows few signs of abating; if anything, the gold market seems to be getting hotter.

All this activity is beginning to attract the small investor, the individual with limited capital and an understandable motivation to invest in something that might withstand inflation's ravages. Taking advice from friends, neighbours, newspaper columnists, and dealers, they are investing their hard-earned savings in various forms of gold. Are they making a good choice? Probably not.

While it is true that gold tends to move in the opposite direction to currency, making it a potential hedge against inflation caused by pandemics, natural disasters, and wars, investing in gold is not suitable for most small investors. They cannot afford to purchase gold bullion, so they "invest" in jewellery instead. But, jewellery is always sold at a price higher than the value of its gold content. This premium represents design, manufacturing, and distribution costs plus the jeweller's profit. If the jewellery is sold through a dealer or auction, commissions will also take a bite out of any profit. These "extra" costs result in many small investors losing money even when gold prices rise. Investments in gold coins have similar drawbacks to jewellery.

Gold bars (ingots) do not pay interest and they require costly storage and insurance, costs that reduce profits. In theory, gold futures, in which investors make a bet on which way the gold price will go, do not require large amounts of money up-front, but small investors will be playing against industry experts and can wind up losing more than they invested.