MENA and the monetary rise of gold
Assistant Professor of Economics Dr. Saifedean Ammous tells us why gold is regaining its monetary role around the world and why the Arab world must catch up.
Dr. Ammous is assistant professor of Economics at LAU’s School of Business.
The year 2012 was the 12th year in a row in which gold rose compared to the US dollar. During this millennium, gold has risen 612.46%, at an average annual rise of 16.72%. This was also the third year in a row in which the world’s central banks added to their gold reserves, after decades of being large net sellers of the yellow metal.
This cannot be viewed as a normal commodity bull market, but rather as gold slowly returning to its historical role as the universal medium of exchange, store of value, unit of account and ultimate extinguisher of debt. In other words: money.
Gold has been used as money essentially for as long as human civilization has existed. This monetary role, however, was usurped by the US dollar in August 1971 when US president Richard Nixon ended the convertibility of dollars into gold. For the first time in history, the entire planet had forsaken the stability of gold and replaced it with a system of floating exchange rates anchored around the US dollar, the new global reserve currency. But since the quantity of the US dollars in circulation varied continuously with economic cycles and US monetary policy, the dollar’s value itself was varying and volatile, rendering it an unstable anchor.
The instability of this monetary system has had predictable and disastrous consequences. Without a stable unit of account, economic miscalculation pervaded the world economy, manifesting in endless cycles of boom and bust, and economic and financial crises. But perhaps the most damning indictment of our monetary system is the sheer devaluation of the currency on which it is based. Whereas roughly USD 40 were needed to buy an ounce of gold in 1971, about USD 1,650 were needed to buy the same ounce in 2012, meaning that the dollar has maintained only 2.5% of its value in gold terms over the last 41 years. Other currencies have barely fared any better, with the British pound, Swiss franc, and Japanese yen at 3.6%, 10.4%, and 10.6% of their 1971 values in terms of gold, respectively. The worst of this devaluation, however, is arguably still ahead of us.
The removal of currency’s link to gold means its quantity can be increased with little restraint, and this has led Western governments down the road of low interest rates and ever-increasing public spending, budget deficits, and public and private debt, which have now reached all-time highs. These debts can only be sustained via the continuous devaluation of the currencies in which they are denominated, meaning that the future devaluation of these currencies is likely to be even faster than the past four decades.
This pace of devaluation raises serious questions about the suitability of these currencies as long-term stores of value and media of exchange. This is best evidenced by the resurgence of global central bank demand for gold, as well as the drive by various global central banks to repatriate and audit their gold reserves after decades of neglect. The MENA region, however, seems to lag behind the rest of the world in this trend.
Gold holds a precious place in the culture of the Arab world, long called ‘zeena w khazeena’ (ornament and store of wealth) and continues to be commonly used as money and dowry. Yet the region’s central banks, sovereign wealth funds, and institutional and private investors continue to be under-invested in it, and have their main holdings in the ever-devaluing western fiat currencies, with predictable consequences. One can only understand the problem of rising prices in countries like Egypt, Jordan, and Tunisia as the result of the ever-eroding value of their paper central bank reserves. Lebanon, on the other hand, with its large gold reserves, has experienced less price rises.
Regrettably, most inter-Arab trade continues to be denominated in unstable Western currencies whose ever-changing value is an impediment to sound economic calculation and planning. As the most stable measure of value and most liquid asset, gold would make an ideal central bank reserve and facilitate inter-Arab trade on a stable and predictable basis.
Finally, gold offers the only true safe haven for institutional and individual investors, since gold is the only financial asset with no counter-party liability - the only asset whose value is not dependent on others fulfilling their financial obligations. As the global financial system and its currencies continue to look vulnerable to shocks and collapses, the serenity, independence, and stability of holding gold becomes ever more alluring.
These are but some of the reasons why gold is regaining its monetary role around the world, and why the Arab world must catch up. There is, however, a strong need for public and private institutions to take active steps towards utilizing gold as money and providing convenient options for individuals to benefit from returning to humanity’s true money.
Dr. Saifedean Ammous is professor of Economics at the Lebanese American University, foreign member of the Columbia University’s Center for Capitalism and Society, and director of Thabit Economics research and advisory (http://www.thabit-economics.ch/).
© Zawya 2013
LAU got permission to post this article that was first published on Zawya.