Books

12.05.13

All that Glitters Is Not Gold: Inside the New Bubble

The latest wild commodity is none other than one of the oldest: gold. A new book by journalist Matthew Hart takes readers on a while ride from South African gold mines to the trading desks where gold fortunes area made and broken.

“We are on the biggest gold binge ever,” writes Matthew Hart. “Never has there been so much to buy and such a frenzied trade.” The economic meltdown certainly played a part in this binge; gold prices doubled between 2008 and 2011 as investors sought refuge from the rocky financial markets. But as Hart whisks us around the globe and across the centuries with the breezy panache of a seasoned journalist, we see that the origins of the current gold boom lie in policies and practices implemented well before 2008—and that anyone who thinks gold is a “safe haven” should think again.

Much like Hart’s earlier title, Diamond, Gold offers an impressionistic portrait of an industry that blends history, science, colorful character sketches, and lively firsthand accounts of the author’s travels—in this case, to new and revitalized gold mines on three continents. It’s an episodic book, opening with a spooky visit to the deepest pit in the world, South Africa’s Mponeng mine, where it takes 6,000 tons of ice a day to keep the tunnels at a barely bearable 82 degrees, and from which thieves siphon hundreds of millions of dollars of ore each year. Interviews with a security guard whose team killed 13 illegal miners in a gunfight and with stock analysts who believe police and other authorities collude with the thieves, reveal that 21st century gold mining is high-risk enterprise run by criminals, crooked politicians, and unreliable governments.

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Gold: The Race for the World’s Most Seductive Metal By Matthew Hart. 290 pages. Simon & Schuster. $26. ()

To explain why it’s worth the risks, Hart backtracks all the way to 1519 for a lightning-fast survey of various historical events—from the Spanish plunder of Inca and Aztec gold to the California gold rush more than 300 years later—that led in the late 19th century to the consolidation of the gold standard. This international agreement linked a country’s paper money to its reserves of gold; participating nations could increase the amount of currency in circulation only when they acquired more bullion. In a major adjustment at the Bretton Woods meetings in 1944, cogently summarized by Hart for the general reader, “participants agreed to peg their currencies instead to the U.S. dollar, and the dollar would be convertible to gold” at a fixed rate of $35 an ounce.

He whizzes through this material in order to get to the point where his main story begins: the “Nixon Shock” of 1971, which unilaterally cancelled the automatic conversion of dollars into gold in response to a foreign run on U.S. gold reserves. Liberated from Bretton Woods controls, the price of gold soared, reaching $825 an ounce by 1980. Production soared in response. Goldfields in Nevada that had been neglected because the ore was just too expensive to extract were now attractive properties. The Chinese government abandoned its communist distaste for gold as an embodiment of personal wealth and got into the mining game; China is now the biggest gold producer in the world. Mining companies swarmed over Africa, undeterred by the political instability in places like Congo that forced them to make deals with armed groups controlling access to the sites—and prompted outraged protests from Human Rights Watch. The potential profits were just too tempting to let ideology or even morality stand in the way.

“Gold lost its structural ballast when it lost its formal relationship to money,” he concludes. “Now it tosses in the same sea of events as other assets.”

Potential profits. Hart divides his time between the swashbuckling folks who dig up gold and the financial markets where gold is traded to drive home the point that gold has become a highly volatile commodity. Its price has fluctuated dramatically since the Nixon Shock cut it loose, though it began a generally upward trend around the time the World Gold Council (WGC) created an investment vehicle that made gold as easy to buy and sell as stocks. That trend starts to look questionable when Hart delves into the exchange-traded fund (ETF) called “the Spider” that the WGC invented in 2000 and persuaded the Securities and Exchange Commission to license for sale in 2004. The details will sound unpleasantly familiar to anyone who closely followed the 2008 stock market debacle: The SEC “hadn’t a clue how the gold market worked,” said one WGC manager; yet the commission licensed the Spider and opened the floodgates so “anyone with a few hundred dollars could take a gold position.” Can you spell speculative bubble?

Indeed, as Hart points out, gold prices “fell off a cliff” in September 2011 and have been trending down ever since. “Gold lost its structural ballast when it lost its formal relationship to money,” he concludes. “Now it tosses in the same sea of events as other assets.” That doesn’t mean an end to the frenzy of mine development he so vividly depicts, or to the vastly expanded trading volume fostered by gold ETFs; the price of gold may have dropped, but it’s nowhere near the $35 it was in 1970. There’s still plenty of money to be made in gold, but Hart’s smart, brisk primer imparts the same lesson that we should have learned in 2008: the money gets made by insiders who understand the intricacies of a complex system, while naïve who think they’re buying into a sure thing will most likely take the losses.