In search of gold at Bretton Woods

  • Business
  • Saturday, 16 Nov 2013

Lust for gold not paying off

BRETTON Woods, New Hampshire, the United States – That’s where it all began in July 1944, where 730 delegates from 44 nations gathered to conclude the final articles of agreement of the International Monetary Conference (IMC). It established the new international monetary system tying the value of countries’ currencies to US dollar, which was convertible into gold at a fixed price (US$35 per troy ounce). The United States then held 70% of world’s gold.

The IMC also set-up: (i) the International Monetary Fund (IMF) to administer this gold-anchored monetary system of fixed exchange rates among currencies; and (ii) the International Bank for Reconstruction and Development (IRBD or World Bank) to provide long-term loans especially to underdeveloped countries.

Ironically, IMF should have been called a bank (because it lends short-term to nations with temporary payments deficits to enable them to adjust), while the World Bank should have been called a fund (since it makes long-term loans-up to 30 years-to assist nations build physical and social infrastructure to develop). It is said that the IMC was more important than the Treaty of Versailles which ended World War One, but crippled the German economy. This time it established the economic base which led to global prosperity after World War Two – rebuilt the German economy and stabilised Europe for the first time in centuries (through the massive US Marshall Plan). It was the first time the victor of a major war helped rebuild a defeated nation!

Back to New England

I just made a nostalgic return drive through New England whose colourful foliage first charmed me as a student at Harvard in the fall of 1969, and which I felt have since lost touch with. I am reminded of the American writer John Steinbeck’s similar road trip five decades ago, which he published in his memoir of the jaunt in 1962: Travels with Charley (his pet poodle). Like him, I drove through the highways of New England just as fall foliage was coming past its focus, seeking (but not always finding) that fabled place where “the trees burst into colour... reds and yellows you can’t believe”.

I started from my daughter’s home in Westerly, RI (Rhode Island) which shares a border with Connecticut, and cut north through RI’s capital of Providence, and then westwards moving through beautiful southern New Hampshire, to the hip-town of Woodstock in Vermont, staying at the Woodstock Inn which dates back to 1793. Its southern flank, full of bucolic vistas and winding back roads in-between, provides the most fabulous scenic drive, with breath-taking foliage colour only available in this Green Mountain State.

It’s off the next day further north to Bretton Woods, high up in the White Mountain Forest of New Hampshire, best known for its majestic peaks and picturesque lakes, rivers and ponds.

Bretton Woods Accord

For me, it was the stay at the Mount Washington Hotel where the ‘44 IMC was held that brought it all back. I spent time at the historic Gold Room, where Harry D. White (US) and Lord J.M. Keynes (UK) did much of the talking and horse-trading but to no avail. National self-interest finally prevailed – US dollar assumed a new supra-international status.

On the door hangs the plaque: “In this Room the Articles of Agreement Setting Up the International Monetary Fund was Signed in July 1944.” On an adjacent wall was displayed a photo of Henry Morgenthau Jr, Secretary to the US Treasury, signing the Bretton Woods Accord. There are also pictures of Keynes, White, Dean Acheson and S. Stepanov, chairman of the USSR delegation. It is amazing that a hotel with only 200 rooms could accommodate close to 1,000 delegates!

Back to Harvard

The journey continues to take me south to historic North Conway and then, westward across the massive state of Maine via the I-95 highway and the arcing Piscataqua River Bridge and passing-by Bangor, its capital. Then to “downtown” Bar Harbour on Mount Desert Island, which hosts the fabulous Arcadia National Park. Its 27-mile scenic “Park Loop” drive was breathtaking. Back tracking Route 3 led me south-westwards towards Deer Island, which earned Steinbeck’s relentless praise. Retracing his drive to picturesque Stonington to try out Steinbeck’s boast that “Maine’s lobsters are the best in the World,” I must admit he was spot-on after chewing this spiny crustacean at the Fisherman’s Friend eatery at this harbour. Thereafter, the drive takes me along the broken, rocky coastline on Route 1, south towards Portland and then to Portsmouth. But fall is still here, with yellows and orange scattered with bright reds and some blues lining the way.

Driving further south on I-95 all the way to Boston was uneventful enough, as I concluded this unusual journey in Boston and on to the Charles at Harvard Square, as I settled-in to prepare for my two-day meeting of Harvard’s Graduate School Alumni Association Council at the end of the first week of November. Yes, it was great to be back at Harvard.


Bretton Woods made me look back on gold. I am one of those who believe gold has no future. It’s just an anachronism of our modern world, although I won’t go so far as Keynes who called it a “barbaric relic”. It simply has no intrinsic value. I had written twice why this is so (So, the Gold Bug Still Bugs You on Jan 16, 2010 and Man’s Addiction to Gold on Oct 20, 2012). Nevertheless, the Bretton Woods system based on gold lasted for 27 years, until President Nixon closed the gold window and took the world off the gold-exchange standard. Events thereafter turned-out that the US dollar is not as good as gold. Even so, the world struggled for the next 42 years on an arrangement of flexible (but managed) exchange rates with no link whatsoever to gold. In return, there were occasional crises of confidence but the world always survived-although the US dollar was blamed for much of the world’s ills-from promoting persistent global payments imbalances to being a major cause of the recent Great Recession and last financial crisis. For details see my Aug 8, 2009 column: The Dollar Quagmire. Nevertheless, gold continued to maintain its allure despite attempts to demonetise it. Gold’s mystique remains intact. It just won’t go away even though the superpower of the day still calls the tune.


For gold bugs or what economics Nobel laureate Paul Krugman calls “goldbuggism”, 2013 has been a dud year-so far. Frankly, gold’s behaviour over the decades has not been easy to define. It’s “somewhat of a chameleon.” Fans see it as mostly a hedge against inflation; sometimes as protection against poor economic performance; at other times, a haven when the US dollar is deliberately debased (decline in value). Gold plays different roles at different times. In early 2000s, gold behaved like other base commodities (such as copper and oil), surging ahead amid fast rising demand from emerging markets and a weak US dollar.

In 2008, it offered protection when other asset classes fell in troubled times. Gold is still up 68% since Lehman’s collapse on Sept 15, 2008. Today, a few still believe it acts as a hedge against potential interest rate hikes, slowing economic performance, and irrational fears and panics.

This is happening simply because no one knows how to really value gold. Unlike common stocks (which give dividends and have earnings growth) or bonds (which pay interest), gold doesn’t provide an income flow. Let’s face it. In the end, gold is worth what the investor is prepared to pay. Gold closed at US$272 an ounce at end 2000; by August 2011, its price was up seven-fold. This drives investors crazy.

Gold disappoints

The gold rush appears to be over – this year, gold is on track to record its first yearly fall in 13 years. It closed on Nov 8 at US$1,292 an ounce, down 22% for 2013 (-30% since its peak on Aug 22, 2011). All’s gone wrong for gold bugs. Indeed everything they wanted gold to do fell flat. According to Wall Street Journal, large-cap US stocks were up significantly (S&P500 has since returned 25%); small-cap stocks did even better (Russell2000, up 30%).

Even US bonds, reflecting the threat of rate increases, fell only 1.1% so far this year, leaving gold licking its wounds. As a hedge against inflation, gold performed just as poorly. The much rumoured and anticipated inflation to have followed the massive QE (quantitative easing) injection of monies into US and the world (up at least US$3 trillion) never came – US consumer prices rose only 1.2% for year ended September 2013. Over longer periods, gold also failed to keep up with prices.

For two decades in the 80s and 90s, price of gold fell by 46% to less than US$290 an ounce, as consumer prices doubled. Today, gold is still below its 1980 inflation adjusted peak price estimated at more than US$2,300.

Conventional wisdom is wrong

Conventional wisdom (CW) has it that demand for gold varies directly with flows in disposable income. So, economic slowdown in China and India will reduce demand for the metal. As Chinese and Indians will have less disposable income, they will cut spending on luxuries like gold and jewellery. CW is probably wrong on China and India where people purchase gold jewellery for adornment and invest in bullion for appreciation as a store of value. Unlike the West, Chinese and Indians instinctively turn to gold as a financial refuge in times of social and political uncertainty and turmoil. With this mindset, any softening of growth in China will lead to a weaker yuan and a rise in political instability, so that demand for gold will accelerate as a way of preserving wealth.

China’s gold purchases more than doubled from a year earlier in 2Q 2013, or 20% higher than in 1Q 2013. They could reach a record 1,000 tonnes this year and will overtake India to become world’s No.1 buyer. However, India’s consumption this year will be lower than last year’s 860 tonnes as government’s curbs on imports begin to bite. Diwali is the biggest gold-buying occasion in India; this year, very weak gold purchases at a time of traditionally strong demand indicated that official restrictions are indeed working, as would the US Fed’s anticipated move to taper its bond-buying programme.

Unlike India, China’s gold consumption has reached a new high, powered by “da-ma” (literally, “big-mama”) oversight, a group of female middle-aged women who keep a tight grip on the family purse and an eagle-eye on gold prices at retail outlets. They even help stabilise prices; indeed, setting a floor at times of crisis. They also ensure retail prices remain at close to world prices, unlike India where 8% to 10% premium above the global price is not uncommon. Overall, China and India remain the driving force for gold purchases; together with Vietnam and Indoensia, they account for 60% of world consumption against 35% 10 years ago.

Bitcoin – digital gold?

Bitcoin is strange. This cult digital currency, invented in 2009, is pure computerised money. It exists only as “strings of digital code.” Some explanation is in order. Unlike money which is created and regulated through monetary policy by central banks, Bitcoin is created by computer geeks-using similar technology as discredited Napster (which started in 1999, allowing individuals to swap music files among themselves to the exclusion of the record labels) and shut-down by legal suits in 2001. Instead, Bitcoin is determined by clever algorithms. That is, new Bitcoins are “mined,” i.e. users can acquire them by letting their computers compete to solve complex mathematical problems; “winners” get virtual cash, in the form of a string of numbers. Owners regard them as digital gold simply because their purchasing power is protected by a hard limit (21 million) on the number of coins that can exist, currently about 12 million.

Early this year, a unit of Bitcoin cost around US$15; by mid-April, it had risen to US$179, valuing Bitcoins in circulation at about US$2bil. It has become a hot commodity, creating a “bubble” inflated by social media, cheap cash in search of high return, and unsettled investors from repeated crises. Not surprising, Bitcoin went through a sharp correction in April (at one point losing 50% of its value), before recovering sharply. By Nov 5, its price rose to a record US$252.61 on the leading Tokyo-based Mt.Gox exchange.

Bitcoin has survived because it (i) acts as a store of value, (ii) has a unique digital signature, making it almost impossible to forge, (iii) is used in Silk Road, a marketplace hidden in the web, or to settle transactions (through BitPay), (iv) is anonymous and untraceable, and (v) it effectively promotes e-commerce (esp. B2B) because of its low transaction costs. But Bitcoin’s success has attracted growing regulatory scrutiny. Already lawsuits are growing, including recent bankruptcy filing of the CoinLab mining unit, Alydian Inc. (the “Bitcoin business incubator”).

Lack of regulatory oversight is challenging law enforcement’s ability to keep tab on the criminal under-world. It is difficult to ascertain how much of the US$2.4bil Bitcoin market is tied to crime. I believe most of Bitcoin transactions are legal since it does have legitimate uses; also, it can be bought and sold on online exchanges, similar to a stock market. Will Bitcoin go the Napster way? We will have to wait and see.

What then are we to do?

Most economists including Krugman agree that gold has been anything but a safe investment. Nevertheless, gold has survived as acknowledged even by Keynes because: “gold has become part of the apparatus of conservatism and is one of the matters which we cannot expect to see handled without prejudice.” And so it remains till this day. Dr Doom (Columbia’s Prof Nouriel Roubini) has since predicted that: “gold prices are likely to move much lower, towards US$1,000 by 2015.” His six reasons does make good sense: (i) gold prices only rise in times of crises; (ii) gold performs best in the midst of high inflation; there is little inflation now and likely to remain so; (iii) gold gives no income; (iv) gold prices rise when interest rates adjusted for inflation become negative; (v) many highly indebted nations also own large stocks of gold; to keep their credit rating, they will increasingly be tempted to sell gold reserves (as did Cyprus; Italy and France may similarly be tempted); and (vi) gold price is political – the conservative far-right fringe is unlikely to have it their way to return to the gold standard; this together with the inability to use gold as a currency means gold will remain impotent. So gold price will continue to gyrate and bump along. I believe the gold rush is over.

To breathe new life into gold, the World Gold Council (WGC) is on the offensive to woo the new generation, campaigning through “LoveGold,” including giving low-interest, long-term loans to independent gold jewellers to create, distribute and market new images of gold, using social media. WGC places special focus by directing more firepower behind its efforts especially in China and India. Good luck!

Former banker TAN SRI LIN SEE-YAN is a Harvard educated economist and a British chartered scientist who speaks, writes and consults on economic and financial issues. Feedback is most welcome: e-mail:

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