Asiaweek.com | A Magical Mystery Ore

NOVEMBER 10, 2000 VOL. 26 NO. 44 | SEARCH ASIAWEEK

A Magical Mystery Ore
Tracing the roots of our obsession with gold
By DEREK PARKER

Bracelets, rings, chains. Or just plain bars. Can folks ever have enough of the glittery stuff? Even now many Chinese consider births, weddings and major celebrations incomplete without a gift of gold. No doubt gold's status as an imperial monopoly added to its mystique. But why was the metal so valuable?

Gold was hugely popular with ancient Chinese rulers, both for decoration and as a medium of exchange. Its circulation, however, was strictly limited for much of China's history. During the Tang dynasty, for example, the ordinary people traded with low-value copper coin instead. The emperors feared that extending the use of gold might enable commoners to accumulate individual wealth — and build a power base that might eventually challenge the throne. At least that is how Peter L. Bernstein explains it in his fascinating book, The Power of Gold: the History of an Obsession (John Wiley & Sons, 407 pages, $27.95).

A shortage of copper during the reign of the Tang emperor Xianzong (806-821), however, forced the Chinese to use pieces of paper instead of coin. From there, it was a short step to paper of larger denominations, and soon a system of paper currency. The process eventually became so authoritative that Marco Polo described it as almost a sort of alchemy. So while China pioneered the use of paper money, Bernstein suggests, the notion may have been something of an accident.

Paper, however, was only useful within the country of its issue. Commerce conducted between nations required a universally valued currency, and that meant gold. This was the story when trade between Europe and Asia exploded in the 17th and 18th centuries. Gold traveled east not in a trickle but in a flowing stream. Between 1600 and 1625, gold bullion accounted for 75% of all the cargo shipped to Asia by the East India Company. Much of this was bullion taken from the Americas by the Spanish, Portuguese and English.

The reason for gold's importance through time has never been fully explained, except as one of the more persistent paradoxes of the human species. Yes, it is almost eerily beautiful, Bernstein notes. The precious metal retains its luster despite age (in fact, the chemical symbol for gold, Au, comes from the Latin word for light). Its softness means that it can be transformed into foil, thread, or the finest jewelry. And beyond its application in microchips (gold is an excellent conductor of electricity), the metal has few other uses. Yet it is almost universally prized.

Investment consultant Bernstein, whose previous book, Against the Gods: the Remarkable Story of Risk, was a surprise international best-seller, has assembled a cast of colorful characters to tell his tale. The Power of Gold imparts a mountain of information in remarkably entertaining fashion for a book about finance. The Greek myths of Midas, Croesus, and the Golden Fleece, he muses, probably had factual bases. He recounts how gold has been used for displays of the most conspicuous consumption, such as when the Roman Christian emperor Justinian lavished gold by the ton on the church of Saint Sophia.

In Europe, gold was democratized by its use in coins, even though successive rulers tried to debase them by mixing in lesser metals or reducing their size. Gold coins, acceptable across borders and classes, helped grease the commercial machine that dragged Europe out of the Dark Ages. But as a medium of exchange between individuals, gold is too valuable for small transactions and too heavy for large ones. When financial dealings become commonplace, paper proved to be the handy substitute.

So where did all the gold go? The precious metal, whether in the form of jewelry or bullion, is eminently hoardable. It is both an investment and an insurance policy. Indians, in particular, like to squirrel it away, and even today they spend more on gold than on cars, two-wheeled transport, refrigerators and color TVs combined.

Gold is also accumulated by governments. The desire of national administrations to hold it as the ultimate source of wealth was the basis of the gold standard that dominated international trade for 200 years. It underpinned first the British pound and later the American dollar. Dire consequences were predicted when, in 1971, Washington announced that it would no longer guarantee the convertibility of gold. But by that time, currency trading was so common it was its own support, and the gold standard died fairly quietly.

Bernstein muses that the virtual currency — nearly all international transactions and many personal ones are now conducted electronically — might finally be overtaking the role of gold as a store of value. Or perhaps not. In times of crisis, he notes, many investors still seek refuge in the precious metal. Bernstein ultimately returns to his first question: Why is gold valuable? His answer: Because people want it. It's as simple, and as complex, as that. Irrational? Yes. Foolish? Probably. But then, as Bernstein says, that's gold for you.

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