[Note from Nick: With Nigel Farage airborne, and either climate change or poor energy policy wreaking havoc with my local power supply, today’s Fortune & Freedom comes from Lord William Rees-Mogg. He wrote the following in The Fleet Street Letter back in February 2008. However, you could be forgiven for thinking it was written only last week…]


Most investment assets are fiduciary; only a minority of them are “real” as in the sense of “real estate”. These “real” assets tend not to be liquid.

Inexperienced investors underrate the importance of the liquidity of an investment. They do not realise that it is one thing to own a marketable security, and quite a different thing to own a house.

The point becomes uncomfortably serious the first time the appreciative investor has to sell a house. In a local housing market it may be impossible to realise the value of the property because no-one wants to buy it at that time. For obvious reasons, country properties tend to be less liquid than town properties.

Constant value over time

There is only one commodity which has very high liquidity and very high reality at the same time, and that is gold. This gives it a unique status in investment. The high liquidity of gold means that it is likely to be saleable in almost any circumstances.

In 1940 when French refugees were fleeing from the advancing German armies, it was still possible to buy petrol for gold or gold coins, but not for bonds or paper money. Even in circumstances of panic, gold still had a value.

Equally gold retains its value, though not precisely the same value for long periods of historic time. Take for instance, the movement of gold’s purchasing power in the last hundred years.

In 1908, good farmland in England was worth about £45 an acre. Similar land would now be worth about £4,500 an acre. One cannot be too precise about this, not all land fetched £45 an acre in 1900, or fetches £4,500 today, but it makes a reasonable approximation. On that basis, land has risen by about 100 times, in terms of sterling, over a century.

We can be more precise about gold. In 1908, an ounce of gold was worth four sovereign coins. At the current dollar price of $900, an ounce of gold is worth about £450, or about 110 times what it was worth a century ago.

It would be possible to refine this calculation, but Professor Roy Jastram’s celebrated book, The Golden Constant, has demonstrated that gold comes back to a fixed relationship with other real assets over centuries of time. His calculations are derived from British and American sources.

There are two conclusions to be drawn. Real assets retain their value over time; liquid assets are always marketable. Gold, as an asset which is both real and liquid, has a strong capacity for retaining a constant value over time and for its marketability.

An adaptable asset

At present, the real or inflation-adjusted price of gold is in the middle of its historic price range. The dilemma for gold investors is to decide whether the next phase of the global economic cycle will be more inflationary or recessionary.

Perhaps 2008 will be the first year of a pronounced global recession; or maybe the central bank response to the threat of recession will be to pour money into the market, which may bring about a return to inflation.

What will happen to gold in each case? If there is a recession, interest rates will be reduced, and the cost of carrying gold will be exceptionally low; on the other hand, the demand for commodities will fall. Oil prices will drop to $60 a barrel or below; even Chinese demand for industrial raw materials will diminish.

Governments will want to reflate their national economies, but will find it difficult to do so. In other words, gold will be under two opposite pressures, which may produce an equilibrium. Historically, gold did operate as the equilibrium of the world monetary system.

Equally there may be a new inflation. In that case, the price of commodities will rise, and central banks will try to bring inflation under control by raising interest rates. Again gold will be exposed to two different and contradictory forces.

As the representative of other commodities gold will be pushed higher but the carrying cost of gold will rise, as interest rates increase. There is no guarantee that gold will be stable, but, as in the first case, gold will be under pressures which tend to produce an equilibrium.

The likelihood is that the next three years will be a period of an unstable world economy. Because it is liquid, gold will also be saleable. Because it is real, it will not lose its value completely, as will all currencies over the next 100 years.

Gold is the asset which adapts to changing conditions. There will never be a gold wipe-out. For every investor, gold can provide an invaluable reserve asset.

Lord Rees-Mogg
The Fleet Street Letter