The history of stock-market panics is written in gold. The past few years have proved gold's position as the last repository of worth in a disintegrating world - it has more than doubled in value since the sub-prime meltdown in 2007. At the end of September, JPMorgan reopened its underground gold vault in New York. Vaulting, which most banks abandoned in the 1990s, has become big business again as gold has soared in price (the banks take a percentage of the value of the bullion they store, so the recent spike in the market has rendered previously uneconomical vaults profitable). For the first time ever, private investors own more of the precious metal than central banks.
On 8 November, the president of the World Bank, Robert Zoellick, caused a rumpus in the financial press. "World Bank head calls for return to gold standard", read the headlines. In a deeply divided global economic system where QE2 - the US Federal Reserve's latest round of quantitative easing - is provoking heated debate, the re-establishment of gold as a financial lingua franca might make sense. Yet Zoellick's article in the Financial Times wasn't about gold. The mention of bullion was a parenthetical comment in the middle of a nuanced appeal
for greater co-operation between the economic superpowers in the lead-up to the G20 meeting in Seoul on 11-12 November. It is a sign of gold's lasting fetish appeal that journalists have fixated on the reference to a return of the standard.
Message rather subtle
Zoellick is bright enough to know that his allusion to glittering metal would dominate the pink pages. There is something both dramatic and comforting in the idea of gold once again being the final arbiter of value - dramatic because previous panics have led to either the abandonment of or a return to the gold standard; comforting because talk of the standard takes financial journalists back to an economic universe that they understand, the one they learned about at university. The solid permanence of bullion returns us to a simpler, more comprehensible age.
Zoellick did not call for a return to the gold standard. In the current economic climate, such a move would be regressive and restrictive.
His exact words were: "The system should also consider employing gold as an international reference point of market expectations about inflation, deflation and future currency values." He also noted: "Although textbooks may view gold as the old money, markets are using gold as an alternative monetary asset today." Gold's ability to reflect the views of the markets should be used to inform currency decisions, he was arguing - hardly a call to re-establish the standard. So why did Zoellick even mention gold? First, he knew it would get him headlines. But it also sent a couple of subtle messages to central bankers ahead of the Seoul talks.
The article calls for nations to work together in Seoul to establish a new mechanism for the interaction of currencies, rather than maintain the present antagonism. Gold is being used as a striking metaphor: get this wrong, Zoellick is warning bankers, and gold will be used to judge you. Its high price can be viewed as a direct reproach to the inflationary tactics being employed by Washington as it embarks on QE2, similar measures in Japan, and to Chinese currency manipulation that maintains the yuan at artificially low levels. The German finance minister, Wolfgang Schäuble, has described the dollar as being in "deep crisis", and the US has failed to win support for its efforts to impose global current-account targets. We may be seeing the first manoeuvres in a currency war. Zoellick's invocation of gold is an attempt to broker peace, and to insinuate the turmoil that will ensue if such a peace is not reached.
In the reverse gold rush of the late 1990s and the beginning of the last decade, governments disposed of their gold reserves in extraordinary quantities. Gold was no longer seen as a sensible investment for central banks, which preferred to hold assets that paid a running yield and did not run up storage and insurance costs. Unfortunately, many governments transferred their bullion holdings into stakes in other countries' national debt. This explains some of the strange cross-holdings that were exposed during the sovereign debt crisis earlier this year.
Gordon Brown's sale of half of Britain's gold reserves in a series of auctions between 1999 and 2002 was part of a huge transfer of the world's bullion from public to private hands. Australia, Belgium, Canada and Switzerland all sold substantial holdings during this time, believing that the fall in the price of gold represented a long-term move away from this ancient store of value towards more sophisticated, interest-bearing products.
Where the east leads . . .
In the past year, central banks have begun to buy gold again. The second implication of Zoellick's reference lies here - because it is not western governments that are buying gold. Even with prices at well above $1,000 an ounce, it is the new economic powerhouses of the developing world that have been reversing the trend for private ownership of the planet's gold reserves.
In November 2009, the Reserve Bank of India bought 200 tonnes of gold, the largest purchase by a central bank in 30 years. Russia has added almost 200 tonnes since 2006 and China is surreptitiously building its reserves, buying up local production - last year, Beijing said that it had added 450 tonnes to its reserves from its own mines since 2003.
So, the message here is to the United States, Japan and the UK. Work with the emerging nations to resolve your currency differences, Zoellick is saying, or they will overtake you even faster.
Alex Preston's column appears fortnightly.
His novel "This Bleeding City" is published by Faber & Faber (£12.99)