John Maynard Keynes once described gold as that “barbarous relic”. Decades later, the relic’s continuing survival must cast doubt on the original hypothesis. All the same, the metal is no less difficult to understand.

A recent World Gold Council lunch to discuss gold’s role as a hedge against the dollar raised as many questions as it answered. That gold provides a hedge doesn’t seem in doubt but on what basis is less clear. Politics, economics, market fluctuations, supply factors – no doubt all have their role, but finding the exact causal links is still far from understood.

All this may change, however, thanks to the rise of the euro and the decline in power of European national central banks. While the trend is for these central banks to sell down their gold reserves (the renewal of the Gold Agreement by the European Central Bank last month ensures a planned and orderly disposal), what they keep may gain in importance.

That’s because a eurozone member central bank doesn’t have a lot to do these days. Monetary policy has gone to Frankfurt and the trend is to give regulation to an all-embracing regulator. That leaves managing the reserves. Hence, understanding gold and even broadening the portfolio to include other commodities such as oil (could equities be next?) suddenly has appeal.

In economic terms, gold has a low use value and a high exchange value. Since it doesn’t get used in the manner of a classic commodity, it is the stock of gold rather than the flow that influences the price. The components of demand are in any case disparate: central banks, New York hedge funds, India’s middle class. Gauging how they might react to price changes, inflation or international uncertainty is something of a dismal art.

Can “retired” European central bankers throw some light on it, and what will they do with the profits they make, if any? Under the Maastricht Treaty, central bank reserves can be used for monetary policy (except individual eurozone countries don’t have one) but not for fiscal purposes. On this basis, the outlook for the European central bankers’ pension fund seems exceptionally healthy!

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