Illustration of Athena Parthenos that stood in the middle of the Parthenon.
Reflecting on history, certain pivotal moments have shaped the trajectory of civilization. Innovations such as the mastery of fire, the invention of the wheel, the harnessing of electricity, and the development of agriculture stand as foundational advancements. Beyond these essential survival innovations, the financial realm has experienced its own transformative milestones, with the role of gold emerging as particularly prominent in this narrative.
In 550 BC, King Croesus of Lydia (modern day Western Turkey) minted the first gold coins through standardization and design. Currency prior to this was largely transacted with lumps of gold or silver of varying purity. By standardizing gold and silver coins, trade became much more efficient and thus created the first financial standard. It was revolutionary for the time period.
Shortly after, the Persians invaded and conquered Lydia. They also began to slowly adopt King Croesus standard for financial transactions. Gold as a means of stored value continued to spread throughout the region as more countries begin to adopt it. In 490 BC, Persia planned to expand their empire by invading Athens. Their initial assault failed, and they attempted again in 480 BC and while initially sacking the city Athens, were later defeated in a naval battle.
The Athenians, jittery and on edge after defeating the Persians, worried about an invasion from the Spartans next. Pericles, an influential leader in Athens, argued for construction of the Parthenon as a demonstration to the world, particularly the Spartans, of Athens’ supreme power, wealth, and cultural refinement.
The Parthenon was constructed around 447 BC and is considered an architectural marvel, not just for its beauty but for its engineering. In the middle of the Parthenon, the statue Athena Parthenos was also constructed. She stood at a massive 39 feet tall and was made of gold and ivory. She was depicted standing, fully armored, with a shield in one hand and the statue of Nike in the other. At her feet, a serpent lay, symbolizing wisdom.
Pericles had to convince the Athenians to also build this massive statue due to the exorbitant cost and he used a simple argument: if necessary, he promised to melt the statue down to finance a military fleet to fight the Spartans with the gold used.
Historically, there has been a profound link between economic power and gold ownership. In the early 12th century, Venice became the world’s greatest trading power, pioneering interest-bearing loans, bills of exchange and double-entry bookkeeping. The city amassed unparallelled gold wealth, which enabled it to set gold prices and finance a formidable army, including a significant naval fleet. Venetian dominance through gold persisted until Christopher Columbus’s discovery of America, which introduced new sources of gold and shifted economic power dynamics.
This historical precedent of gold’s role in economic power set the stage for later financial systems. In 1821, England was the first country to peg their currency to gold, implementing a gold standard. Fast forward to post-World War II era, the Bretton Woods agreement further altered the global financial landscape as the United States agreed to peg the dollar to gold. All other participating countries then pegged their currency to the US Dollar, which indirectly pegged them to gold. However, just twenty-seven years later, President Nixon ended this system due to the US hemorrhaging gold reserves amidst massive trade deficits. This decision marked a pivotal moment in financial history, shifting the world towards a system of fiat currencies.
Gold’s scarcity and the difficulty of altering its form made it an excellent store of wealth for thousands of years. It could be stored for centuries without losing its value significantly which made it the preferred choice for hoarding wealth, especially by the wealthy and governments. However, since Nixon’s decision, gold has largely taken a backseat in financial strategy. I’ve even gone on record stating that gold doesn’t have much of a place in modern investment portfolios.
But perhaps this perspective has shifted with Russia’s invasion into Ukraine. Shortly after the invasion, the US and its allies imposed the most severe financial sections ever enacted, effectively barring Russia from using the current global financial system. Essentially, these sanctions froze any Russian reserves held outside of Russia, seized any assets located beyond their borders, and suspended Russia’s ability to use the dollar and other allied currencies for trade.
The ostracization from Western financial systems significantly diminished the Ruble’s value outside of Russia, prompting the country to explore alternative economic strategies (they ended up pegging the Ruble to gold in an attempt to stabilize the currency). Notably, the Bank of Russia began significantly increasing its gold reserves around 2007, when it held approximately 400 tonnes, and continued this accumulation up until the invasion, amassing about 2,300 tonnes by 2022. This strategic expansion of gold reserves was part of Russia’s broader economic maneuvers to mitigate the impact of sanctions and stabilize its currency. Looking back with the clarity of hindsight, Russia’s amassed gold reserves (along with oil and natural gas reserves) provided them with the capability to continue trading.
The unprecedented sanctions also appeared to mark a turning point and raised several questions in my mind over the past few years:
- For any adversary to the West, do they begin to stockpile gold for fear that their foreign currency reserves could be frozen and seized? Could stockpiling gold enable these countries to continue trading during sanctions? Will this prompt Western countries to increase their own gold reserves?
- If Russia’s ban from the West’s financial system remains intact after the war is over, will they and China pursue a new ‘reserve’ currency? And what effect, if any, will this have on the Dollar and gold?
- With the US running massive deficits, will questions percolate around the reserve status of the US Dollar and further expand gold both in trade and central bank holdings worldwide?
It seems likely that it will take several years to achieve full clarity on these questions. However, there is currently evidence suggesting that:
- Central banks globally have been increasing their gold reserves worldwide and don’t appear to be slowing down purchases or production. Here and here.
- China moved to establish a new reserve currency (although presently struggling to gain traction), aiming to reduce reliance on the Dollar in international trade and finance especially if the US uses it as an economic weapon. Here.
- The United States is expected to persist with substantial budget deficits for the foreseeable future, raising ongoing concerns about the dollar’s global strength and its role as the world’s reserve currency. Here and here.
These developments indicate a shifting landscape in global finance and trade that has accelerated in the last few years and is poised to continue years ahead.
