On the fifth day of Christmas...


ringsMy true love sent to me: five gold rings. It probably means the first five books of the Old Testament, but to me five rings means the Olympics, which are coming to London in 2012.

If you had bought your gold rings a year or two ago, you would have done very well on them. The price of gold has soared. Some people say that this is only because the dollar has sunk, and gold is priced in dollars. But that is only a small part of the story. Countries like China and India are growing fast – China is already the world's second-largest economy, and will soon overtake the United States – and their residents like to wear their wealth in the form of gold jewellery. But even that doesn't explain gold's huge price rise. No, people want gold because it is a hedge against chaos in the world's economies and currencies. Gold is always negotiable. It has been so for millennia.

This strange appeal of gold makes some people believe that we should go back to a gold currency standard. Let's have something that keeps its value, rather than paper currencies that governments can print as and when they fall a bit short – making those banknotes increasingly worthless. Markets work only on the basis of trust, and if nobody can trust the currency, they don't work. I can see the appeal. But I remain skeptical about gold – or any commodity currency.

First, gold is expensive to pull out of the ground: it seems wasteful to spend so much effort simply to produce a medium of exchange. Second, gold is a good like any other, and its price fluctuates according to supply and demand: its value is not in fact constant, and its quantity at any time may well be more or less than the economy – with its own ups and downs – actually needs. Third, and partly for that reason, the gold (and bimetallic, gold and silver) standard did not actually produce monetary stability. There were many financial crises even before the 1906 crisis that finally convinced everyone it had to go. Fourth, gold is so precious – and if it were the world's only currency, it would be incredibly precious – that only tiny amounts of it would be needed to pay our bills. Indeed, paying small bills with gold would be quite impractical. So instead, we would be issuing notes to represent tiny amounts of gold, and paying with those. And that would tempt the monetary authorities – or private banks, or whoever – to overissue those notes. Which brings us pretty well back to where we are now.