The "Gold Connection"

We have noted in an earlier posting that one of the main, grossly misunderstood, relays between energy, EROI, and “Planet Finance” is gold. Considering this “gold connection” from a very long-term perspective will enable us to throw more light on the present state of affairs and how it can possibly be resolved.

In fact, Nixon’s decision marked the term of a long evolutionary process. Over several centuries the world moved from money being predicated on energy flows, initially solar energy flows through human and animal labour, that is, past work aimed at ensuring a future, to a system where money has become de facto a pure gamble on the future, completely disconnected from thermodynamics realities. A quick glance at history will clarify this turn around from tangible past to gambled future and its consequences.

In medieval times, in what is now called Green Provence, peasants used to measure the size of fields in the number of days of scything required to complete harvest, which means that they had an acute sense of what we now call EROI. Before the industrial revolution, societies were all 100% solar based. In order to collect enough energy in the form of food (where wheat and other cereals played a key role), animal feed (typically hay) and wood to live on for at least another year, one had to have enough food left over from the previous crop to feed the harvesters. Famine was never far away with overall EROIes typically between 2:1 to 4:1.

Tax to the local lords was paid by farmers to a large extent in wheat. The de Puget, lords of Néoules and a few other fiefdoms, for example, were collecting between 4 and 7 tonnes of wheat a year. They could sell any surplus to merchants against gold. In effect, there was a direct relationship between gold and annual energy flows.

With the advent of banking, first in China, then in Italy in late medieval and early Renaissance times (more particularly in Venice, Florence, and Genoa), and the development of credit and commercial paper, a wedge was progressively inserted between energy flows and money. The town dwelling and speculating bourgeois, increasingly cut-off from the rural energy bases of their very existence, step by step lost the EROI intuition of the peasants feeding them.

Further on, with the advent of the industrial revolution and large amounts of low cost energy extracted with high EROIs from coal mines (sometimes over 100:1), the wealthy and powerful could afford to ignore the thermodynamics of the whole new societal systems.

Still further on, with Nixon, the disconnection between economics, money and finance on the one hand and thermodynamic reality was completed. From this point onwards finance has been free floating and energy treated as if it was a commodity like any other, which in reality it never was and never will be, while gold ended up labelled “a barbarian relic” by people who apparently had little knowledge of thermodynamics.

Yet, as we have already noted in Figure 3, over some 150 years since the beginning of the oil industry the ratio of barrels of oil per one ounce of gold, or grams of gold per barrel of oil, has remained fairly stable throughout major historical changes including during World Wars (illustrated in the large gold line) while since the late 1990s the price of oil has “shot to the stars” (illustrated in the blue line).

Like oil, gold is a scarce resource requiring increasing amounts of energy to mine what’s still left in the ground, that is, ores whose metal contents are already very low and relentlessly diminishing. Like energy, gold just is, neither created nor lost (first principle of thermodynamics) – as many gold investors like to say, “gold cannot be printed” like fiat money can, with no tangible backing. Gold is dense and resistant to corrosion. For a very wide range of societies, historically, these qualities have made it an ideal store of value and most specifically value grounded in energy flows, the irreplaceable basis for life. For centuries, Gold has thus been used as a de facto proxy for energy, energy recognised implicitly as the fundamental referent of economic value. Through its link with oil, gold continues to be used in this (largely unnoticed) fashion.

Figure 12, demonstrates further the precariousness of the global fiat monetary and financial system. In terms of actual tangible value, energy or its gold proxy, current currencies presently have as little value left in them as the Roman Denarius had in the late 260s when the Roman Empire entered final decline.

Figure 12 – End Game for the present Fiat Monetary System

In other words, trends for gold and energy versus currencies now track the downward slope the global monetary system is on and point at the prospect of its impending collapse. [1]

Figure 12 also reminds us that systemic monetary breakdowns like what we are presently witnessing have happened before and point at the fundamental reasons for it. The top left hand diagram on Figure 12 tracks the silver content of the Denarius, the “dollar” of the Roman Empire, from about 95% silver to nil by the beginning of the fourth century AD. The leaders of the time were debasing their currency in a vain attempt to literally keep the Empire afloat. Present ones act similarly with various forms of “quantitative easing”.

We now know that the main drivers of the collapse of the Western part of the Roman Empire (Byzantium survived painfully for about another 1000 years) were an energy crisis and a slight climatic fluctuation that ended the Roman Climatic Optimum – the Empire’s hierarchy, entirely solar energy based, had become top heavy energy wise, with the Roman aristocracy, the Empire’s administration and its armies costing increasingly more energy than what the productive slave base could ever supply, while immigrant barbarians placed increasing pressure to take their shares of the Empire’s perceived wealth. [2] The Roman elites fell into an EROI energy trap that they did not understand and from which they did not know how to re-emerge. It took over 1,200 years for European regions to roughly recover. The two key differences between then and now are that (1) the matter is now global – it concerns the whole of humankind, and (2) while the Roman civilisation was essentially solar, thanks to the fossil and nuclear components of BAU, the whole of humankind is now under the threat of a global ecological catastrophe.

The inescapable conclusion to draw from the lost connection between energy and gold on the one hand and contemporary fiat notions of economic value is that during the long period between late European medieval times and the present, economics and finance progressively emerged as a body of myths and related ritualised exchanges, with “Growth” and “Globalisation” having become the foundation myths of our times. Let’s stress it again, while believed in by millions of decision-makers in complete ignorance and defiance of thermodynamics, these myths are no more than a perpetual motion machine fantasy – something that is always lethal.

[1] Since September 2011, the drop in value of most currencies against gold has marked a pause and since November 2012 gold’s value expressed in Euros has dropped substantially. This is recognised by expert traders as being essentially due to speculation concerning what is commonly referred to as “paper gold”, i.e. derivative products such as ETF and futures while the focus on and global demand for physical gold remains extremely strong, especially with China having become the main global gold producer and holder of gold reserves (now estimated to be slightly ahead of US gold reserves). A number of specialists have noted the evolving strategies on the part of China and a number of other emerging countries and OPEC oil producers, as well as Russia, to move away from the US dollar as the dominant global reserve currency without causing a major disruption in the process, and an increased focus on gold as part of that effort. Many gold trade experts seem to consider that the market fundamentals that have seen gold prices in all currencies increase relentlessly from 2001 till 2011 remain unchanged and that the various forms of “quantitative easing” that have been implemented since 2007 in the US, the UK, the EU, Japan and some other countries are mere delaying tactics that are likely to make matters worse eventually. They expect the abandonment, or even the collapse, of the present US dollar-based global system to have become unavoidable and expect it to take place in the short to medium term. However, most miss the crucial links with energy and global thermodynamics and their consequences.

[2] See Tainter, Joseph A. and Crumley, Carole, “Climate, Complexity and Problem Solving in the Roman Empire” (p. 63), in Costanza, Robert, Graumlich, Lisa J., and Steffen, Will, editors, 2007, Sustainability or Collapse, an Integrated History and Future of People on Earth, The MIT Press, Cambridge, Massachusetts and London, U.K., in cooperation with Dahlem University Press.

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