by Michael J. Kosares
Black Swans, Yellow Gold – Part Five
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(The following is the fifth of a five-part series on how gold performs during periods of deflation, chronic disinflation, runaway stagflation and hyperinflation. It includes at the end an abbreviated chronology of notable panics, mania, crashes and collapses from 400BC to present.)
“An ounce of gold cost $271 in 2001. Ten years later it reached $1,896—an increase of almost 700 percent. On the way, it passed through some of the stormiest periods of recent history, when banks collapsed and currencies shivered. The gold price fed on these calamities. In a way, it came to stand for them: it was the re-discovered idol at a time when other gods were falling in a heap of subprime mortgages and credit default swaps and derivative products too complicated to even understand. Against these, gold shone with the placid certainty of received tradition. Honored through the ages, the standard of wealth, the original money, the safe haven. The value of gold was axiomatic. This view depends on a concept of gold as unchanging and unchanged—nature’s hard asset.” – Matthew Hart, Vanity Fair, November, 2013
A BOOK COULD BE WRITTEN ON THE SUBJECT OF GOLD AS A HEDGE against the various ‘flations. I hope the short sketches provided over the course of this series will serve at least as a functional introduction to the subject. The conclusion is clear: History shows that gold, better than any other asset, protects the portfolio against the range of ultra-negative economic scenarios, such so-called black swan, or outlier, events as deflation, chronic disinflation, runaway stagflation or hyperinflation.
Please note that throughout this series I was careful not to favor one scenario over the other. The argument as to which of these maladies is most likely to strike the economy next is purely academic with respect to gold ownership. A solid hedge in gold protects against all of the disorders just outlined and no matter in which order they arrive.
I would like to close with a thoughtful justification for gold ownership from a UK parliamentarian, Sir Peter Tapsell. He made these comments in 1999 after then Chancellor of the Exchequer, Gordon Brown, forced the auction sale of over half of Britain’s gold reserve. They get to the heart of the matter and are as relevant today as they were when they were first spoken. Tapsell’s reference to “dollars, yen and euros” has to do with the British treasury’s proposal to sell the gold reserve and convert the proceeds to “interest bearing” instruments denominated in those currencies. Though he was addressing gold’s function with respect to the reserve of a nation-state (the United Kingdom), he could have just as easily been talking about gold’s role for the private investor:
“The whole point about gold, and the quality that makes it so special and almost mystical in its appeal, is that it is universal, eternal and almost indestructible. The Minister will agree that it is also beautiful. The most enduring brand slogan of all time is, ‘As good as gold.’ The scientists can clone sheep, and may soon be able to clone humans, but they are still a long way from being able to clone gold, although they have been trying to do so for 10,000 years. The Chancellor [Gordon Brown] may think that he has discovered a new Labour version of the alchemist’s stone, but his dollars, yen and euros will not always glitter in a storm and they will never be mistaken for gold.”
These words are profound. They capture the essence of gold ownership. In the nearly one and a half decades since the British sale, gold went from $300 per ounce to over $1900 per ounce at what many believe to be its interim high — making a mockery of what has come to be known in Britain as Brown’s Folly. The “dollars, yen and euros” that the Bank of England received in place of the gold have only continued to erode in value while paying a negligible to non-existent return. And most certainly they have not glittered in the storm. What would the conservative government of David Cameron give to have that 415 tonnes of gold back as it introduces austerity measures in Britain and attempts to undergird the value of the British pound?
Returning to the stories told in the first installment of this essay, these were just two accounts among thousands that could be swapped among our clientele. I receive calls regularly from what I like to call the “Old Guard” — those who bought gold in the $300s, $400s and $500s, even the $600s. Many had read The ABCs of Gold Investing: How to Protect and Build Your Wealth with Gold. Some have become very wealthy as a result of those early purchases. The most important result though is that these clients managed to maintain their assets at a time when others watched their wealth dissipate. When it comes to preserving assets, gold remains, in the most fundamental sense, the portfolio choice for all seasons.
Black Swans A chronology of panics, mania, crashes and collapses
(400 BC to present)
“You say: ‘I did not think it would happen.’ Do you think there is anything that will not happen, when you know that it is possible to happen, when you see that it has already happened?” – Seneca, 62 AD at the time of Emperor Nero’s debasement of Roman coinage
The chronology immediately below serves as the final word on Black Swans, Yellow Gold: How gold performs during periods of deflation, chronic disinflation, runaway stagflation and hyperinflation. My original intent was to make a short list that would illustrate the frequency with which periods of economic breakdown have made their appearance in the historical record. Little did I know how extensive a list it would become.
Panics, mania, crashes and collapses, as it turns out, are as common to financial history as thunderstorms to placid summer afternoons. They tend to show up suddenly, wreak more than their fair share of havoc, and recede into the history books only after endless discussion of their causes and cures. Whether brought on by popular delusion, unscrupulous market operators, misguided governments and/or central banks or some random, unforeseen shock, black swan events are part and parcel of the human experience and just as permanent a fixture in our collective history as wars and natural disasters. Those who think it can’t happen here, or that this time around it’s different, should take note of the number of black swan events in American history alone.
Nialls Ferguson, the economic philosopher, summed up what a good many were thinking in the wake of the 2008 meltdown when he said, “Those few goldbugs who always doubted the soundness of fiat money — paper currency without a metal anchor — have in large measure been vindicated. But why were the rest of us so blinded by money illusion?” Why indeed. . .
|Sovereign Default of 400 BC (Syracuse, Greece) – Dionysius confiscates gold and silver money, re-mints it keeping the weight the same but changing the denomination from one to two drachmae — the first known official devaluation at the expense of the general population. A virulent inflation ensues.|
Sovereign Default of 377 BC (Ephesus, Greece) – Gold and silver jewelry confiscated to pay budgetary deficit and avoid a collapse of the city-state, no compensation is paid to owners (reported by Aristotle).
Punic Wars Inflation of 241-146 BC (Rome) – Continuous debasement of gold and silver coinage to pay for wars against Carthage. Wealthy classes of savers, who saved in the form of metal, suffered greatest losses, heavily indebted masses did not object.
Sovereign Default of circa 200 BC (Miletus, Greece) – Economic depression, first instance of forced public bond subscription by citizens to pay the debts of bankrupt city-state.
Inflation Crisis of 64 AD (Rome) – Emperor Nero debased gold, silver and copper coinage as an indirect tax on Roman savers, policy ignited inflation and caused general impoverishment of the lower classes. This same devaluation tactic was used repeatedly by emperors during Rome’s decline and fall.
Inflation Crisis of 301 (Rome) – Emperor Diocletian minted an overvalued silver denarius and touched off a rapid and devastating price inflation, then speculative frenzy and social chaos.
Inflation Crisis of 1020 (China) – One of the first paper money printing schemes (S’ung Dynasty) to buy off potential invaders that led to rapid inflation.
(Note: China’s Cai Lun invented paper in 105 AD, so it is fitting that China would introduce the first paper banknotes in 806 AD. Upon Marco Polo’s return from China, he described its use as money: “All these pieces of paper are issued with as much solemnity and authority as if they were of pure gold or silver; and on every piece a variety of officials, whose duty it is, have to write their names, and to put their seals. And when all is duly prepared, the chief officer deputed by the Khan smears the Seal entrusted to him with vermilion, and impresses it on the paper, so that the form of the Seal remains printed upon it in red; the Money is then authentic. Anyone forging it would be punished with death.” It would follow too that the first abuses in the printing of paper money would occur where it was first issued.)
Hyperinflationary Crisis of 1166 (China) – Money printing scheme (Chin Dynasty) based on government monopoly of tea and salt to pay for war against Mongols led to hyperinflationary breakdown.
Inflation Crisis of 1296, 1309, 1350 and 1374 (China) — Series of inflationary crises related to debased currency issuance by various dynasties, explosive credit and subsequent economic breakdowns.
Inflation Crisis of 1455 (China) – Excess issuance of paper money caused inflation to soar, paper currency eliminated as means of payment for several hundred years.
Medici Bank Collapse of 1494 (Florence, Italy) – Corruption, faulty investment, political intrigue and incompetent management brought down the famed Florentine bank — millions lost resulting in tyrannical taxes imposed on citizenry.
Inflation of 1520-1640 (Spain, Europe) – Gold and silver from the New World drove down the value of money leading to Europe-wide hyperinflation. Spain defaulted on its sovereign debts in 1557, 1560, 1575 and 1596.
Tipper and See-Saw Debt Crisis of 1621 (Holy Roman Empire) – States in Europe minted debased coinage that touched off an inflationary nightmare resulting in widespread riots, political instability and crippled economies.
Tulipmania of 1637 (Netherlands) – Speculative frenzy in tulip bulbs ruined thousands when the bubble burst.
South Sea Bubble of 1720 (Great Britain) – Collapse of inflated shares in the South Sea Company ruined investors; value depended on individuals willing to pay ever higher prices for shares, not company- generated profit.
Mississippi Bubble of 1720 (France) – Financial crisis and paper money scheme perpetrated by John Law based on exaggerated wealth and trade opportunities in Louisiana. French economy collapsed when the bubble burst.
Crisis of 1772 (Great Britain) – Triggered by collapse of a major London banking house.
Continental Currency Failure of 1779 (United States) – America’s first currency collapsed, George Washington complained that a “wagon load of money will scarcely purchase a wagon load of goods”, Spanish silver dollar cost 1.25 Continentals in 1777 and 500 Continentals in 1781.
Fiat money inflation of 1789 (France) – Over-issuance of paper money plunged nation into decade-long inflationary crisis leading ultimately to the French Revolution.
Panic of 1792 (United States) – Brought on by credit expansion of newly formed Bank of the United States and rampant speculation by prominent bankers.
Panic of 1796 (United States, Great Britain) – Precipitated by collapse of inflated land prices.
Debt panic of 1813 (Denmark) – Early sovereign default created internal financial crisis.
Panic of 1819 (United States) – End to first American boom-bust economic cycle fueled by unrestrained issuance of paper money through the Second Bank of the United States, encouraged speculation resulting in financial disaster.
Panic of 1825 (Great Britain) – Stock market crashed due to widespread failure of British banks, near collapse of the Bank of England.
Panic of 1837 (United States)– Deflationary breakdown in the United States caused 25% unemployment rate, bank collapses, business failures.
Panic of 1847 (Great Britain) – Financial markets collapsed following 1840s railroad boom with similar effects to the Panic of 1837, specie standard reinstituted as a result.
Panic of 1857 (Global) – First pervasive international economic breakdown. New York financial sector did not recover until after the Civil War Panic of 1866.
Panic of 1873 (United States, Europe) – So-called “Long Depression” lasting twenty years started with financial failures in Vienna and spread to rest of Europe and finally the U.S., resulting in widespread bank failures and railroad bankruptcies.
Panic of 1884 (United States) – Caused by tight credit following depletion of gold reserves in Europe and failure of two New York City banks with ripple effect to other banks.
Panic of 1890 (Great Britain) – Crisis triggered when Barings Bank nearly went bankrupt due to poor investments in Argentina. Bank of France bailed out British central bank.
Panic of 1893 (United States)– Gilded Age collapse and stock market collapse similar to 1873 triggered by shaky railroad investments and a coup in Argentina, also caused a run on gold at the U.S. Treasury.
Panic of 1896 (United States)– Commodity price deflation and a drop in U.S. silver reserves caused stock market collapse and minor economic depression.
Panic of 1901 (United States) – First crash on the New York Stock Exchange precipitated once again by speculation in railroad stocks.
Panic of 1907 (United States) – Major banking panic, run on deposits, stock market collapse (many feel that this panic led ultimately to the creation of the Federal Reserve System). JP Morgan organized bank bailout to keep financial failure contained.
Panic of 1910–1911 – The after-effects of the Sherman Anti-Trust Act, the break-up of Standard Oil caused slight depression.
Nightmare Hyperinflation of 1923 (Germany) – Inflation rate hit 3,250,000% per month at its peak, many blamed World War I reparations as the cause of the money printing binge that brought on the crisis. (Note: Similar hyperinflationary crises, though not as severe, occurred during the 1920s in Hungary, Poland, Austria and the Soviet Union.)
Wall Street Crash of 1929 (United States, Global) – The most devastating stock market crash in U.S. history launched the Great Depression of the 1930s.
Nightmare HyperInflation of 1944 (Greece) – Started with the German occupation and reached its peak after liberation. Citizens refused to accept the Drachma in commerce, the country became impoverished.
Nightmare Hyperinflation of 1946 (Hungary) – Worst inflation ever recorded, prices doubled every fifteen hours wiping out savings.
Stagflation Crisis of 1973 (United States, Global) – Global double-digit inflation rates and high unemployment caused by decoupling gold from the dollar and two associated dollar devaluations (1971, 1973).
Debt Crisis of 1982 (Latin America) – Excessive external debt triggered most serious capital crisis in Latin American history, currency devaluations and sovereign debt defaults.
Stock market crash of 1987 (Global) – Began in Hong Kong, spread to Europe and then the United States, the largest one-day percentage decline in history of Dow Jones Industrial Average (called Black Monday).
S&L crisis of 1989-1991 (United States) – Nearly one-fourth of U.S. savings and loan associations failed as the result of bad real estate loans and brought on a mirror real estate crash and disinflationary economic environment.
Asset bubble of 1990 (Japan) – Stock and real estate prices crashed launching Japan’s Lost Decade, deflationary – disinflationary crisis largely confined to Japan.
Scandinavian banking crisis of 1990 (Sweden, Finland) – Currency and financial institution breakdown, real estate bust.
Pound sterling crisis of 1992–93 (Great Britain) – Speculative attack on British pound forced UK’s withdrawal from European Exchange Rate Mechanism and caused recession.
“Tequila Crisis” of 1994 (Mexico) – Sudden devaluation of peso touched off high inflation, asset destruction, bank runs and controversial bailout by the United States government.
Financial Crisis of 1997 (Asia) – Financial contagion affected several Asian nations, including stock market collapses, high inflation and unemployment, real estate busts and a general financial panic.
Monetary Crisis of 1998 (Russia) – Russia devalues ruble, defaults on its debts with knock-on effects globally, including an 11.5% drop in the Dow Jones Industrial Average in three trading sessions and the collapse of Long Term Capital Management.
Economic collapse of 1999 (Argentina) – Government defaults on sovereign debts causing bank runs, riots, capital flight. Overnight, the government freezes all bank accounts for 12 months. The economy grinds to a virtual halt.
Dot-com bubble bust of 2001 (United States) – Internet stock speculative frenzy ended in general stock market collapse and malaise that lasted for over a decade. Helped launch gold’s secular bull market.
Bank crisis of 2008 (Iceland) – Banks’ collapse caused depositor run, sharp drop in value of Icelandic kronor.
Nightmare Hyperinflation of 2008 (Zimbabwe) – The worst 21st century hyperinflation thus far, a 79.6 billion per cent annual inflation rate at its peak in 2008.
Financial Crisis of 2008 (United States, Global) – Near collapse of global financial system caused extensive, widespread government bailouts and strong international safe-haven gold demand among private investors, institutions and central banks.
Sovereign debt crisis of 2010 (European Union) – Began in Greece and spread through most of Europe. Ongoing crisis precipitated fear among global investors about stability of Europe’s banking system and the euro currency bloc.
* * * * * * * * * *
Foreign Bonds: An Autopsy/Max Winkler (source ancient examples)
Ten Fascinating Economic Collapses/Richard Urban
China’s First Experience with Paper Money/Mike Hewitt
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Black Swan, Yellow Gold Series 2014
Part One — Gold as a deflation hedge
Part Two — Gold as a disinflation hedge
Part Three — Gold as a stagflation hedge
Part Four — Gold as a hyperinflation hedge
Black Swans, Yellow Gold – The complete series in one download