Every once in a while we rummage around USAGOLD’s creaky old attic and dust-off a golden vignette from our storied past. The following vignette first appeared in our monthly client letter in April 2015. It is titled “Caveat Venditor” (Let the seller beware) and it tells why the prudent investor might think twice about parting with his or her gold even if a small investment had grown to be worth millions. Though hyperinflation, or inflation at any level, seems a distant threat at the moment, this nugget of wisdom is one to file for future reference.
Gillian Tett (Financial Times): “Do you think that gold is currently a good investment?”
Alan Greenspan (private citizen): “Yes. Remember what we’re looking at. Gold is a currency. It is still, by all evidence, a premier currency. No fiat currency, including the dollar, can match it.” – Council on Foreign Relations meeting, November, 2014
Let the seller beware! The German citizen/investor who put away a few rolls of 20 mark gold coins (.2304 tr ozs. shown below) in 1918 would have done so at 119 marks per ounce. By early 1920 the previous rapid inflation had suddenly German money given way to deflation. Had that gold owner decided to cash in on gold’s significant gains thinking runaway inflation was over, a 100,000 mark investment would have made him or her a millionaire.
The glow, however, would have quickly worn off. By late 1921 the runaway inflation had resurfaced but now with a vengeance. Gold shot to 4,000 marks per ounce. By mid-1922 gold reached 10,000 marks per ounce and the wholesale price index went from 13 to 70. By late 1922, the roof caved in. Gold traded at 134,000 marks per ounce. In January, 1923, it cracked 1,000,000 marks per ounce. By midyear, it broke the 100 million marks per ounce barrier and at the peak of the hyper-inflationary breakdown, it sold for over 100 billion marks per ounce.
The individual who thought he or she had the cat by the tail and cashed-in his or her golden chips during the 1920’s deflation became a millionaire. In short order though, that millionaire became a pauper as wave after wave of hyperinflation washed over the German economy. One moral from this somewhat frightening tale is that becoming a millionaire or even a billionaire on one’s gold holdings was inconsequential. Another is not to give up one’s hedge until there is ample evidence that it is no longer needed. Momentary nominal profits can be illusory.
Trailer note – From The Nightmare German Inflation by Scientific Market Analysis: “Those who held funds in dollars, pounds or other stable currencies, or in gold, saved their capital. The government set up rigid exchange controls as the inflation proceeded. As usual under such conditions, a black market flourished. The ones who fared best were the small minority who had the foresight to exchange marks into foreign money or gold very early, before new laws made this difficult and before the mark lost too much value.”
The currency image (top left) illustrates the rapid depreciation in Germany’s paper money with single notes going from a 20 mark value in 1918 (the paper equivalent of one 20 mark gold coin) to a 20 million mark value in 1924. Fast forward to 2015, nearly one hundred years later, and we find that all currencies are being deliberately devalued against one another in an on-going global currency war. That hedge is no longer available. Only gold stands outside the fray. Perhaps that is why former Fed chairman Alan Greenspan recently said, “Remember what we’re looking at. Gold is a currency. It is still, by all evidence, a premier currency. No fiat currency, including the dollar, can match it.”