Gold suitably undervalued
“The price of a fine suit of men’s clothes,” says the U.S. Geological Survey, “can be used to show anyone who is not familiar with the price history of gold just how very cheap gold is today. With an ounce of gold, a man could buy a fine suit of clothes in the time of Shakespeare, in that of Beethoven and Jefferson, and in the depression of the 1930s.”
So where do we stand in 2019 with respect to The Quality Man’s Attire-Gold Ratio? At Brooks Brothers a top quality, off-the-rack suit ranges between $2625 and $3122 without a vest. Brooks Brothers does carry a less expensive suit at about $1250, but the ratio requires a top (not lower or middle) quality man’s suit. On London’s Saville Row – the standard for quality men’s attire – a hand-tailored men’s suit ranges in price from £3500 ($4620) at Huntsman to £4950 ($6534) at Kilgour (as published in Gentleman’s Quarterly). By any of those measures, gold at $1300 per ounce is suitably undervalued.
Worry about the return ‘of’ your money,
not just the return ‘on’ it
“To be fair, the fiscal side of our current system has been nonexistent. We’re not all dead, but Keynes certainly is. Until governments can spend money and replace the animal spirits lacking in the private sector, then the Monopoly board and meager credit growth shrinks as a future deflationary weapon. But investors should not hope unrealistically for deficit spending any time soon. To me, that means at best, a ceiling on risk asset prices (stocks, high yield bonds, private equity, real estate) and at worst, minus signs at year’s end that force investors to abandon hope for future returns compared to historic examples. Worry for now about the return ‘of’ your money, not the return ‘on’ it. Our Monopoly-based economy requires credit creation and if it stays low, the future losers will grow in number.”
Bond-fund guru Bill Gross posted that piece of advice in his Investment Outlook column back in 2016. It still applies today – maybe even more so now than it did then. In the wealth game, emphasize defense when you need to, offense when it makes sense. At all times, remain diversified. And by that, we mean real diversification in the form of physical gold and silver coins and/or bullion outside the current fiat money system. There is nothing wrong with owning stocks and bonds. Realize though that these assets are denominated in the domestic currency. If it erodes in value, the underlying value of those assets erodes along with it. A proper diversification addresses that problem now and in the future. Bill Gross, by the way, has recommended buying gold on a number of occasions over the years.
Doomsday prep for the super-rich
“Survivalism, the practice of preparing for a crackup of civilization, tends to evoke a certain picture: the woodsman in the tinfoil hat, the hysteric with the hoard of beans, the religious doomsayer. But in recent years survivalism has expanded to more affluent quarters, taking root in Silicon Valley and New York City, among technology executives, hedge-fund managers, and others in their economic cohort.” – Evan Osnos, The New Yorker
Everyday on this page we report on the reasons why gold ownership makes a great deal of sense to ordinary investors. In doing so, we have always taken exception to the mainstream media’s portrayal of the ordinary gold owner as “the woodsman in the tinfoil hat”. . . etc. I would think that many among the media are utterly amazed that people like Steve Huffman (Reddit, CEO), Peter Thiel (PayPal founder) and the long roster of other luminaries mentioned in this New Yorker article are identified as “preppers” in one capacity or another.
They would probably be even more amazed to find that a good many of this same group are likely to be gold and silver owners as well. As such, they take their place alongside a wide range of Americans who own gold – physicians and dentists, nurses and teachers, plumbers, carpenters and building contractors, business owners, attorneys, engineers and university professors (to name a few.) We know because that is the description of our clientele. In other words, gold ownership is pretty much a Main Street endeavor. One Gallup poll a few years back found that 34% of American investors rated gold the best investment “regardless of gender, age, income or party ID. . .” In that survey, investors rated gold higher than stocks, bonds, real estate and bank savings.
The inverted yield curve as a harbinger
of higher gold prices
(Grey vertical bars indicate recessions.)
During the course of the past several weeks, we have heard much about the inverted yield curve in three-month and ten-year Treasuries as a harbinger of recessions. Missed in the press reports is the fact that it has also been a harbinger of higher gold prices. In the chart above, please note the upward surges in the price of gold in the five-year periods following the two most recent yield inversions in 2000 and 2006. The first occurred with gold trading in the $300 range. It subsequently rose to the $600-650 level in 2006. The second occurred with gold priced in the $600-650 range. It subsequently rose to over $1900 per ounce in 2011 – its all-time high.
“Ominously,” writes Robin Wigglesworth and Joe Rennison in a recent Financial Times editorial, “the US yield curve has now inverted once again, with the 10-year Treasury yield on March 22 dipping below the three-month T-bill yield for the first time since 2007. Combined with the length of the post-crisis expansion — this summer it will become the longest growth spurt in US history — and deteriorating economic data, the inverted yield curve has stirred fears that the countdown to the next downturn has already begun.”
Peter Fisher, formerly head of fixed income at BlackRock and currently a professor at Tuck School of Business at Dartmouth, puts it succinctly in that same Financial Times editorial. “The mistake,” he says, “is to think it [an inverted yield curve] is a predictor of recessions. I think it causes recessions.” The rise in the price of gold following the two prior instances of yield inversion, it is now well understood, came in response to aggressive central bank monetary easing and the sudden emergence of credit-related systemic risks.
A very old yet very new thought
from Mr. Charles Dickens
“It was the best of times, it was the worst of times, it was the age of wisdom, it was the age of foolishness, it was the epoch of belief, it was the epoch of incredulity, it was the season of Light, it was the season of Darkness, it was the spring of hope, it was the winter of despair, we had everything before us, we had nothing before us, we were all going direct to Heaven, we were all going direct the other way – in short, the period was so far like the present period, that some of its noisiest authorities insisted on its being received, for good or for evil, in the superlative degree of comparison only.” – Charles Dickens, A Tale of Two Cities (1859)
Things change little. Things change a great deal. The opening passage to A Tale of Two Cities – a very old yet very new thought.
Is Buffett wrong about gold?
“While I very often agree with Warren Buffett’s views regarding, for example, the level of cash in portfolio or migration from growth to value stocks,” says Independent Trader for ETF Trends, “I absolutely can not agree with what he wrote in the letter to shareholders about gold, once again showing how badly it performs in comparison to the US shares.” The article goes on from there to do a good job of debunking Buffett’s latest attack on gold – one of many he has conducted over the years – while drawing on cyclical analysis to lay out a solid longer-term future for the metal. It concludes with the opinion that Buffett’s stance on gold is “part of a deal with the establishment of the United States.”
That could be true, but it could also be little more than an old professional bias on Buffett’s part going back decades combined with a classic talking of one’s book. We counter with a single chart that refutes his arguments at a glance. It tells the story of gold and stocks in the times in which we live – the historically distinct fiat money era that began in 1971 – not some other timeline that carries little relationship to the present. To make a very long story short, gold has appreciated 3,399% since January 1971. Stocks have appreciated 2,884%. What’s more stocks are bumping against all time highs while gold looks like it might be recovering from cyclical lows.
Chart courtesy of MacroTrends
Will 2019 be the year of the big breakout for gold?
“In each of the last three years, gold has gotten off to a strong start only to fizzle as the year moved along. Will 2019 be the year gold finally breaks the pattern? A good many investors, fund managers and analysts think that 2019 might very well be the year when gold breaks the restraints and pushes to higher ground. One of those is Carter Worth of Cornerstone Macro in New York who CNBC’s Melissa Lee refers to as “the chart master.” In a recent interview with Lee, Worth referred to a rendition of the long-term chart below saying that there is “a well-defined set-up and a lot of tension.” He says that combination is going to resolve to the upside – “a breakout to all-time highs.” With respect to gold’s relationship to the dollar, Worth says “Gold’s got its own momentum now. . .It is all setting-up for higher gold prices and trouble for equities, trouble for the economy.”
For gold . . .
It is not a question of if, but when
The lesson is one as old as the gold market itself: The best time to buy is when the market is quiet – a strategy that requires both discipline and conviction. As an old friend and client used to say (he passed away years ago): “It is not a question of if, but when.” He accumulated a large hoard of the metal in the 1990s and early 2000s between $300 and $600 per ounce and lived to see his prediction come true. His estate though was the ultimate beneficiary of his wisdom. He was not one to sell gold once he had acquired it. We chatted regularly on the phone back then and I told him that I had used the story just told in one of my newsletters. He was in his late 80s at the time. “Tell them,” he said resolutely, “that I bought my first ounce of gold at $35.”
“The possession of gold has ruined fewer men than the lack of it.”
– Thomas Bailey Aldrich –
JP Morgan study ranks gold second best
investment over past twenty years
J.P. Morgan Asset Management released a report recently ranking investments over the past twenty years. It shows gold as the second best performer over the period at a 7.7% average gain annually. REITs (Real Estate Investment Trusts) were number one at a 9.9% gain. Stocks ranked fourth at 5.6%.
Gold could go to $1800 to $2200 in the long run
A number of technical analysts have reverted to a more bearish forecast over the past few weeks with the $1250 area once again being touted as the downside support area. Many of those same technical analysts, though, have a significantly more positive outlook for the longer term.
Among that group is Gary Wagner of the Wagner Financial Group who sees $1267 or even $1247 as possibilities in the short run, but also forecasts the possibility of $1800 to $2200 in the longer run. “Our research,” he explains in an article published recently at the Singapore Bullion Market Association website, “suggests that gold is in the final phase of a major long-term impulse cycle. This model also provides a look-back at the final major bullish wave could be traced back to end of 2015, following a correction to $1,040. This corrective fourth wave developed from the all-time high at $1,900 in 2011. The model suggests that gold could re-test the record highs that, if taken out, could see an extensive surge to between $1800 and $2200 per troy ounce.”
Caveat: At USAGOLD, it bears repeating, we have always advocated the ownership of both gold and silver coins and bullion for long-term asset preservation purposes rather than speculative gain. Though we pass along various projections, we do so with the caveat that anything can happen. The analyst who forecasts downside today can quickly change his or her outlook to the upside tomorrow – or vice versa. The long term charts for gold and silver, though, reveal a consistent upward trend that has served investors well in the period since 1971 when the global monetary system departed the gold standard and entered the fiat money era.
“This MMT sounds like a recipe for immense inflation, even hyperinflation. You are spending all this money directly into the economy. It will drive consumer prices through the attic roof, you say. This is crackpot. A witch’s sabbath of inflation would surely result. Yes, but here the MMT crowd meets you head on… They agree with you. They agree MMT could cause a general inflation, possibly even a hyperinflation.”
USAGOLD note: Modern Monetary Theory (MMT) is neither modern nor a theory. John Law, the Scottish financier, tried a version of it exactly 300 years ago (1717-18) in France.* He did so with the blessing of the French monarchy and with a rationale very similar to MMT’s proponents today. In the end, Law’s theories (to his surprise if we are to believe the historical account) bankrupted the French people and the government, reduced the economy to ashes, and created such a distaste for paper scrip among the citizenry that it took 80 years for France to reintroduce paper money as a circulating medium.
“The shrewder speculators* became alarmed. They began to sell their shares of stock, and hoard in gold the enormous wealth they had acquired. This resulted in a demand on the government for metal in exchange for its paper, and soon the government had no metal to give. Then the crash came. Those who had the government paper could buy nothing with it. Those who held the Mississippi stock could scarce give it away. It was worthless. The government itself refused to accept its own paper for taxes. A few lucky speculators had made vast fortunes; but thousands of families, especially among the wealthier classes, were ruined.” – Edward S. Ellis and Charles F. Home, The Story of the Greatest Nations (1900)
* Please see this link for a summary of Law’s Mississippi Company land scheme.
Image by Internet Archive Book Images [No restrictions], via Wikimedia Commons/The Mississippi Bubble, Street of Speculators/The Story of the Greatest Nations/Edward S. Ellis and Charles F. Home (1900)
Repost from 2-4-2019
Gold in six easy lessons
1. Don’t buy it because you need to make money; buy it to protect the money you already made.
2. Don’t look at price as a barrier; look at it as an incentive.
3. Don’t buy the paper pretenders; buy the real thing in the form of coins and bullion.
4. Don’t fall prey to glitzy TV ads; do your due diligence instead.
5. Don’t allow naysayers to divert your interest; allow yourself the right to protect your interests as you see fit.
6. Don’t forget the golden rule: Those who own the gold make the rules!
Economic insecurity is becoming
the new hallmark of old age
“In the United States,” writes Katherine S. Newman and Rebecca Hayes Jacobs for The Nation, “economic security in old age was seen, for a long time, as both a social issue and a national obligation. From the birth of Social Security to the end of the 20th century, the common assumption has been that we have a shared responsibility to secure a decent retirement for our citizens. Yet that notion is weakening rapidly. Instead, we have started to hear echoes of the mantra of self-reliance that characterized welfare ‘reform’ in the 1990s: You alone are in charge of your retirement; if you wind up in poverty in your old age, you have only your own inability to plan, save, and invest to blame.”
Image courtesy of GoldChartsRUs
Some compare today’s stock market psychology to the period just before 2008. Others compare it to the 1920s when everything was hunky-dory until suddenly it wasn’t – perhaps a more apt comparison. Too many are “all-in” with respect to stocks in their Individual Retirement Accounts hoping to accumulate as much capital as possible without regard to the potential downside. The stock market did not recover from the losses accumulated between 1929 and 1933 until the mid-1950s, almost 25-years later – a fragment of stock market history lost to time.
Some will rely on the fact that stocks recovered nicely once the Fed launched the 2009 bailout. We should keep in mind though that many prominent Wall Street analysts have warned that the Fed no longer has the firepower it did then. The financial markets and economy are much more vulnerable as a result – all of which brings us back to the notions of self-reliance and taking personal responsibility for our retirement plans. If you find yourself among the group that thinks hedging a stock market downturn to be in your best interest, we can help you easily and effectively structure a gold and silver diversification as part of your retirement plan to hedge that possibility.
From deflation to hyperinflation in a heartbeat
“I recall an interview with Nassim Taleb on Bloomberg TV in 2009 when he said, ‘We will go from deflation to hyperinflation without seeing inflation.’ Our view is that Taleb will be proved right. Back in 2009, we predicted ‘Tokyo… then Buenos Aires’ – a Japan-like deflation, followed by Argentine-like hyperinflation. Most likely, there will be no stop in between for moderate levels of inflation. Inflation, as economist Milton Friedman observed, is ‘always and everywhere’ a monetary phenomenon. But hyperinflation is a political phenomenon.” – Bill Bonner, Bonner & Partners
For the present, runaway inflation and hyperinflation are the farthest things from most investors’ minds. Yet, Nicholas Taleb’s (of black swan fame) notion that we could go from deflation to hyperinflation without the interim step of inflation remains an intriguing consideration. Few people know that just prior to the sudden onslaught of the nightmare German hyperinflation of the 1920s there was a period of deflation that lasted for over a year. In the chart above, it is represented by the shallow depression in 1920. We should keep in mind that in the very peculiar set of circumstances following the 2008 financial crisis, much of the money created to bail out the financial system is bottled up on the Fed’s balance sheet in the form of excess reserves. The commercial banks who own those reserves have already laid claim to an important percentage of that latent monetary energy unleashing that printing press money with results still to be determined. Still more could be reclaimed in the weeks and months ahead under current Fed policy – all of which raises possibilities that neatly tie into Taleb’s prediction.
Bill Bonner makes the point that hyperinflation is a political phenomenon. If so, what are we to make of Republican President Trump’s unrelenting pressure on the Fed for lower rates and a new round of quantitative easing in the ramp-up to the 2020 election? And how are we to interpret the sudden widespread acceptance of modern monetary theory within the Democratic Party as a workable economic policy? Printing press money is now part of the campaign platform for both political parties – a political evolution, if not revolution,
Thinking in big numbers
Big numbers do not register with most people. Thinking in millions is difficult. Billions are a major challenge, trillions nearly impossible. The reason for this, says Wall Street Journal columnist Jo Craven McGinty, is that big numbers are usually offered in isolation without the benefit of comparison – numbers without an appropriate anchor, so to speak. People need some sort of measuring stick to give the numbers meaning. She recently offered some interesting tactics for making big numbers meaningful. Here is one of them:
“[T]hink of it [big numbers],” she says, “in terms of time, like Richard Panek, a professor at Goddard College in Vermont and a Guggenheim fellow in science writing. There are 1 million seconds in roughly 11½ days. There are 1 billion seconds in around 31 years. And there are 1 trillion seconds in around 31,000 years. Someone who doesn’t grasp these differences in magnitude is also likely to be clueless when it comes to assessing the impact of chopping $2.7 billion from a $1.068 trillion budget.* It’s less than 1% of the total—the proverbial rounding error.”
*The proposed outlay for discretionay spending submitted by the Trump administration for the 2019 fiscal year budget
Nine lessons from prosperous investors
We first introduced our readers to these nine lessons all the way back in 1999. They were passed along to us by the legendary commodity market analyst R.E. McMaster, formerly editor of The Reaper newsletter. The original source for the nine lessons was a highly regarded money manager who handled accounts for wealthy Greek and Mexican merchant families.
1. It is easier to make a fortune than keep it.
2. Intelligence is an inadequate substitute for wisdom. Wisdom fears, respects the unknown and fosters humility. Intelligence can lead to self-destructive arrogance and ultimate failure.
3. Risk must have premium, and we must understand it well.
4. There is no order. There is no formula. There is no equation that works all of the time. It works just long enough to fool just a few more of us just a little longer.
5. What we fail to remember is that a paper gain is just that. Paper. Worth nothing. Not until we say sell, and not until we get cash. Anything less is just that.
6. When the Bass Brothers in Texas write a check for real money, their money, to buy 25% of the Freeport McMoran Gold Series II, we take notice. When the Fidelity Magellan Fund buys a fifty-million in Dell computer, we yawn. So, should you. It is other people’s money.
7. Slick advertising budgets, powerful computers and few slabs of marble do not, by themselves, make a great financial institution.
8. Never invest in anything you do not feel comfortable with or understand well.
9. When a thousand people say a foolish thing, it is still a foolish thing.
Image: Chinese character for prosperity
Gold mine production by country
Divergent paths among the major global producers tell an important tale
When you take in the table to the left, it inspires little beyond a shrug until you consider the policies toward gold of the countries involved. China, for example, is the world’s top gold producer, but its production is essentially sequestered, i.e., it stays in the country and winds up at the central bank as part of its monetary reserves. Russia, the world’s third largest producer, also channels its production into central bank reserves. Thus, 23% (700+ tonnes) of the world’s gold production in 2017 did not see the light of day on international markets. Of the top-ten producers that still make their production available to the rest of the world, production is level for two – the United States and Australia. Of the three countries experiencing production growth – Canada, Russia and China – only one, Canada, makes its production available in international markets.
In short, the world is a different place now than it was prior to the 2008 financial crisis in terms of gold production. Should physical demand soar once again as it did in the 2009-2013 period, we could get the same price response we did then. Even as it is, substantially less metal is reaching the marketplace at a time when central banks have become net buyers of the metal and investor demand, though presently in a lull, is generally on the rise.
The trends now favor “strong-handed” long-term gold investors holding for asset preservation purposes and capable of weathering the market’s ups and downs. As for the official sector, the trend toward building gold reserves is likely to continue. More and more emerging countries are likely to see diversification as in their best interest while established states are likely to hold close the gold reserves they already own.
The inflation-deflation debate
No one knows off which side of the tight wire—hyperinflation or deflationary crash—the economy will fall. Needless to say, neither proposition is very comforting from an investor’ point of view. Yet from the point of view of the gold investor, the inflation/deflation debate is purely academic. Gold will protect and preserve your assets in either instance. Gold is the time-honored, historically proven hedge against economic disasters of all descriptions. Both deflationists and inflationists recommend gold as the portfolio item to hedge against disaster. In a deflationary crash, gold becomes the only asset left standing after others are undermined by default. In an inflationary debacle, gold survives the erosion of the currency’s purchasing power and retains its value after all other assets are devalued. Hedge your portfolio with gold and leave the inflation-deflation argument to the economists.
Two legendary central bankers embrace gold
All is not well with the economy. Growth rates continue to remain stubbornly low in the United States and at recessionary levels in much of the rest of the world. A recent Gallup Poll found that “Americans’ outlook for the economy has soured in the past two months, with 48% now saying economic conditions are worsening – up from 45% in December and 36% in November.”
In The End of Alchemy (2017), Mervyn King, the former governor of the Bank of England, writes of central banks’ frustration in dealing with the persistently stagnant global economy. “Central banks,” he says, “have thrown everything at their economies, and yet the results have been disappointing, Whatever can be said about the world recovery since the crisis, it has been neither strong, nor sustainable, nor balanced. . . [W]ithout reform of the financial system, another crisis is certain – sooner rather than later.”
“Our problem,” Alan Greenspan once said, “is not recession which is a short-term economic problem. I think you have a very profound long-term problem of economic growth at the time when the Western world, there is a very large migration from being a worker into being a recipient of social benefits as it is called. And this is legally mandated in all of our countries.” The western world, he concludes, is headed to “a state of disaster.”
It is interesting to note that both Greenspan and King, two of the most respected central bankers in modern times, have embraced gold since leaving their respective posts. The former Fed chairman has consistently suggested that gold is “a good place to put money these days given the policies of governments.” The former governor of the Bank of England says that he is “very struck by the fact that over many many years, central banks, governments and individuals have always, despite the protestations of economists, held some gold in their portfolio. . .[W]hen unexpected things happen, particularly when governments rise and fall, then gold is a means of payment that everyone is always prepared to accept. And I think that’s why even central banks have always had a role in their portfolios for gold.”
Gold coins, hoofs found in 2,000 year old Chinese tomb
“Chinese archaeologists. . . discovered 75 gold coins and hoof-shaped ingots in an aristocrat’s tomb that dates back to the Western Han Dynasty (206 BC – 24 AD). The gold objects — 25 gold hoofs and 50 very large gold coins — are the largest single batch of gold items ever found in a Han Dynasty tomb. They were unearthed from the tomb of the first ‘Haihunhou’ (Marquis of Haihun) in east China’s Jiangxi Province. The coins weigh about 250 grams each, while the hoofs’ weights vary from 40 to 250 grams, said Yang Jun, who leads the excavation team.” – Xinhuanet/11-17-2015
USAGOLD note: These gold artifacts were found along with a portrait of Confucius, perhaps the oldest known. Wisdom and gold make easy company. Confucius once said something that has current applicability: “In a country well governed, poverty is something to be ashamed of. In a country badly governed, wealth is something to be ashamed of.” Or at the very least, well-hedged . . . . . . . .
One for the history buffs:
730 years of a strong British pound ends
in 1931 with gold standard exit
Sources: Bank of England, ICE Benchmark Administration Limited, St. Louis Federal Reserve [FRED]
The St. Louis Federal Reserve recently released this interesting chart on consumer prices from 1209 to present. We added the price of gold to show the direct relationship between declining purchasing power in the British pound and the sterling price of gold after 1931, the year Britain departed the gold standard. Prior to 1931, there was an occasional minor bump higher in the price of gold, but for the most part, it followed along the same flat line as consumer prices. It was only after Britain separated the pound from gold in 1931 that the price began to move radically higher in terms of the currency. It gained significant momentum after 1971 when the Bretton Woods agreement was abolished. Currencies and gold were then allowed to move freely in international markets. Though interesting from a historical perspective, the real lesson in this chart is that when a nation-state goes from gold-backed to fiat money, gold coins and bullion become a logical and worthwhile alternative for citizen-investors – even after 730 years of relative price stability.
$200 billion in gold sits beneath
the streets of London
“One historical nugget of note: During WWII, the vaults served as bomb shelters. By that time, though, the gold they held had been secretly shipped to Canada, in case the Nazis overran London. ‘It’s all very James Bond,’ says the Sun of the relatively old-school security still in effect—access involves 3-foot-long keys. ‘You can’t visit the gold, of course,’ observes a post at Atlas Obscura.” – Luke Rodney, Newser
USAGOLD note: The Canada shipments seem to be much rigmarole over a barbarous relic, one would think. Here’s a photo of Queen Elizabeth amidst all that gold in December 2012 – a relic no more, but a very present and important component of reserves in nearly all the primary developed economies. The World Gold Council recently reported the strongest demand for gold among central banks in 50 years. Britain once owned one of the largest gold hoards on Earth, but most of the gold in this room belongs to other countries who deposited it with the Bank of England.
When the United States owned
most of the gold on Earth
Chart courtesy of GoldChartsRUs
Few Americans know that just after World War II the United States owned most of the official sector gold bullion on earth – about 22,000 metric tonnes or 80% of the world total. As part of the 1944 Bretton Woods Agreement, though, the United States allowed unrestricted redemptions from its reserves at the benchmark rate of $35 per ounce. In the 1960s, a group of European countries, led by Germany and France, got the idea that U.S. trade and fiscal deficits had undermined the dollar, making gold a bargain at the $35 benchmark price. Steadily over the next decade, they exchanged dollars for gold at the U.S. Treasury’s gold window. By the early 1970s, 14,000 tonnes of gold – or 64% of the stockpile – had departed the U.S. Treasury never to return (See the chart above).
The transfer of gold finally ended in 1971 when President Nixon halted redemptions, devalued the dollar and freed the greenback to float against other currencies. The era of global fiat money with the dollar as its centerpiece had begun. Gold transformed from its official role as backing the dollar to serving as a hedge against its depreciation. Since that role reversal, gold has risen in fits and starts from the $35 official benchmark in 1971 to a peak of over $1900 in 2011. It is trading now in the $1300 range. For the central banks and private investors who redeemed their dollars for gold at $35 per ounce, the gains have been extraordinary – over 3700% at current prices or 7.5% annually compounded over the 47-year year period. Simultaneously, the dollar has lost 84% of its purchasing power.
Copernicus on the debasement of money
“Although there are countless scourges which in general debilitate kingdoms, principalities, and republics, the four most important (in my judgment) are dissension, [abnormal] mortality, barren soil, and debasement of the currency. The first three are so obvious that nobody is unaware of their existence. But the fourth, which concerns money, is taken into account by few persons and only the most perspicacious. For it undermines states, not by a single attack all at once, but gradually and in a certain covert manner.” – Copernicus, Essay on the Coinage of Money (1526)
Few know that Copernicus applied his genius to the insidious effects of currency debasement. The ground-breaking essay linked above probably influenced both John Maynard Keynes (See below) and Thomas Gresham of “bad money drives out good” fame. Supply Side Blog’s Ralph Benko says Copernicus’ essay “has been translated into English several times yet those translations remained difficult to obtain for students of the monetary arts and sciences. It has remained mostly the property of elite historians.” Above we link Edward Rousen’s translation that you might keep company with the knowledgeable elite.
It cost 8¢ to mail a one-ounce letter in 1973 as indicated by the commemorative Copernicus stamp shown above. It costs 55¢ today – an illustration of his assertion that currency debasement “undermines states, not by a single attack all at once, but gradually and in a certain covert manner.” The post office increased the cost of mailing a letter by 5¢ – to 55¢ – beginning in 2019.
“By a continuing process of inflation governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens. By this method they not only confiscate, but they confiscate arbitrarily; and, while the process impoverishes many, it actually enriches some. The sight of this arbitrary rearrangement of riches strikes not only at security, but at confidence in the equity of the existing distribution of wealth.” – John Maynard Keynes, The Economic Consequences of Peace (1919)
‘Wannabes’ and ‘Gonnabes’ not the real thing
“Gold has often been referred to as a relic. But from a behavioural perspective, this may also mean it is ingrained in our subconsciousness and related actions. Put differently, as long as humans remain tangible, it is likely that they maintain a desire to hold real and tangible assets. Very few companies on the US stock exchange, for example, are older than 50 years. By comparison, gold has existed for thousands of years and any gold coin or gold bar will most likely outlive any company and their stocks and bonds. Put together, it is unlikely that a company that sells claims on gold, such as a gold ETF, will beat physical gold’s longevity.” – Dick Baur, Professor of Finance, University of Western Australia (Why ‘digital gold’ won’t ever kill off the real thing)
Wannabe and gonnabe paper gold will never pass for history’s time-honored store of value – nor will it be mistaken for actual gold coins or bars stored nearby should the cold wind blow. By the way, adding the word, blockchain, to a paper gold product might enhance its marketing appeal, but it changes nothing in terms of its usefulness to the investor. The instrument is still paper gold and little more than a price bet.
“Bear markets are sneaky beasts. . .”
“Bear markets are sneaky beasts and they like to do their damage as secretly and as unobtrusively as possible. I hate to say it but somewhere ahead, the bears going to get it all together and the innocent little stream is going to turn into a waterfall. What can you do about it? Stay out of the market? Protect yourself by remaining in pure wealth, gold. For thousands of years, silver and gold have been treated as pure wealth. As the standard measures of wealth (stocks and bonds) have deteriorated, veteran investors have forgone profits and moved their assets into pure wealth.” – Richard Russell, King World News, 2016
USAGOLD note: King World News called the late, great Richard Russell – who regaled us with his wisdom in the Dow Theory Letter for nearly half a century – “the greatest financial writer in history.” A Mish Shedlock warning recently that Americans should expect a “Lost Decade” and that the stock market rout is “just a start,” lit the memory banks and sent me off searching for this old quote. We can only guess what Russell would have had to say about the current state of affairs, but the quote above provides a clue. Never predictable in his opinions, he was rock solid on one axiom throughout his career – the necessity and transcendence of gold as a permanent component of the well-balanced investment portfolio. As he said, so often, it helped him sleep at night.
Stuck in a fiat dollar world
for some time to come
“For all its problems, the current dollar-based non-system has been far more resilient than the Bretton Woods gold-exchange standard, which never operated as White intended. And the real alternatives — a classical gold standard, in which interest rates are driven by cross-border gold flows; or a supranational currency, like Keynes advocated at Bretton Woods — are likely to remain too radical politically. We are, therefore, almost surely stuck in a fiat dollar world for some time to come.” – Benn Steil, Council on Foreign Relations
Those of you who frequent this page will recall previous references to Benn Steil’s gold advocacy. Steil, who is the director of international economics at the Council on Foreign Relations, sees central banks’ utilizing gold as a reserve asset to the offset the risks of holding national currencies as opposed to direct backing for the dollar. In this respect, his thinking is closely aligned with that of Nobel Prize winner, Robert Mundell, who also proposed the use of gold for the same purpose to the European Union at the inception of the euro.
In the essay linked below Steil provides a brief but revealing history of the transition from the late-1960s, early-1970s gold-based system to the dollar-based system under which the global economy functions today. He includes a number of interesting stories about the countries and people involved. Few people know, for example, that France dispatched a battleship in the early 1970s to New York harbor to pick up its gold deposited at the New York Federal Reserve.
In the absence of a gold standard, the best recourse for the average investor is to put one’s portfolio on the gold standard through a diversification in physical coins and bullion. We agree with Steil: “We are almost surely stuck in a fiat money world for some time to come” with all its attendant risks.
Adopt a gold-backed dollar? This is what happened the last time we tried
The stock market faces ‘unlimited downside risk’
“There is unlimited downside risk in the market right now and I don’t think it’s being respected. It’s not until afterwards that they ask, ‘what happened? The Fed, the Trump, the ebola, or whatever excuse du jour is being regurgitated on the various media outlets. The only one to blame is ourselves.” – J.C. Parets, All Star Charts, as reported by MarketWatch
USAGOLD note: Especially if one fails to properly diversify. “We have met the enemy,” as Walt Kelly of Pogo fame once put it, “and he is us.”
Full article: The stock market faces ‘unlimited downside risk,’ warns veteran trader / MarketWatch / 10-24-2018
“The durable market rise that began March 6, 2009, is as intoxicating as the Lehman anniversary should be sobering: Nothing lasts. Those who see no Lehman-like episode on the horizon did not see the last one.”
USAGOLD note: This time around no one can claim that they weren’t warned or that they didn’t see it coming as was universally the case in 2008. Now the warnings come almost daily.
Repost from August 19, 2018
“In his most recent call, [John Hussman] argued that measured ‘from their highs of early-2018, we presently estimate that the completion of the current cycle will result in market losses on the order of -64% for the S&P 500 index, -57% for the Nasdaq-100 Index, -68% for the Russell 2000 index, and nearly -69% for the Dow Jones Industrial Average.’”
USAGOLD note: Trees, as Richard Russell used to say, do not grow to the sky.
Repost from July, 2018