Forecasts, Commentary & Analysis on the Economy and Precious Metals
Celebrating our 48th year in the gold business
“Despite everything that could be imagined, said, written, done, as huge events happened, it is a fact that there is still today no currency that can compare, either by a direct or an indirect relationship, real or imagined, with gold.”
Charles DeGaulle (1965)
––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––The key to financial wisdom
To fully understand markets, understand gold. It is the key to financial wisdom. By learning of its role as a financial asset, one will discover universal truths about the value of money, and hence, the underlying value of all assets. It does not do much good, for example, to make a small fortune in the stock market, only to see it dwindle (or disappear overnight) in an inflationary storm or an implosion in financial markets.
The central tenet to the wisdom of gold lies in its status as the most liquid and widely owned asset that is not simultaneously someone else’s liability. Former Federal Reserve Chairman Alan Greenspan once remarked: “No one refuses gold as payment to discharge an obligation. Credit instruments and fiat currency depend on the creditworthiness of a counter-party. Gold, along with silver, is one of the only currencies that has an intrinsic value. It has always been that way. No one questions its value, and it has always been a valuable commodity, first coined in Asia Minor in 600 BC.”
In 2001, James Grant wrote an essay aptly titled “For Real Money.” It is a study of gold’s role in the financial marketplace. Though two decades old, that essay still resonates today. In it, he said that a new bull market for gold was already underway. Few believed him, but he turned out to be right. At the time, the metal was trading in the $280 range. Over the ensuing twenty-year period, it would rise to a little over $1800 per ounce today for a total return of 567%, or just over 10% per year compounded. (Gold reached a record high in August 2020 at $2067 per ounce.) He summed up the need for gold as follows:
“There are many differences between physics and economics, but the greatest of these is that particles aren’t people. Participating in a monetary system, clever people will exploit the rules in such a way as eventually to bring the system down. The system in place subsidizes and encourages risk-taking and borrowing. Accordingly, leveraged financial structures and colossal debts abound. The gold standard failed by reason of its structure (perceived as rigid). The pure paper standard is failing on account of its lack of structure. Anticipating the end of the dominance of the paper dollar, we have cast around for an alternative. The answer we keep coming up with is the one you already know.”
Two years later, as gold began to nudge higher, Grant would lay out a similar argument under the title “Value Hedge” – another study emphasizing the need for gold in the private investment portfolio:
“The salient feature of the millennial economy is not, as claimed by Greenspan, its complexity, but rather the determination of the Federal Reserve to forestall bad things through money printing. The rich old speculator Bernard M. Baruch forehandedly bought gold and gold shares after the 1929 Crash. Years later, a suspicious Treasury Secretary asked him why. Because, Baruch replied, he was ‘commencing to have doubts about the currency.’ Many are beginning to doubt the strength of the dollar today, as well they might. Following Baruch’s example, they should lay in some gold as a hedge.”
Grant has refined the message a bit over the years. “Gold,” he said back in May, “is not exactly an inflation hedge, but it is an investment in ‘monetary disorder,’ which is what we have. If I am right, there will be a world that will want tangible monetary stability because it loses confidence in central banks. When the cycles turn, people will want gold and silver. When people consider the shortcomings of the Fed, they will turn to gold.” Lay in a hedge. Financial wisdom need not be hard-won.
If you would like to read the two essays from the early 200os referenced above, USAGOLD reprinted both with Mr. Grant’s kind permission back in 2004 as part of our Gold Classics Series. Here is the link. A subscription to Grant’s Interest Rate Observer, his monthly newsletter, is highly recommended.