Forecasts, Commentary & Analysis on the Economy and Precious Metals
Celebrating our 49th year in the gold business
“Lenin was certainly right. There is no subtler, no surer means of overturning the existing basis of society than to debauch the currency. The process engages all the hidden forces of economic law on the side of destruction, and does it in a manner which not one man in a million is able to diagnose.” – John Maynard Keynes, The Economic Consequences of Peace (1919)
Hedging the decline and fall of a currency
The baseline case for gold hasn’t changed much in 1700 years
Image courtesy of Visual Capitalist • • • Click to enlarge
(Editor’s note: We first published this review of Jack Whyte’s novel, The Burning Stone, almost two years ago in March 2020. With inflation back at the forefront of investor concerns, we thought it appropriate to reprint it here for our new readers and those who may have missed it. The story is likely to capture your interest. The message Whyte imparts on saving, the value of money and inflation is timeless.)
We sometimes forget that inflation is a process rather than an event. One of the better-known examples of that axiom is the nearly two centuries-long debasement of Rome’s silver denarius – an inflationary episode Jack Whyte, a writer of historical fiction, skillfully addresses in his latest novel, The Burning Stone.
Set in Great Britain in the fourth century AD during the Roman occupation, The Burning Stone is a prequel to Whyte’s engaging, seven-book series on King Arthur – The Camulod Chronicles. Throughout the series, Whyte juxtaposes the rise of Arthur’s Camelot against Rome’s decline. This particular story is told through the lens of a young Roman from a wealthy family with banking, political and military interests who flees to Britain after his immediate family is murdered for reasons that remain a mystery for most of the novel.
After a series of fateful events involving his future wife, he becomes a blacksmith forging and fashioning the highest quality swords. Even as he assumes the life of tradesman-entrepreneur, he keeps contact with the Roman military in Britain and goes about the business of reordering his affairs as an expatriate Roman citizen, albeit one who wishes to keep a low profile. Then, one day, the young blacksmith, Quintus Publius Varrus, receives a scroll from his uncle, an admiral in Rome’s navy, advising him to expect an important shipment from the continent in the near future.
This is where Whyte’s tale takes a turn toward monetary economics and an insightful commentary on Rome’s currency debasement as a symptom of, if not a catalyst for, the empire’s ultimate demise. The inflationary process extended over the reigns of several emperors and went on for more than two centuries (See graphic below). The Roman citizen who had the wisdom to hedge that process ended up preserving and building his or her wealth — those who did not suffered the debilitating effects of the resulting inflation.
In Whyte’s telling, Varrus’ grandfather, an advisor to Emperor Diocletian and a member of the ultra-wealthy Seneca banking family through marriage, was among those who chose to accumulate gold coins as a hedge against the ongoing debasement of the silver denarius.* When Varrus opens the shipment from his uncle, he finds it to contain a very large hoard of Roman imperial gold coins and a letter describing his grandfather’s rationale for forming the accumulation.
“His heroes,” the uncle writes, “included giants like Cincinnatus and Cato the Elder, both revered for their unswerving loyalty, integrity, and civic duty. More humorously, and with genuine irony, he distrusted banks and bankers – unsurprisingly, perhaps, given that he wed into the wealthiest banking family in Rome… In keeping with that distrust, he was assiduous in hoarding his money, keeping its whereabouts unknown.”
“There are five thousand aureii in the box,” he goes on, “the oldest of them dating from the time of Octavian, Caesar Augustus, and the newest of them, in the fourth level down, minted during the reign of Marcus Aurelius. After that time the value of the aureus declined from year to year as the intrinsic value was degraded by unscrupulous speculators, so your grandfather refused to deal in anything more recent than the mintings of Marcus Aurelius.”
“The bottom layer of coins, though,” he says concluding his description of the chest’s contents, “contains nothing but golden solidi minted during the lifetime of Diocletian. There can be no deception there. The solidus is minted of pure gold, and though few of them were issued, there can be no doubt of there validity in real terms, and my father valued them highly. That layer contains one thousand Diocletian solidi. There is no more valuable coin in existence, and I know of no one other than yourself, among all the people I know, who can claim to have a thousand genuine Diocletian solidi in their possession. Any one of the other coins in the box could fetch ten times their nominal value from a sharp-eyed trader.”
And so it is, according to Whyte’s tale, that great wealth was transferred at the time of Rome’s decline from one generation to the next………
(Please scroll to Final Thought for concluding section.)
Short & Sweet
FUND GURU JOHN HUSSMAN’ delves into the return of your capital in a market so distorted none of the old verities matter any longer. He says we are in an era of “return-free risk.” He goes on to say in a recent client letter that “By relentlessly depriving investors of risk-free return, the Federal Reserve has spawned an all-asset speculative bubble that we estimate will provide investors little but return-free risk. … In a world where securities are regularly described on CNBC as ‘plays,’ it’s clear is that the financial markets presently have little to do with ‘investment’ – at least not by Benjamin Graham’s definition as ‘an operation that, upon thorough analysis, promises safety of principal and an adequate return.'”
“The difference between genius and stupidity is that genius has its limits.”
Albert Einstein, as quoted by Hussman in that same article
THROUGHOUT THE 1970s, we recall, the federal government blamed inflation on everything but itself: businesses, oil exporters, even farmers. The 1970s Nixon administration went so far as to introduce price controls – a policy that only made things worse and had to be abandoned. The real source of inflation now is the same as it has always been – running large federal deficits and financing them with printing press money. The White House, from our perspective, is doing its best to ignore the continuing pleas of the former Treasury Secretary. Summers says we are moving toward “higher entrenched inflation.” In a recent Bloomberg report, Summer says that “misdiagnosis of the problem around greed or around particular sectors raises the risk that ultimate recession will be necessary. We need to recognize that we’ve got an overheated economy that we are going to need to cool off.”
ONE OF THE MORE INTRIGUING ANALYSES of the gold market to emerge in recent months comes from Myrmikan Research’s John Oliver. He inquires into gold’s rangebound behavior under these extraordinary circumstances and concludes, “what propels gold into the multi-thousands of dollars per ounce—is sharply rising rates that destroy the value of the Fed’s assets and make further federal deficit spending impossible. Without a political reason to buy the dollar, it will seek out its economic value.” It’s all in the math, and more specifically, he says that when looking at gold, investors “are going to have to get used to logarithmic scales.” Last January, Myrmikan projected a gold price of $5000 per ounce at some point down the road to give one-third backing to the Fed’s balance sheet. Now, says Oliver, it would take a gold price in excess of $11,000 to achieve the same backing. Consulting projections on gold’s logarithmic chart, he says, “the first stop of $10,000 is actually not that far away.”
“THE NATURE OF INFLATION is widely misunderstood and misinterpreted,” writes analyst Dave Kranzler in an Investing.com overview, “‘Inflation’ and ‘currency devaluation’ are tautological—they are two phrases that mean the same thing. … Dollar devaluation has been occurring since the early 1970’s. The value of the dollar relative to gold (real money) has declined 98%. In 1971, $40,000 would buy a 4,000 square foot home in a good suburb. Now it takes $700,000 on average to buy that same home. Price inflation is the evidence of currency devaluation. The CPI is not a real measure of price inflation. The CPI is methodically massaged – starting with the Arthur Burns Federal Reserve (it was his idea) to hide the real degree of currency devaluation from all of the money that has been printed since 1971.”
Cartoon courtesy of MichaelPRamirez.com
FINANCIAL TIMES’ DELE OLOJEDE Financial Timers recently reviewed Howard French’s new book, Born in Blackness, which chronicles Africa’s central role in the emergence of the modern world. In the fourteenth-century Mali ruler Mansa Musa, who some say was the wealthiest individual in history, traveled to Mecca to pay homage spreading his golden largesse along the way. “Camels and horses,” he writes, “reportedly carried up to 18 tonnes of pure gold, all of which the benevolent ruler dispensed along his route to all and sundry. … On account of this singular voyage, the price of gold reportedly plummeted throughout the region by up to 25 percent over the following decade.” Musa’s journey, says French, “remembered by virtually no one save the historians of medieval Africa, merits consideration as one of the most important moments in the making of the Atlantic world.”
“For those who think gold missed the inflation train, there are several reasons to reconsider. There have only been two other inflationary periods in the last 50 years. The first was in the seventies, the second from 2003 to 2008. In each of these inflationary periods, gold underperformed commodities in the first half and outperformed in the second half. It seems that markets don’t take inflation (or gold) seriously until it proves to be intractable. There are many reasons to believe 2022 will see the beginning of a wage/price spiral.” – Van Eck Funds
The six keys to successful gold ownership