A light just went on. It suddenly dawned on me that the best way to present gold to someone whose only exposures to it are the hyped ads on the Glenn Beck Show or the full-page Gold Eagle ads in their local newspaper is to set it apart from all other “investments.” Why would I say that? Well, because gold is different from all other investments. Gold is NOT an investment. Gold is just plain old money, but in a form that will hold its value over decades or centuries or for that matter, since the earliest days of recorded history.
When I tell you that gold has outperformed all other asset classes for the last ten years, I am really doing you a dis-service. Yes, it is true that it takes four times as many dollars to buy gold today than it did in 2000 – and four times as many euros or Swiss francs or any other major currency, but when presented in that manner, gold becomes just another investment. It is not an investment. Gold is money.
In it’s role as “money” gold becomes the standard against which all other currencies are measured. Gold neither rises or falls in value,it’s just a matter of how many dollars or euros it takes to buy it. In other words, currencies rise and fall – against each other and against the standard, gold.
So, when I tell you that gold has increased by 400% in 10 years, what I am really telling you is that your dollar has lost three-quarters of its purchasing power relative to gold. That’s a pretty big loss in just 10 years, wouldn’t you say?
But if gold isn’t an “investment” and it’s just money, why should anyone bother to buy it? Good question! My reply is that you don’t buy it, you trade dollars for it. You buy a car, or a house, or a movie ticket. Your money is “spent,” it’s gone. When you acquire gold all you are doing is changing from one form of money to another form of money. A fist full of hundred-dollar bills in your left hand is replaced with a couple of gold coins in your right hand. The value remains exactly the same – for a short while. Now we are getting to the meat of the discussion.
If paper money retained its full value, its purchasing power, for long periods of time, then there would be no need to acquire gold. For over one hundred years, throughout the nineteenth century, there was virtually no inflation and a person could place a dollar bill in a drawer and the heirs could retrieve it decades later and miracle of miracles, it would still have the same buying power that it represented when it was tucked away for safekeeping. That is what money is supposed to do.
When we were on a gold standard, where money was gold or redeemable in gold, it was possible to pass wealth down from generation to generation without any thought about what the value would be. Its value would be the same. No one bought gold as an investment prior to WWII. Gold wasn’t an investment, gold was money.
So what changed? Why is gold “pitched” as an investment now? I am as guilty as anyone in this regard because I have pointed out the remarkable gains for at least the last five years. I should have known better. I confused gold with other forms of “investments” because it is easier to think of gold as rising than to think of the dollar as collapsing.
When I enrolled at the University of Minnesota in the fall of 1959, my tuition for a quarter was$60. By the time I graduated in 1964 it had risen to $90 a quarter. It was illegal to own gold then, but if it were legal, my tuition would have cost me either two or three ounces of gold, per quarter between 1959 and 1964.
My oldest granddaughter starts college this fall. Her tuition is $2,500 a quarter or $7,500 a year. It will cost her two ounces of gold per quarter. In the last 45 years, gold has retained its buying power. What if my father had set aside $60 X 12 (4 years tuition, 3 quarters a year – no summer school) for my grandchild’s college education. Let’s say that he invested it in bonds,paying 5% per year. Compounded, as of today, (it would be worth about $900 per quarter, or $2,700 per year. Even factoring in compounding interest at the rate of 5%/year (a 15+ increase in 45 years), money, (the dollar) as we know it, does NOT hold its value over time. Gold does.
I am writing this on an airplane on the way to visit a friend in San Diego. I am writing it on my lap top – I hate writing on a laptop. But, as luck would have it, I happened to notice one of the documents that I had saved from January 12,2010. It was a piece written by none other than Richard Russell. I couldn’t resist opening the file and checking it out. Funny, I guess, just how similar his comments are to what I just finished writing. In fact,his piece is so good, I think it’s timeless. I want you to read what Russell had to say, five months ago,about gold. The truth is, you know, timeless!
January 12, 2010 – I’ve been a fan of Noriel Roubini’s, (my daughter’s been to his parties) one of the very few economists who foresaw and predicted the housing collapse. That great call made Roubini famous. But I was surprised and dismayed to note Roubini’s recent warning about what he termed the “gold bubble.” Roubini is the son of an Iranian-Jewish family, and if that didn’t provide him with respect for gold I don’t know what would. Actually I was shocked that the brilliant Roubini didn’t understand gold, all of which leads to today’s site.
At any rate, I feel the urge to talk about the fundamentals of gold. Eighty-five percent of all the gold ever mined in world history is here on the surface of the earth today — it’s in your tooth crown, it’s in your sweetie’s ring, it’s on the ceiling of your church, it’s in those heavy bars buried deep in the vaults of the New York Fed, it’s in the case of your Rolex watch. In general, gold is not “used up,” it’s simply accumulated.
Gold is mentioned repeatedly in the Bible. Gold appears to be etched into the DNA of man. Gold has been lusted after and treasured since the dawn of civilization. The search for gold opened up America’s West. The quest for gold sent the merciless Spanish explorers into the Americas. Gold has been an item of wealth through the dark ages, through two world wars, through the Holocaust,through the Crusades, through Biblical times. As far as I can discover, there has never been a time when man has not lusted for the beautiful yellow metal that never tarnishes.
Gold is the standard around which all other prices revolve. The price of gold does not change. Gold is the eternal, immutable standard. Gold is priced by the minute worldwide in dollars. If the dollar price of gold rises (as now), the dollar is, in effect, being devalued. All other currencies are compared with the dollar. Thus, if the price of gold rises, that rise effects all other currencies, and thus all currencies move around the dollar, and the dollar in turn fluctuates around gold.
The Founding fathers had intimate experience with fiat paper currency, and the Constitution of the United States states that only gold and silver are to be considered money. Further, the Constitution warns specifically against paper money. Prior to 1933 you could take your dollars to a national bank and exchange those dollars for gold. Since the dollar was backed by gold, the discipline of gold limited the number of dollars that could be issued by the United States. Not enough gold, stop printing dollars.
The Federal Reserve took over the money-creation capabilities of the US in 1913. The Fed had the ability to create money “out of thin air.”Because gold represented a discipline and thus a power over the Fed’s money-creation ability, the Fed sought to denounce gold as “an enemy of the people.” During the 1960s the US ran up international debts. De Gaulle of France wanted to call in the US’s French debts in the form of gold. At that point, Nixon “slammed the gold window” and declared that the US would no longer settle its debts in gold. This effectively ended the gold standard.
At this point, the US faced a confusion of logic. The US would not give up any of its gold, but ironically, the US insisted that the price of gold was $42.22.This is where we are today. The US holds the world’s largest hoard of gold, (we hope it’s still there since the government has not allowed a third-party audit in half a century) yet it refuses to make the dollar convertible into gold.Thus the US dollar is a fiat currency, backed by nothing but the “full faith and credit of the United States.” Unfortunately, the credit of the United States, in view of its multi-trillions in debt, is now suspect.
The dollar is now in a down-trend, compared with a basket of leading currencies(i.e. the Dollar Index). This is causing large (fearful) dollar-holders to diversify out of dollars and into other currencies, foremost of which is gold(and yes, gold is money). The burning question — What can the US do to halt the tide of declining dollars?
(1) It can raise interest rates, which will impact on the already staggering US economy.
(2) It can cut back on creating additional dollars, and halt stimulus plans,both of which would impact on the economy.
(3) It can raise the price of gold and make the dollar convertible into gold,which may be the ultimate answer (see yesterday’s site).
So that’s the problem, and those are the possible solutions. Which will it be?The verdict? So far, the market is saying, “gold goes up.”
What has changed since Russell penned this brilliant article on gold? Well, the dollar has stopped falling and is now rising. Actually, that is not correct – the euro is plunging and that makes the dollar appear to be rising. It is, against the euro, but gold is at or on the threshold of an all-time high in all of the major currencies of the world, which means that ALL currencies are losing value against the standard, gold.
The dollar is still the world’s “reserve” currency and it will be the last one standing, but that does not mean it will hold its value against gold. It has not, is not and will not. It’s simply the best of a bad lot!
Jim Sinclair, who I hold in equally high esteem with Russell, is certain that gold will rise to anywhere from $3,000 to $5,000 an ounce and not come back down. A new “dollar” will replace our current dollar and it will be at least partially backed by gold at the higher number. Sinclair was correct in the ’70s and earned the moniker of “Mr. Gold” and he has been right on target for the past ten years as well. I wouldn’t bet against his promise.
So there you have it – gold is eternal, gold is a part of the DNA of mankind, gold is eternal wealth and gold make a whole lot more sense in your portfolio than CDs, stocks, bonds or annuities. Invest and speculate in any asset class that is in vogue,but take your winnings “off the table” and save in dollars.