In 1973 then President Nixon executed what has come to be known as ‘The Nixon Shock’ by liberating the price of gold that had been fixed for thirty-eight years at US $35 per ounce. With similar Executive Order he reversed the system of fixed exchange rates and allowed the dollar to ‘float’ against the other major currencies of the World.
The Vietnam War and President Johnson’s ‘Great Society,’ paid for with borrowed funds, created a ‘Guns and Butter’ situation that let loose the dogs of inflation on an unsuspecting public. The dollar had ruled supreme as the International medium of exchange since the Breton Woods Economic Summit at the end of the Second World War. The very idea that America did not have enough wealth to fight wars while lavishing its citizens with expensive social programs came as a shock to a society that has been promised an ever-increasing standard of living. The result of the broken promise was even more shocking.
The Stagflation of the 70’s resulted in never before seen values for gold. In 1972 it took just US $100 to buy and ounce of gold By 1978 it took nearly US $1800 to buy the same ounce of gold. The rot was only stopped by exorbitant Central Bank Rates of interest that made the dollar palatable for lenders. Expressed in different terms The Bond Market (the lenders) dictated policy to the US Treasury and the Federal Reserve Bank alike.
The surprise here in not that Stagflation occurred, or that the Bond Market ruled supreme. It is rather that Citizens of the Western Trading Nations were so quick to forgive and forget the pain and suffering caused by the policy blunders of their rulers. No doubt the Dot.Com Bubble of the 90’s made life easier, as did the resulting easy money policy of the Greenspan Federal Reserve. But the sheer hubris that it was possible to return to the same policies without a repeat of the pain is breath-taking.
History has shown time and again the consequences of profligate spending and the indiscriminate printing of specie. There is no reason to believe that it will be any different this time around the dance floor. The US Dollar will be devalued by one means or another so that the massive US debts ($ 14 trillion and counting) will be serviced in ‘New Dollars’.
Because the Dollar remains the most commonly excepted medium of exchange in International Trade, many believe that this devaluation will be accomplished by a new World Order for currency alignment, in much the same way as that achieved by Breton Woods in 1946. There is a good possibility that the measuring stick for this new order, will be a basket of currencies and commodities that will include gold and silver, but not to the extent that the savers of the Eastern World would want.
The is no practical way of returning to the wonderful simplicity of the Gold Standard. The spenders of the Western World would never agree to grant such power to the savers, at least not all at one time. The gold standard worked so well because the Bank of England was in the unique position of being at the center of World Trade and a vast empire ruled by Gunboat diplomacy. England was also an exporter of capital as opposed to an importer of capital (as the United States now is) and thus able to dictate the terms of the Bonds that financed so much of Western Industrialization.
With the hindsight of the Gold Reserve Act as a guide, the coming monetary re-alignment will provide gold owners with a one time lift, but it is very unlikely help gold or silver producers in the longer term. Assuming the basket theory is correct the weighting of gold to the total value of the basket will attempt to fix the value of gold as a constant rather than a variable. During the first thirty ears of Fort Knox Gold the miners were very depressed and in some cases were forced to rely on Government largesse for their continued existence. Only those who mined excellent grades and had long-term contracts with International Jewellers survived.
Gold Miners have never really been a good investment, unless that is you happen to be lucky enough to own shares in a company at the time gold is discovered. The so-called magic multiple accorded to shares of gold companies is based on voodoo mathematics. The idea that somehow a company with more ounces of gold in the ground is worth more that a very profitable one with fewer ounces is nonsense. So is the idea that anyone anywhere knows how to find gold. They do not and there are 3000 years of history to prove the point. The lure of gold is the metal, not the miners, who produce the 99.99% pure metal.
The best method of owning gold ever devised was structured and sold by the investment division of the Royal Bank of Canada in 1987, during the last gold rush of the 20th Century. The investment vehicle was a dividend paying share, in a company with a lot of gold, that was exchangeable into a fixed amount of gold, as valued by the London Bullion Market. This vehicle, that is unfortunately no more, was the for-runner of the etf (Exchange Traded Fund Ticker Symbol g.o.l.d.) designed by the World Gold Council who guaranteed the physical gold bullion for the exchangeability of the fund shares.
The etfs’ are now the best way to own gold without having to pay for storage and insurance of physical bullion and are far safer than taking the chance on a gold miner. The etfs’ also, just happens to be a direct look-alike to the Bills of Exchange issued by Chartered Banks during the early years of twentieth century. There are now etfs’ that link gold in currencies other than US Dollars and offer a near perfect arbitrage between the various exchange rates. They are very liquid and trade around the clock on the various exchanges of the World.
The future for the Skin of the Gods is murky but the chances are great, that despite continuing efforts to marginalize the importance of the metal it will survive as the only reliable store of true value.