The Skin of the Gods Part Three:

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.

 

The Skin of the Gods Part Two:

Goldfields is one of the oldest and most pre-eminent gold companies in the world. Based in South Africa it was a  founding member of the World Gold Council and has done more than any other company to keep gold relevant in the age of specie and paper money. Once a year the company publishes “The Gold Book” a massive tome that tries to make sense of gold as a commodity, subject to supply and demand equations, as are other precious metals such as silver and platinum.The attempt works somewhat but falls far short in explaining the rise and fall of gold values over time expressed in the major currencies of the World

The reason for this is that gold is not, and never has been, merely a commodity. Rather, it remains primarily an international reserve currency, albeit not one that is accepted as legal tender in everyday trade.

The great bulk of gold in the World is held in vaults as bullion  that never sees the light of day. Annual gold production of a little less than 700 tons, (22 million ounces) is small enough so as to make very little difference to demand that comes mainly from jewellery manufacturers (India, SE Asia, and China), central banks, and the Communications Industry

Because of the very small float gold prices on the London Exchange tend to be very volatile in the short-term  frequently moving more than 2% in a trading session. A much better gauge of relative gold values is the COMEX Futures Exchange in New York where all the players meet, including those engaged in arbitrage of gold and the dollar as freely trading currencies. In the simple terms, if fund managers believe there will be continued debasement of the dollar by means of printing more specie, they will short the dollar and go long gold. They achieve this by executing forward contracts  in dollars in exchange for gold on COMEX  (usually thirty to ninety days out). This is the institutional method of hedging against currency devaluation in the short-term. It is not suitable for Individual savers and investors since the market has no stops (limits to changes in price during a trading session)

Longer term the likelihood of continued currency devaluation presents a much greater challenge for those who do not wish to suffer the resulting reduction in their standard of living.  The reason for this, can, once again, be found through history.

The Romans showed us how to mint specie tied to the value of gold. Unfortunately they also showed us how to screw up , by minting too many brass and copper coins, thereby debasing or devaluing the central currency and destroying the Empire. Through the ions of time the practice has continued in one form or another, to the extent it can almost be predicted, when, not if, there will be further devaluation of currency in terms of the rate of conversion into gold. In this equation gold is the constant and the various forms of specie are the variable.

Wars are a great equalizer, as are depressions and panics. In these circumstances the central governing bodies, fearing retribution from an angry populace, choose the easy way out and print more specie, as opposed to paying for their folly. It seems as though this undeniable fact is recognized by about half the population of the World. These are the inhabitants of Asia and India who have a healthy distrust of governments and their ability, or willingness to take care of them when things go wrong. No surprisingly these people are the biggest buyers of gold. Take for instance the inhabitants of the Island of Formosa or Taiwan. They fear, rightly, that, given half a chance the Monster of Peking will take back its’ lost Island’ and they will be left to fend for themselves. It is estimated that Taiwanese own gold to the extent of four times all of the currency in circulation. Under normal circumstances this would destroy the local currency, as ‘good money always drives out bad money’. Not so in this case since the Taiwanese are also the World’s greatest savers.

The other half of the citizens of the  World appear willing to take their chances, believing that the omnipotence of central governments in the form of the welfare State will take care of them in their needs.

It is this great divide that sets up the dichotomy that exists in the treatment of gold in the major markets of the World.

It is an open secret that Monetarists ( The Chicago School) who now hold sway over  the policy dictates of Central Bankers would like to get rid of gold. altogether. But they face at least two very large problems.  They cannot control  the elected representatives who give rise to the printing of  the specie that is at the heart of the problem. Instead they are left to warn and cajole law makers of the dangers of uncontrolled spending while they try to devise new methods of controlling the ever-increasing money supply. And, they face an almost insurmountable challenge of convincing the rest of the World, all those who save more than they spend, that they really can control the money supply and thus prevent further devaluation.

So it appears likely that the millions of tons of gold bullion in national vaults will stay put for a while longer. What is much more likely is that gold will be further marginalized by legislation.

In 1935 President Roosevelt, who apparently had a visceral dislike of Bankers, along with the New Deal Democrats passed into law “The Gold Reserve Act”. The Act fixed the price of gold at $35  an ounce, (a 90% devaluation of the dollar), outlawed the use of gold as legal tender, and forbade American Citizens from owning large amounts of gold bullion or coinage. Surprisingly this draconian  act omitted  gold Jewelry leaving the door open for a small portion of gold producers to survive.

The effect of the ‘Great Gold Fix’ was the issuance of nearly $40 billion  in specie ($6 trillion in today’s money)  in exchange for nearly 650 million ounces of gold all held in great secrecy at the United States Mint at Fort Knox in Kentucky.

If this appears vaguely familiar simply substitute US Treasury Bonds for gold and you have the answer.(Quantitive Easing) The whole exercise was designed create inflation as opposed to dis-inflation or depression. We will never know if this grand ruse worked because the Second World War started and fiscal controls were put in place to help the ‘War Effort’ (stop Inflation)

Much the same thing happened in France during the depression following  the Second World War. The French Governments of the day (there were many) was forced to continually devalue the Franc because of the continuing war with Algeria and the fixed exchange rates dictated by the Breton Woods Agreement.  Then along came President de Gaulle who put a stop to the useless war and issued ‘New Francs’ in return for gold held by French Citizens. The result was much the same as with Fort Knox, the second largest hoard of gold in the World and finally monetary stability.

Chances are very great that history will repeat, because monetary realignment, anywhere in the world cannot succeed unless gold is taken out of the equation or at least marginalized. Gold has a two thousand-year history as the best currency and will drive out specie unless this occurs.