The Box of Money

The most persuasive arguments for buying gold do not reside in musty old economics textbooks or in the minutes of the latest FOMC meeting…They reside in Henry Hackel’s “box of money.”

Henry, as faithful Rude Awakening readers will recall, is the president of R.F. Lafferty, a broker-dealer specializing in options trading and resource stocks. In his 26th floor corner office overlooking the Hudson River sits a non-descript cardboard box – a simple shoebox that contains a powerful message: Buy gold.

“Hey Eric, have you ever seen my box of money?” Henry asked one day, wearing an impish grin.

“Um…no,” your editor replied. “I think I would have remembered that.”

“You gotta see this… C’mon, follow me,” said Henry, as he grabbed the box and marched toward the conference room. After seating ourselves at the conference table, Henry slung the box across the table like a bartender slinging draft beers and said, “Take a look.”

Your editor peeled back the lid, peered into the box and saw money – lots and lots of money…but all of it worthless. There were rubles from pre-Soviet Russia, 50 million-mark bills from the Weimar Republic period in Germany, pesos from the 1950s government of Cuba’s Battista regime, and even a few extinct Brazilian cruzeiros.

As your editor sifted through layer upon layer of worthless currencies, he imagined himself a kind of archaeologist, tooth-brushing his way through the ruins of civilizations past – in this case, monetary ruins. The message contained in this “dig” is very clear: The forces of monetary entropy – fueled by politicians and central bankers – continuously erode the value of paper money.

One of Henry’s favorite “ruins” is an elegant, 1928 10-Franc note. “To think,” he says, “at one time, someone held up this note and said ‘It’s as good as gold’.” But of course, the 1928 franc note turned out to be somewhat less good than gold. In fact, not one bill in that box – to borrow a familiar saying – is worth the paper it’s printed on.

“If the same man who carried around this note in 1928 instead took two and bought a 20-Franc ‘rooster’ gold piece, it would be worth about $80 today,” Henry laments. By comparison, the two 10-franc notes, post multiple devaluations, would be worth no more than a few cents today.

“Your box of money is very impressive, Henry,” your editor remarked. “But I don’t need any convincing about the long-term value of gold… So let’s take a shorter time horizon.

“How does gold look to you in 2005?”

“Well, I think the bottom is in for gold,” he answered, “but I can’t give you any price targets.”

“That’s fine,” your editor replied, “what I really care about most is the primary trend. Do you see any evidence that the bullish trend for gold is gathering strength? What about your coin-dealer buddy in Florida? Is he still selling more Beanie Babies than Krugerrands?”

“Yeah, I think so,” Henry laughed. “I don’t think Beanie Babies are the hottest items in the store anymore.”

(Three years ago, when gold was still languishing below $300 an ounce and trying to shake off the stigma of a two-decade bear market, Henry related the following anecdote about his coin dealership in Hollywood, Florida:

“We offered some ‘retired’ Beanie babies for sale – a set of three particularly coveted Beanie Babies for $1,100. We put the sets one at a time in the window of the store…people were ‘daggering’ each other for them. At the same time, an elderly gentleman comes into the store and asks: ‘How much is a Krugerrand?’

“‘$285,’ came the reply.

“‘Forget it,’ the old man said. ‘Too expensive.’

“Imagine that. For an ounce of gold you couldn’t even buy one Beanie baby. No interest in gold, but these Beanie Babies were flying out the door. It was amazing.”)

“So let’s return to the topic of gold,” your editor continued, mindful of his writing deadline. “Are we heading to $1,000 an ounce?”

“Who knows?” said Henry, “But that wouldn’t be out of line. That’s not a crazy idea at all… Gold’s gonna keep moving higher. It’s easy to buy now. That’s a big difference. Buying gold used to be cumbersome and difficult. But now you just toss in an order for 2,000 shares of GLD and boom, you’re long $100,000 worth of gold. Buyers now have a liquid market for gold for the very first time. That could be a big influence on the gold price.”

“Yeah, I’m with you on that,” your editor replied. “Okay Henry, since you won’t give me a price target for gold, just tell me this: Are you buying or selling?”

“I’m buying,” Henry replied without hesitation. “But I’m always buying.”


Eric Fry
for The Daily Reckoning