The Power of Gold

The Daily Reckoning PRESENTS: ‘So, if the U.S. economy is crumbling and we shouldn’t put our money in stocks…or bonds…or housing – what do we invest in?’ Our dear readers…and friends…and family are constantly asking us this question. We know you secretly hope that we will shrug our shoulders and say, ‘I dunno’…but our answer never wavers. “Buy gold.” Read on…


Mr. James Surowiecki wrote a wise and moronic piece on gold in the New Yorker. His wisdom is centered on the insight that neither gold, nor paper money are true wealth, but only relative measures, subject to adjustment.

“Gold or not, we’re always just running on air,” he wrote. “You can’t be rich unless everyone agrees you’re rich.”

In other words, there is no law that guarantees gold at $450 an ounce. It might just as well be priced at $266 an ounce, as it was when George W. Bush took office for the first time. Since then, a man who counted his wealth in Kruggerands has become 70 percent richer.

But gold wasn’t born yesterday, or four years ago. Mr. Surowiecki noticed that the metal has a past, just as it has a present. He turned his head around and looked back a quarter of a century. The yellow metal was not a great way to preserve wealth during that period, he notes. As a result, he sees no difference between a paper dollar and a gold doubloon, or between a bull market in gold and a bubble in technology shares.

“In the end, our trust in gold is no different from our trust in a piece of paper with ‘one dollar’ written on it,” he believes. And when you buy gold, “you’re buying into a collective hallucination-exactly what those dot-com investors did in the late nineties.”

Pity he did not bother to look back a little further. This is the moronic part. While Mr. Surowiecki looked at a bit of gold’s past, he did not see enough of it. Both gold and paper dollars have histories, but gold has far more. Both gold and dollars have a future. But, and this is the important part, gold is likely to have more of that, too.

The expression, “as rich as Croesus,” is of ancient origin. The king of historic Lydia is remembered, even today, for his great wealth. Croesus was not rich because he had stacks of dollar bills. Instead, he measured his richness in gold. No one says “as poor as Croesus.” We have also heard the expression, “not worth a Continental,” referring to America’s paper money during the Revolutionary War era. We have never heard the expression, “not worth a Kruggerand.”

Likewise, when Jesus said, “Render unto Caesar that which is Caesar’s,” he referred to a denarius, a coin of gold or silver, not a paper currency. The coin had Caesar’s image on it, just as today’s American money has a picture of Lincoln, Washington, or Jackson on it. Dead presidents were golden back then. Even today, a gold denarius is still about as valuable as it was when Caesar conquered Gaul. America’s dead presidents, whose images are printed in green ink on special paper, lose 2 percent to 5 percent of their purchasing power every year. What do you think they will be worth 2,000 years from now?

A few years before Jesus, Crassus, who had made his fortune on real estate speculation in Rome, decided to put together an army to hustle the east. Alas, such projects almost always meet with disaster; the attempt by Crassus was no exception. He was captured by the Parthians and was put to death in an unusually cruel and costly way. He did not end his days with paper money stuffed down his throat, and certainly not dollar bills.

No, they poured molten gold down his gullet-or so the story has it. Gold has a long history. And during its history, many was the time that humans were tempted to replace it with other forms of money- which they believed would be more convenient, more modern, and mostimportantly, more accommodating. Gold is hard to find and hard to bring up out of the earth. By its nature, the quantity of gold is always limited.

Paper money, by contrast, offers irresistible possibilities. The list of bright paper rivals is long and colorful. You will find hundreds of examples, from assignats to zlotys, and from imperial purple to beer suds brown. But the story of paper money is short and predictable. Since the invention of the printing press, a new paper dollar or franc can be brought out at negligible cost. Nor does it cost much to increase the money supply by a factor of 10 or 100-simply add zeros. It may seem obvious, but adding zeros does not add value.

Still, the attraction of being able to get something for nothing has always been too great to resist. That is what makes goldbugs so irritating: They are always pointing it out. Even worse, they seem to enjoy saying “There ain’t no such thing as a free lunch,” which comes as a big disappointment to most people.

Once people were able to create money at virtually no expense, no one ever resisted doing it to excess. No paper currency has ever held its value for very long. Most are ruined within a few years. Some take longer.

Even the world’s two most successful paper currencies-the American dollar and the British pound-have each lost more than 95 percent of their value in the past century, which is especially remarkable since both were linked by law and custom to gold for most of those years. For the dollar, the final link to gold was severed only 34 years ago.

Some paper currencies are destroyed almost absentmindedly. Others are ruined intentionally. But all go away eventually. By contrast, every gold coin that was ever struck is still valuable today, most have more real value than when they first came out of the mint.

Central bankers reported in early 2005 that 70 percent of them were

Increasing their reserves of euros. As for the world’s erstwhile and present reserve currency, the dollar, they seemed to have, not growing reserves, but growing reservations. We also have reservations about the dollar. Whatever it is worth today or tomorrow, we are sure it will have less worth eventually. That it is not regarded as worthless already is remarkable. The average dollar is nothing more than electronic information. It exists thanks only to the ability of digital technology to keep track of it. Relatively few dollars ever make it to paper, and many of them end up in the pockets of Russian drug dealers and African politicians. Most dollars inmost people’s accounts are not even graced with the image of a dead president; when the end comes, they won’t even be useful for starting fires.

It is imperial vanity that keeps the dollar in business. And it is vanity that will make it worthless. Economists want money they can control.

Central bankers want money they can debase. And politicians want money they might get their mug on. The trouble with gold is that it turns its back on world improvers, empire builders, and do-gooders. It is money that no central bank promotes and none destroys. It is money that exists only in a tangible form, a real metal-a number on the periodic table.

“Gold goes up and down, just like other kinds of money,” say economists. Which is true. “You can protect yourself from inflation in other ways,” say the speculators. True again.

“Gold pays no dividends or interest,” say the investors. True.

Nor will gold cure baldness or add inches to your most private part. Even as money, gold may not be perfect. But it is better money than anything else. Gold was around millions of years before the U.S. dollar was invented. It will probably be around a billion years after. This longevity is not in itself a great recommendation. It is like buying a suit that will last longer than you do; there is no point to it. But the reason for gold’s longevity is also the reason for its great virtue as money: It is inert; it yields neither to technology nor to vanity.

The world improvers will always be with us. They will spend more than they have, boss other people around, and generally make the world a worse place to live. They will offer proposals like those of Thomas L. Friedman. The nice thing about gold is that it is so unresponsive. It neither laughs nor applauds. Gold is money that no central bank promotes and none destroys.

Paper money is a handy tool for the world improvers. They use it like politicians use civil service jobs and generals use heavy bombers-to get their way. Whatever the vapid ideal du jour, it takes money to pursue it. Given enough money, the poor can be fed and housed. The middle classes can be given free medical care and low-cost loans for houses. The upper classes can be given contracts and favors. Enemies can be summoned up, bombed, and reconstructed. Bread, circuses, war-the imperial program costs money.

How to get more money for these great new programs, these marvelously worthwhile ideals, these fabulous public spectacles? Gold flatly refuses to cooperate. It doesn’t even give a reason. Instead, it stays as mute and reticent as a dead man in front of a television. No matter how persuasive the advertising, the man is not going to go for it.

Paper money, on the other hand, barely needs encouragement. Start up the presses! Lower the interest rate! Relax reserve requirements and lending standards! Sell more bonds! Create more paper! Paper money is ready to go along with anything. Like George W. Bush, it never met a boondoggle it didn’t like. Sooner or later, it ends up as worthless as the projects it was meant to pay for.

Gold is merely the subversive investor’s way of protecting himself.


Bill Bonner and Addison Wiggin
for The Daily Reckoning
October 19, 2006

Editor’s Note: Bill Bonner is the founder and editor of The Daily Reckoning. He is also the author, with Addison Wiggin, of The Wall Street Journal best seller Financial Reckoning Day: Surviving the Soft Depression of the 21st Century (John Wiley & Sons).

In Bonner and Wiggin’s follow-up book, Empire of Debt: The Rise of an Epic Financial Crisis, they wield their sardonic brand of humor to expose the nation for what it really is – an empire built on delusions. Daily Reckoning readers can buy their copy of Empire of Debt – now available in paperback – just click on the link below:

The Most Feared Book in Washington!

“…you gotta ask yourself [one] question: Do I feel lucky? Well, do ya, punk?”

-Clint Eastwood (as Dirty Harry)

Recent Nobel Laureate Edmund Phelps is quoted as saying, “Man is a thinking, expectant being.” The economist should have inserted an “or” in the middle of this sentence. Man tends to expect…or think. Rarely does he do both at the same time.

He most expects profits, for example, only when they are least likely to appear – that is, after his favorite investment has already gone up.

We watch the Dow and wonder: What do investors expect? Higher earnings? Higher P/Es?

There are only two ways to get rich, we recall from yesterday – accumulation or speculation. Either you earn the money and save it, or you get lucky. The vast majority of wealth – both individual and national – is made the old-fashioned way, by accumulation. People typically try to spend less than they make. The difference becomes ‘retained earnings’ for a corporation, or ‘savings’ for a family – in general, the greater the savings, the richer the family.

But lately, another wave of new era thinking has washed over America’s burgs, metropolises, and hamlets. People have gotten so lucky that they think they’ll never need to save again. Even supposedly sophisticated investors have given up on the tried-and-true method of building wealth; they all must feel very lucky.

Corporate profits may be at all-time highs, but dividend yields are puny – less than two percent – which is to say, that an investor expecting to accumulate his way to wealth by buying stocks is not thinking at all. His dividends will not even equal the rate of consumer price inflation.

He must be expecting something else. He has become a speculator, not an accumulator, counting on price increases to make him money.

We turn to Jeremy Grantham for a hint about how likely he is to have his expectations met.

Grantham analyzed stock market history, and divided it according to how cheap or expensive stocks were at the time…and then looked to see what happened next. Since 1929, if you bought stocks at times when they were among the cheapest 20% in terms of P/E ratios, you would have earned an average return of 10.6% over the following10 years. If you had bought them when they were at their most expensive – the top 20% in terms of P/E ratios – you would have earned only 0.6% per year during the following 10 years.

Where are stocks now? In the most expensive quintile. What can investors reasonably expect? Well…if history and theory are any guide, they can look forward to less than 1% annual rate of return. Why would any forward thinking investor buy stocks under those conditions? Of course, he wouldn’t.

Which goes to show how little investors actually think at all. Yesterday, the Dow edged up closer to the 12,000 mark; the federal deficit came in lower than expected; and even housing starts showed new energy. What’s not to like?

It’s times like these that we count on our natural gloominess to pull us through. Otherwise, we might be tempted to buy a stock…or a Picasso.

Talk about getting lucky! Steve Wynn, an art collector, bought a Picasso in ’97 for $48.4 million. It was an absurd price for an absurd painting, but that didn’t stop it from becoming even more absurd. He was about to sell the ghastly thing to another art collector, Steve Cohen, for a $90 million profit when he turned suddenly around and put his elbow through it.

But apart from sharing the same first name, the two men are also in the same business – gambling. Wynn runs gambling casinos in Las Vegas, Nevada. Cohen runs a hedge fund business in Greenwich, Connecticut. Evidently, lady luck has been good to them both. But we hasten to point out, that neither man made his money by luck alone. Each made his money by selling speculations, not buying them. As Felix Dennis puts it, “I never met a man who got rich buying hedge funds. I’ve met several who got rich operating them.”

Meanwhile, the poor saps who buy stocks and pull the levers on slot machines haven’t much of a chance. Even though the Dow is setting records, investors’ real returns are still negative. Inflation has taken nearly 20% off of nominal gains over the last six years. And in terms of gold, the returns are much, much worse. Measured in gold, the typical stock market investor has lost more than half his money since 1999.

More news…


Byron King, reporting from Pittsburgh:

“…Her husband died of a heart attack a few years ago, and she is now running what is left of his business interests. One of her husband’s former business interests was a gold-mining operation in a particular Asian country…”

For the rest of this story, see today’s issue of Whiskey & Gunpowder


More news…

*** “Enjoy the low crude oil prices while they last – it may be a brief celebration,” warned our commodities guru, Kevin Kerr.

“Last December, I had the opportunity to visit the now-shut-down (at least temporarily) oil shale mines in Estonia. My wife is Estonian, and we have family and a home there. The tiny country was once part of the former Soviet Union. Now it’s part of the E.U., and capitalism is growing, or at least trying to. One natural resource the country has tons of is oil shale, since it is on the Gulf of Finland, which is one reason the deposits are so rich.

“These once-thriving mines produced enough oil shale to power an entire country or two. Over the years, as cheap, easily accessible oil was fairly abundant, oil shale fell by the wayside. Now, as the world faces the eventual threat of $100-per-barrel oil, regardless of the recent correction, oil shale is back on the radar screen in a big way.”

*** We haven’t been to Argentina in many months…but we try to keep up with what is going on down there.

For example, yesterday, a friend sent a photo of a house for sale. It is a beautiful place, in fashionable Palermo Chico…with balconies outside, and attractive woodwork in the interior…and about 3,000 square feet of space. A similar house in Paris would cost $3 million or so. In London or New York, you might spend $5 million or more. But in Buenos Aires, the price is only $800,000.

“Were I not living in Asia,” writes our old friend Mark Faber, “I would consider buying a property there. Buenos Aires is a beautiful city with a pleasant climate, and I would recommend it to those of my U.S. readers who are thinking of relocating… My friends in Argentina are of the opinion that Buenos Aires real estate prices will never approach prices in Miami, New York, and London, and I am inclined to agree with them. However, the colossal price difference could narrow in the future, especially if there was a financial meltdown, which would hit real estate prices in financial centers very hard.”

Argentina is recovering quickly from the sharp slump of 2002, when GDP fell 10.9%. In U.S. dollar terms, the economy was more than cut in half from ’98 to ’02, and one out of every five people was out of a job. The only thing comparable in American experience would be the Great Depression.

But Argentina did not stay in a slump like the United States in the 30s, or Japan in the ’90s. Its currency collapsed, and the government had no money to prop up losing enterprises. So, the slate was wiped clean fairly quickly. Since ’03, in fact, it has had one of the fastest-growing economies in the world – with growth rates around 9% annually. Unemployment dropped down to single-digit levels, and the country produced trade surpluses – led by the agricultural sector, which was greatly aided by a cheaper peso. Currently, Argentina’s trade surplus equals about 10% of its GDP, compared to a NEGATIVE 7% for the United States. Argentina’s stocks reflected the turnaround. From the low in ’02 to today, the index has risen 491%, one of the best performers in the world.

Is it too late to invest in Argentina? Not necessarily. Mark Faber’s “Gloom, Boom and Doom Report,” suggests three different ways. The first is property, which except for the very top-end, still seems cheap.

The second is electrical utilities. Because of popular pressure, the Argentinean government refused to allow utilities to raise prices. The average residential electricity bill is only $10 per month. Naturally, the utilities saw little interest in expanding capacity. Also, investors did not rush to put their money into the sector. As a result, Argentina’s power companies produce no more juice now, than they did before the financial crisis, while electricity consumption has increased 24%.

Thus, the opportunity in the utility sector is obvious. As demand increases, the government will be forced to allow prices to rise to increase investment. Existing utility franchises should rise in value.

*** Short Fuse, reporting from the City of Angels:

“‘So, what’s your movie about?’

“Well…debt,” we answered, awaiting a polite head nod and quick subject change. After all, we know that the subject matter we’ve chosen for our documentary isn’t the most glamorous…there won’t be any love scenes…and most likely, nothing will blow up.

But the agent who had posed the question, put down the magazine he had been flipping through and gave us his full attention.

“Debt…debt…great idea. So, you’re thinking 85% Inconvenient Truth, and 15% Enron? What a great idea,” he said, pacing around the room. “What a perfect time to make a movie about debt. You know, my mother, she has never had a bit of debt in her life. Owns two huge houses that have been paid off for years – and has plenty of money squirreled away.

“My wife makes sure we pay off our credit cards each month. She was letting me do it for a while, but then realized I wasn’t paying off as much as I could – she really kicked my butt then.

“‘Do you realize this isn’t free money?’ she said to me.

“I wasn’t allowed to pay the bills after that.”

“It’s too bad the majority of the country – not to mention our government – doesn’t realize it isn’t free money. We wish we could take away their checkbook,” we replied.

It’s funny how most people have forgotten the lessons we learned during the Great Depression…then again, many of the people that were alive during the Depression aren’t around anymore – but as we’ve pointed out in these pages before, no one seems to care about dead people.

As we wrote in Empire of Debt:

“Each generation seems to think they are the first to stand upright, that their mothers and fathers walked on four legs and howled at the moon! Even when the living feign admiration for same fallen forebare, it is usually without paying of the least attention to what the poor schmuck actually said or did. The dead leave us their memoirs, their gospels, their histories, and their constitutions – for what is a constitution but a pact with the dead? – and we ignore them. We seem to believe that all that they suffered, all they went through, all the mistakes they made, hold no more interest for us than a comment by a sun struck contestant in a TV survival show: ‘This is…like…weird…”

More from Empire of Debt, below…