L: Doug, we’ve talked about cars, cows, and cash, but the investment world thinks of you as a gold bug, so let’s give that a go; why gold?
Doug: Sure. First of all, it’s because gold is actually money. It’s an unfortunate historical anomaly that people think about the paper in their wallets as money. The dollar is, technically, a currency. A currency is a government substitute for money. Gold is money.
Now, why do I say that?
Historically, many things have been used as money. Cattle have been used as money in many societies, including Roman society. That’s where we get the word “pecuniary” from: the Latin word for a single head of cattle is pecus. Salt has been used as money, also including in ancient Rome, and that’s where the word “salary” comes from; the Latin for salt was sal (or salis). The North American Indians used seashells. Cigarettes were used during WWII. So, money is simply a medium of exchange and a store of value.
By that definition, almost anything could be used as money, but obviously, some things work better than others; it’s hard to exchange things people don’t want, and some things don’t store value well. Over thousands of years, the precious metals have emerged as the best form of money. Gold and silver both, though primarily gold.
There are very good reasons for this, and they are not new reasons. Aristotle defined five reasons why gold is money in the fourth century BC (which may only have been the first time it was put down on paper). Those five reasons are as valid today as they were then. A good form of money must be: durable, divisible, consistent, convenient, and have value in and of itself.
L: Can you elaborate on that?
Doug: Yes, and from them, we can draw inferences that will help us anticipate the fate of the dollar.
First, let’s take durable. That’s pretty obvious – you can’t have your money disintegrating in your pockets or bank vaults. That’s why we don’t use wheat for money; it can rot, be eaten by insects, and so on. It doesn’t last.
Divisible. Again, obvious. It’s why we don’t use diamonds for money, nor artwork. You can’t split them into pieces without destroying the value of the whole.
L: If I paid for a new Ford GT with the Mona Lisa, what would be my change – a small canvas by Picasso?
Doug: [Laughing.] That’s right. Maybe you’d get millions of those paintings of Elvis or Jesus on velvet.
Consistent. The lack of consistency is why we don’t use real estate as money. One piece is always different from another piece.
Convenient. That’s why we don’t use, for instance, other metals like lead, or even copper. The coins would have to be too huge to handle easily to be of sufficient value.
Value of itself. The lack here is why you shouldn’t use paper as money.
Actually, there’s a sixth reason Aristotle should have mentioned, but it wasn’t relevant in his age, because nobody would have thought of it…
L: It can’t be created out of thin air.
Doug: Right. Not even the kings and emperors who clipped and diluted coins would have dared imagine that they could get away with trying to use something essentially worthless as money.
L: I think we can forgive Aristotle for the oversight.
Doug: I think so. At any rate, these are the reasons why gold is the best money. It’s not a gold bug religion, nor a barbaric superstition. It’s simply common sense. Gold is particularly good for use as money, just as aluminum is particularly good for making aircraft, steel is good for the structures of buildings, uranium is good for fueling nuclear power plants, and paper is good for making books. Not money. If you try to make airplanes out of lead, or money out of paper, you’re in for a crash.
That gold is money is simply the result of the market process, seeking optimum means of storing value and making exchanges.
But it’s not something that suits governments, because paper money is an excellent means for governments to tax people indirectly, surreptitiously, through inflation. That’s one reason central bankers love paper money, but also, phony economic theories, like those of John Maynard Keynes, hold that the government not only can but should meddle with the economy, and the ability to print paper money gives them a means to do that.
In today’s world, not only do people around the world take it for granted that paper is money, but that it should be so.
But it’s all nonsense. It’s one reason for taking a gloomy view of humanity – people will believe almost any kind of claptrap, if the story is retailed by those in authority.
After the current system collapses, as every paper money system in the past has collapsed, some form of money will have to replace it, and it’s almost certainly going to be gold.
L: There are already experiments with digital gold currencies. E-gold got taken out behind the woodshed by the feds, but GoldMoney.com seems to be doing well. Do you believe those could see widespread adoption, as paper currencies lose their credibility?
Doug: Sure. You know, in the 19th century, the “paper money” you carried in your wallet was called bank notes. Why? Because they actually were notes from your bank representing a specified amount of real money on deposit. People carried these things because they were much more convenient for large amounts of money than chests of gold. Dollars today say “Federal Reserve Note,” not “XYZ Bank Note” on the back, because they aren’t redeemable for anything besides more Federal Reserve notes. That’s why today’s paper money substitutes are called fiat currencies; they have zero intrinsic value and are not redeemable for anything, but are accepted because the government will put you in jail if you don’t. It’s a fiat accomplished by force, not real value recognized by those who accept the notes.
Things like GoldMoney.com are simply modernized, updated versions of bank notes. They are basically transferrable warehouse receipts that represent amounts of gold you have on deposit someplace. I do recommend GoldMoney.com, incidentally, because it allows you to hold your gold in digital form, outside the U.S. And to my understanding, these accounts are not reportable under current U.S. rules. It’s an excellent alternative to storing large amounts of gold in a safe deposit box.
L: But will people believe in them? Will the public accept them so they can be used in everyday transactions, as paper money is used now? Hundreds of years ago, people accepted bank notes because they knew the reputations of the banks issuing them (when you traveled, you went to a reputable local bank, which knew the reputation of the bank that issued your notes, and the local bank could issue you new notes in local currency, etc.). There was no central authority to certify these notes. But today, people don’t think that way. They think it takes a government to assure the value of money.
Doug: You’re quite correct on that – a sea change in thinking will have to take place. Of course, anyone in Zimbabwe can tell you a government’s guarantee is not necessarily worth anything. A collapse of the dollar – the worlds’ de facto reserve currency – could spark such a change in that way of thinking. With GoldMoney.com or the Perth Mint – another worthy alternative – it’s a question of predicting the solvency of an actual company, and we have tools for that. I believe this is exactly what is going to happen in the future. As far as I’m concerned, either of these outfits is more reliable than, say, Citibank. And gold is far more desirable than the dollar. So I’d rather have a thousand ounces of gold stored with GoldMoney.com than a million dollars deposited at Citibank.
The dollar will be phased out of the world economy, because everyone can see that it’s a hot potato. This Chinese have two trillion of them. They want to get rid of them because they aren’t stupid, and they can see what the ultimate fate of the dollar is. This is true of every country around the world at this point; their central banks know they are sitting on hot potatoes, and they are going to want to unload them.
What’s going to happen is that one or more countries are going to institute a sound, stable, gold-backed currency. Ten years ago, Mahathir Mohamad of Malaysia tried to get Islamic countries to return to hard money, adopting the gold dinar and the silver dirham, which are defined in the Koran as specific weights of gold and silver. It didn’t work because of mistrust between the players; the governments of Muslim countries are, as a group, almost universally corrupt. But I think it’s entirely possible, nonetheless, that something like that might arise in the Islamic world. After all, they believe that the Koran is the actual word of Allah, and there is a resurgence of Islamic fundamentalism everywhere.
According to press reports, the Chinese government is actually encouraging Chinese people to accumulate gold at this point. They might go for a gold-backed yuan – it would put them on the map as an international monetary leader. The press also reports that the Russian government has been consistently buying large amounts of gold. We might even end up with a gold-backed ruble.
Meanwhile, the U.S. government is creating trillions more dollars per year. This could result in the entire world monetary system being overturned. But there’s no reason for anyone to trust any of these other governments more than they trust the U.S. government. And rightly so; they shouldn’t trust any currency that doesn’t come with a guarantee of redemption for something specific. And as Aristotle and history have shown us, gold is the best choice.
L: So the question now boils down to, what is gold really worth in terms of today’s dollar? How do we compute that?
Doug: Well, aside from a few Spanish galleons at the bottom of the sea and dentures returned to the earth after a lifetime of use, pretty much all of the gold ever mined and refined is still sitting on the surface of the earth somewhere. Nobody really knows how much that is, but the most reasonable estimates I’ve seen are something like six to eight billion ounces. That happens to work out to about one ounce of gold for every human being on the planet at this time.
Out of this, the U.S. government reports that it has 265 million ounces of gold in its treasury. If we divide the money supply by the number of ounces the U.S. could back its paper with – and here we’d have to decide what measure of money supply we want to use. Nobody, including the Federal Reserve, actually knows how much money they have floating around out there. It would seem that there are about six trillion dollars outside the U.S. alone. Let’s estimate that M0 in the U.S., the narrowest measure of money supply that consists of just notes and coins, amounts to one trillion. So, 265 million into seven trillion gives you about $26,420 dollars per ounce of gold.
Now, if we add in the total obligations of the U.S. government, which it will either need to print more money to meet, or it will have to default on – that’s about 100 trillion. If those dollars are printed, that would give us $377,430 per ounce. The same ratio for M1 would give you about $6,226 per ounce and M2 would give you $31,320 per ounce.
All of these numbers are far, far above the current level of roughly $1,000 per ounce. And that’s the answer to the question you started this interview with. Why gold? Because it’s got only one way to go: up. It seems to me that everyone should have a very significant portion of their wealth in gold.
That’s not just for safety, security, and prudence, though those are reasons enough, but because gold is cash in its most basic form. Better yet, even though it’s quadrupled since its bottom in 2001, it’s also still an excellent speculation. I can see somewhere between three and ten times your investment in current capital. And there’s no limit to the upside in dollars, depending on how rapidly the government destroys the currency.
To my view, that offers an exceptional combined opportunity; by buying gold, you protect your wealth but also have enormous speculative upside.
L: Plus, as you like to say, gold is the only asset class that is not also simultaneously someone else’s liability.
Doug: Absolutely right. And in a world as financially unstable as today’s, you just don’t want to hold on to someone else’s liabilities any more than you have to. Especially if that’s a liability of an entity like the U.S. government.
L: Got it. You should own gold because it’s money, because of its security, and because it’s an excellent speculation. In our publications, we’ve been telling readers that they should have as much as 1/3 of their portfolio in gold, 1/3 in cash, and 1/3 in investments that could do well in times of crisis, including gold stocks, commodities, certain kinds of real estate, etc. Do you think those are still the right proportions? That worked out very well for our readers last year. Those who actually followed our advice would have had 1/3 in gold and 1/3 in cash, so even if they lost 50% of their remaining third, they would still have only been down 16.67% by the end of the year. But that was then, and there were signs of short-term price deflation, and now things are different. How should we be deployed today?
Doug: That’s still a good balance, but if you start really thinking of gold as cash, and the dollar as a merely temporarily fashionable means of exchange, you’ll find yourself loading your portfolio with much more gold and gold proxies. That will protect you against the very rapid loss of value the dollar faces in years to come. Inflation is going to truly get out of control.
The only reason to hold any dollars at all right now, other than what you need for a few months’ living expenses if you live in the U.S., is that there is still a possibility of a very short-lived but catastrophic deflation. That could make the silly things worth more in the short term and give you liquid capital to deploy quickly into other asset classes. But certainly within one year, I would start moving more money out of dollars and into gold and other investments, possibly including well-positioned real estate and stocks that could benefit from the destruction of the dollar.
And once again, I want to emphasize, especially for Americans, that it’s not just a question of what you have and what you’re doing in the market, but where you’re keeping these things. Everyone, not just Americans, should try to have half of their gold, cash, and investments outside of their countries of citizenship and/or residence. You don’t want all of your assets within easy reach of whatever government considers you its milk cow.
L: Good reminder. Well, we’ve talked a long time again, but briefly, what are the best ways to own gold?
Doug: I prefer gold coins to bars. They are more recognizable and convenient. You can walk into a coin shop in many places around the world, and they will recognize your Gold Eagles, Krugerrands, Philharmonics, etc. Dealers, or the public, may not recognize the hallmark of some bars.
For larger amounts, I like GoldMoney.com, as I mentioned above, and I believe Kitco offers secure and convenient accounts accessible online. I also think highly of the Perth Mint Certificate program, especially for those who feel more secure with some sort of government backing (though government involvement is a reason to run in the opposite direction, in most cases). And, of course, there are various banks that will store gold for you in vaults in London or Zurich, that sort of thing. We cover these sorts of things in Casey’s Gold and Resource Report.
L: Okay, then, one last question: how about the gold stocks – where do they fit into this picture?
Doug: That’s a whole new conversation. For now, I’ll sum it up with three words: leverage to gold.
L: Very well then – I look forward to our next conversation. Thank you for your time.
Doug: A pleasure, as always.
December 29, 2009
Doug Casey, author of the best sellers Strategic Investing, Crisis Investing and Crisis Investing for the Rest of the 90's, has lived in seven countries and visited over 100 more. He has appeared on scores of major radio and TV shows and remains an active speculator in the stock, bond, commodity, and real estate markets around the world.
Doug, I have a question for you. How would you value the future of the Canadian dollar vs the American Dollar when the USD inflation heats up? You have given very good estimates of the US position, circulating dollars versus gold. Would you suspect that the Canadian Dollar will be very close to the USD when inflation heats up for the USD. Or, would you think the CanDol is better protected from inflation? This is something that I have been wondering about as our economies are so closely intertwined. Best Regards, CanadaNorth
Fantastic conversation, guys, and I wish I had been there to listen to far more than we got. Although I would have dragged you back to cows and chickens. My priorities are that FIRST we secure our individual food reserves, then we work out how to produce sustainable supplies, and THEN we can go rampaging around in gold, betting the government will do a lot more dumb things, and swapping our FRNs for almost anything that locks in today’s value that will have a good market when the dying credit-consumer society realizes that the only things worth buying are fuel, food, and the means to protect them..
How’s this for a wild-cow investment? Loans are very hard to get, and even successful farmers and ranchers usually need seed and feed money. How about buying stock almost literally? Find a farmer/rancher, offer to invest, say, $2000 or so, and work out what a good share of his harvest is. If you took your pay back in meat, eggs, vegetables and such, even at retail prices, a good set-up would return ample and very real value, and it might even offer tax breaks. Perhaps you could arrange for him to run a feeder calf with his, thus turning about $250 into 800 pounds of pastured beef. Even with processing costs, that would be an excellent profit and a major upgrade in your family’s beef. Those would protect against a very lengthy depression and food shortages. Better yet, you could work out the place in the country you may need in case of serious unrest/collapse of the food distribution network. Just thinking, but an offer of capital to invest now in return for an agreement that you could could stay there in your Bug Out motorhome or towable trailer and share the added safety and food being produced strikes me as a very sensible insurance policy. It may not be traditional high finance, but it would be very practical.
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Unfortunately, many americans have not got this.
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