Gold, Silver and the Wonderful Wizard of Oz

This week, the price of gold touched $1,040 per ounce while silver took a ride to now over $17 per ounce. It seems like the gold and silver run-up caught the politicians and monetary authorities by surprise. The lookouts were napping up in the crows’-nest. Then the golden alarm clock started buzzing, and it was a shock.

Lately, the politicians and monetary bubbas have all been focused on big-picture stuff, like saving the world financial system. Dressed in their superhero suits, they’ve lost sight of issues like the fundamental soundness of the dollar. They’re just too busy admiring themselves in the mirror and patting their own backs about how smart they are.

Meanwhile, a single headline set the metals markets on fire. It was about how a group of Arab nations plus Russia, China, Japan and France are plotting to replace the dollar for trading oil. Sound plausible. Will that happen? Eventually, I’ll bet, but not overnight.

$1,000 Is the New $900

The point is the dollar replacement story is a monetary rumor, and we’ve heard it a zillion times before. This week, for some reason, the rumor gained traction. Why? Well, sometimes the rubber meets the right spot on the road. It’s just “time” for something to happen. And this week, it was time for $1,000 gold to become the new $900.

It’s not hard to understand why. For many years, American politicians have overspent the resources of the nation. It was one of the few bipartisan things that national leadership could agree on. Spend, spend, spend. No issue was too small for federal intervention and funding.

The U.S. dodged the monetary bullet because a) the U.S. economy was big and resilient and it appeared like the economy could deal with the hit, b) the rest of the world didn’t have an alternative to the dollar and c) most of the world wasn’t really on to the monetary con job of the U.S. writing checks that never got cashed.

The politicians spent money like it didn’t matter. Except… it did. We’ve been approaching some sort of monetary tipping point. Now it seems like we’re there. Information flows around the world in microseconds. So there’s no big con job anymore. People across the world are tired of getting jerked around by the U.S. dollar.

Thus, now we’re watching the dollar melt down before our eyes, like the Wicked Witch at the end of The Wizard of Oz.

Off to See the Wizard

Let me digress for a moment. Author Lyman Frank Baum wrote the original book, The Wonderful Wizard of Oz. The book, published in 1900, was whimsical. But among other things, it poked fun and caricatured the gold and silver debate in the U.S. in the 1890s. More broadly, Wizard was an allegory about life and political populism in the U.S. in the 1890s.

Author Baum had a keen eye for the gold-silver debate because he knew something about the subject. Baum was wealthy, and heir to serious family money that came from the 19th-century oil fields of Pennsylvania. So he took the idea of debased currency and ran with it.

Just look at just the title, The Wonderful Wizard of… Oz, where “Oz” stands for “ounces.” I’ve heard that in the real story, the “Emerald City” of Oz was a city of gold. (It became emerald when MGM Studios made the famous Depression-era movie in 1939.) The yellow brick road was a metaphor for gold. Dorothy’s slippers were silver in the book, and changed to ruby in the movie.

The Tin Woodman stood for the urban workers of America, who were left out in the cold and rain by the forces of banker capitalism. The Scarecrow stood for the farmers — and recall that he had no brain, because many East Coast snobs thought farmers were dumb hicks, ripe for the picking. The Cowardly Lion was a dead ringer for William Jennings Bryan, who made good speeches, but could not stand up to the entrenched big guys.

The Wizard was all smoke and mirrors, reflecting the political classes as a bunch of charlatans who promised much and delivered little.

Hey, Wizard is a children’s story. It’s not a cookbook for what ails us today. If there are any real answers in the Wizard book, it’s along the lines that things aren’t what they may at first appear. And the common people — workers and farmers — are smarter and nobler than the elites think.

The only thing that’ll begin to save us is if the elites realize that they’re not as smart as they think. Of course, then they have to admit it and pursue other policies that work — like not spending so much money at the federal level. That, and create conditions to rebuild the basic economy and maintain a stable dollar.

But these are politicians we speak of so I wouldn’t count on that anytime soon. Instead of hitching your cart to political salvation, you should be counting on gold, silver and oil to pull you and your portfolio through.

Until we meet again,
Byron King

October 16, 2009

The Daily Reckoning