Heart Of Gold

“I’ve been to Hollywood,

I’ve been to Redwood,

I’ve crossed the ocean for a heart of gold.

There’s an expression,

That gives direction,

And keeps me searching for a heart of gold.

But I’m getting old.”

Neil Young Despite the fact that ‘money can’t buy me love’…and the despite the disappointment of the law of declining marginal utility (the more you get, the less you appreciate it)… and despite the fact that Christendom’s most reliable source said it increases the likelihood of burning in hell for all eternity…

…the quest for wealth remains popular.

Not only do people want to get it. They also are very keen on not losing it.

In both respects, gold has played an important role for many generations.

This is not to say that other ways of amassing and preserving wealth have not been found. “Money” is, after all, an abstraction. It represents purchasing power only by common agreement. An ounce of gold, for example, is inherently almost worthless. It is useful, say, for leveling an old table…or repairing a broken tooth. But, you cannot eat it…nor will it keep you warm. It is not even entertaining, unlike, say, a Jimmie Rogers song or the racy Aubade (so bad…so bad…) underwear ad which Rafael has turned into a screen saver.

Yap is an island in the Caroline chain somewhere in the vast Pacific. Peter Bernstein’s new book, The Power of Gold, explains the Yap money system, as it was when anthropologists studied the island in 1903:

“The medium of exchange, or more properly, the store of value on Yap at that time was called fei. Fei consisted of thick stone wheels with diameters ranging from saucer- size pieces to twelve-foot millstones. The stones from which these fei had been fashioned came from limestone quarries found on the island of Babelthuap, one of the Pealao Islands about four hundred miles away, and brought to Yap long ago, piece by piece, in canoes and on rafts by some venturesome natives…”

This, dear reader, is the similarity between the Yap stones and gold, and a point of difference with shares in Cisco. The Yap stones were hard to replicate. It was a coin that was hard to debase.

Many high tech and dot.com shares are like gold and Yap wheels in that they are similarly inert. You could get about the same dividend yield from a stone wheel that you might get from a tech stock – that is, zero.

But while the earth gives up more gold grudgingly…and the stone wheels on Yap were almost impossible for the natives to reproduce…all it took was a few business meetings to increase the world’s ready supply of Cisco shares.

But while the Yap stones offered no hope of investment yield – they paid no dividends, nor distributed any earnings – tech stocks have always held out the potential of making money for their holders. Paradoxically, this also limits their usefulness as a store of value. Tech stocks are valuable as long as people believe they are valuable. But they fall in value as investors seek to increase their rate of return by moving to an alternative.

The attractiveness of gold is precisely that it is not engaged in any activity that might be profitable. It has no creditors. It reports no earnings. It issues no options to employees. It is financially, as well as physically, lifeless.

Gold bugs often say that they like the yellow metal because it represents “tangible” or “hard assets.” Yet, the actual value of gold is pure abstraction – not much different from an electronic brokerage report that you see on your computer screen. Cut off from almost all financial, economic and utilitarian activity – gold, like the Yap stones, is worth only what people agree that it is worth.

“In fact,” continues Mr. Bernstein, “the wealthiest family in the [Yap] community owned an enormous fei that no one could see or had ever seen. According to this family, their fei lay on the bottom of the sea. Many generations past, while an ancestor was towing it on a raft attached to his canoe, a terrible storm came up. [T]his man decided that life came first and money second: he cut the raft adrift and watched the huge stone sink below the waves. But he survived to tell the tale and to describe to everyone the extraordinary size and quality of the stone he had lost. Nobody had ever doubted the veracity of his testimony. As Furness [the anthropologist] described it, ‘The purchasing power of that stone remains, therefore, as valid as if it were leaning visibly against the side of the owner’s house.'”

Bernstein’s subtitle for his book is “The History of an Obsession.” He points out how, over the centuries, gold has been used as a convenient proxy for wealth.

From the time of King Croesus of Lydia, the man whom people even today still wish to be as rich as – who took the throne in 568 BC – right up until approximately the moment when Alan Greenspan acceded to the throne of the Federal Reserve System, people still searched for a heart of gold. Wealth could be accumulated, exchanged, and preserved in the form of gold coins and bricks. This was as true for individuals as it was for central banks.

And one of the most successful and ubiquitous forms of gold was the Byzantine gold coin: the bezant.

A contemporary of Emperor Justinian in the 4th century reported that the bezant “is accepted by everywhere from end to end of the earth. It is admired by all mean and in all kingdoms, because no kingdom has a currency that can be compared to it.”

In 1951, an economist called the bezant “the Dollar of the Middle Ages.”

But a dollar is not an exact replica of a bezant. A dollar is made of paper; the bezant was made of gold. Like the Yap’s rocks, the bezant resisted inflation as well as rust. Bezants, even today, have value – even though the Empire that created them fell to the Turks in 1453 – more than 5 centuries ago.

What will the dollar’s value be in 500 years?

More to come… on wealth, gold, and the dollar,

Bill Bonner Paris, France October 19, 2000

*** Wheee! The market took investors for a wild ride yesterday. The Dow plunged 433 points before bouncing back to close down 146 points – below 10,000 for the first time since March.

*** The Nasdaq, meanwhile, followed the same trajectory, coming near the 3,000 level early in the day, but ending the session down 42 points.

*** The proximate cause of the market’s trouble was the IBM announcement I mentioned yesterday. IBM’s sales are barely growing, giving investors cause to knock the share price down $18.

*** Despite the morning flop in prices, there was no panic or fear on Wall Street. Investors are accustomed to believing that share prices always go up in the long run. Many saw the big drop in the indexes as a decisive end to the bear market they said couldn’t happen.

*** “People are asking themselves is this is the end of the sell-off,” said one analyst quoted by the N.Y. TIMES.

*** I will venture an answer: No. Prices may go up in the near term…but it is very unlikely that a genuine bull market can begin with prices still this high, and so many people so deeply committed to investments that can’t possibly be profitable. Mr. Market just doesn’t work that way.

*** But what do I know? The euro continues to disappoint me. It hit yet another new low yesterday. Today, a euro is only 84 cents…and you can get 7.8 French francs for your dollar. The dollar may be “an accident waiting to happen” – but it has a lot of patience.

*** What really ails the euro? “Three things: statistics, perceptions and propaganda,” says Dr. Richebacher. “Dollar strength and euro weakness is a matter of perception. But the ‘technological gap’ – suggested by the official statistics – is a function of the yardstick rather than the cloth. Look for the dollar to fall.”

*** Gold seems to have unlimited patience too. It lost 80 cents yesterday. More on gold, money…and wealth, below…

*** AOL lost ground yesterday, even though it reported earnings in the last quarter up 100% from a year ago.

*** MSFT came out with good numbers, after the market closed. Its latest quarter showed net income up 18%, the news of which is supposed to revive the market this morning.

*** The cost of living rose 0.5% last month, after falling in the previous month. The year-to-date inflation figure is 3.5% – more than twice the nominal yield on the S&P 500. In real terms, investors are losing a lot of money: a couple of percent points to inflation, net of dividends…plus the loss in capital value.

*** There were 994 advancing issues yesterday; 1888 declined. The number of new lows rose to the highest level in 9 months – 297, while only 19 stocks hit new highs.

*** Amazon rose $3 yesterday…it is now trading at $24 and change. Cisco fell $2 5/16th.

*** “Chase Manhattan Corp.,” reports Caroline Baum on Bloomberg.com, “the second largest U.S. bank, reported today that third-quarter earnings fell 24 percent from the year- ago quarter, dragged down by a $25 million loss in Chase Capital Partners, its private banking unit that lends money to start-up companies.”

*** Bankers have a habit of lending money to whatever popular sensation is in the news… Follow their lending and it will lead you to the next financial implosion: “Back in the 1970s and early 1980s, when OPEC was having its way with the oil markets, banks lent hand over fist to the oil and gas industry,” Baum explains. “With the Organization of Petroleum Exporting Countries controlling the limited oil supply and oil demand rising, oil was as good as gold.

[But] “The price of oil collapsed in 1986, and so did the loans to the oil patch.” The next target of lending was Latin America – where the loans went bad to such a big extent the banks had to be bailed out by the U.S. Treasury. Then, “proving that memory is fleeting, banks repeated their mistake, this time with emerging markets in Asia. In between they managed a couple of forays into real-estate loans, which left them holding the bag when prices collapsed.

“The coup de grace,” says Baum, “was the banks’ eagerness to lend, under very favorable terms, to Long-Term Capital Management, the hedge fund to end all hedge funds. When the fund almost collapsed in 1998, the banks professed to be shocked, shocked, at the degree of leverage and size of LTCM’s positions. They were too shocked to explain their lack of due diligence.”

*** Well, now the bankers are heavily invested, along with the Cisco Kids, in new technology start-ups. Will those go the way of oil loans and Brady bonds?

*** Are their bargains among the crashing techs and dot.coms? Maybe. The NY TIMES reports that Stamps.com, one of Ray Devoe’s 65 Fallen Internet Angels, “now sells for less than $3 a share, down from a high of $98.50 last November – and less than half the amount of cash per share the company has in the bank.”

*** Today is a big day in history – it is the anniversary of the stock market crash of ’87. It is also the date on which Napoleon began his disastrous retreat from Moscow, in 1812. Bonaparte ended up with fewer than 5% of his troops alive – about the same percentage of investors’ money that will survive the retreat from Big Tech.

*** Episodes of collective imbecility are defined and encouraged by big, dumb words. Napoleon pushed his troops onward with appeals to ‘La Patrie,’ which had little real meaning in Paris… but was utterly senseless in Moscow. In the Nasdaq Nation, the rallying cry is ‘Technology’!

*** People are not buying as much ‘technology’ as they used to. James Paulsen, chief investment officer at Wells Capital Management: “Real personal consumption growth in technology went from an 80 percent rate in 1999 to 35 percent right now,” he said. “When there’s not real price declines, it slows the growth.”

*** But what is ‘technology?” My friend Michel notes that the word implies the use of information and electronics. “Thus, the transmission in your car is industrial equipment. But add a cheap little calculator and it becomes ‘technology.’ The word has no real meaning, and since it has no real meaning, it has taken on a magical dimension that allows people to believe that ‘technology’ will make people rich.”