Invest in Gold
Invest in Gold: A Brief History
A Daily Reckoning White Paper Report
There are many ways that people have chosen to store value through time, and some make a lot more sense than others.We can talk about history but even now some agricultural communities use cattle – and aside from these Texas ranchers there are quite a few in other parts of the world too!
Let’s think about what makes a good storehouse for value:
- Durability – cows don’t last forever and are additionally susceptible to drought, predators, hungry farmers and many other forms of abuse.Some think of stockpiling timber, or coal but they don’t fit the bill.
- Value / Storability – It is a lot easier to hoard something when it is very valuable per unit of volume.For a period of European history tin was popular – unfortunately there is lot of it so one had to carry quite a bit around to do business.
- Transferability – Land is quite valuable when it’s in the right place.No one could say that holding a square mile in downtown London is bad.But land doesn’t move and as a result without selling factional interests it is extremely difficult to use in transactions.Things that can be carried or even better these days moved electronically are best.They should also be safe to store – uranium and its ilk drop off the list rather quickly.
So after this short background what is best?Portable solid objects, generally metals or gems, have functioned for thousands of years in this role.Many are rare and as a result valuable, some are very compact in comparison to their value, and they can be effectively transferred so long as they can be held safely.
That brings us around to gems and gold and silver. I’ll leave gems for another day and say straight up that for thousands of years gold has been the best storehouse for value, and should be a part of your portfolio today.
One of the keys to understanding the potential value of gold for you is to take a short tour of how fiat moneys as we know them developed.I’ll stick to the European history but know that in China there are many parallels.
Somewhere along the way, back in our prerecorded economic history, gold became something that people valued.Perhaps it was the sparkle, or one of the physical properties that attracted us, but humans began to keep gold and trade it for goods that other people produced.
Worldwide gold coins came next.In 1091 B.C. gold squares were legalized in China as a form of money. In 560 B.C the first coins made purely from gold are minted in Lydia, a kingdom of Asia Minor. In 1284 A.D. the first gold ducat was introduced and quickly became the most popular coin for over 5 Centuries. That same year, Great Britain issued its first gold coin.
The history of gold as a form of money is rich and full of stories of fallen empires, sunken ships, and gold rushes. After the discovery of North America by Europeans the continental powers rushed to gain control over more sources of gold.This created enormous wealth for those like Spain and Portugal, and in an amusing turn, a swell in the “money supply” of gold and a period of price adjustment – not unlike a swell in inflation.
One of the key issues with gold or silver as a means of payment is authentication on the spot.We can all remember movies with one character or another biting a coin.Mints stamped clear images of the sovereign or lord, added serrated edges to show when the coin was “cut” or “shaved” and generally tried to make it easier to deal with on a daily basis.
Since people generally didn’t trust their governments any more then than they do now there were tests devised to demonstrate the high quality of the national coin.A good example is England, where the Bank of England was (and is) responsible for minting the coins.As each batch is completed, a sample from this batch is randomly chosen by the Mint, labeled and placed into a Pyx – a locked safe where keys from multiple parties are required to open the box.
At the Trial of the Pyx, these parties, typically with competing interests, come together to test the coins set aside for weight and fineness based on an agreed trail plate that was cut as the keys were divided and a piece given to each key caretaker.If the tests are successful the Mint is publicly declared to have been minting proper coins, if not there’s trouble.
In his role as Master of the Mint, Sir Isaac Newton was challenged in 17xx in a Trial of the Pyx based on the 1707 Trial Plate.The coins turned up to be below quality.Now before we think that one of the most intelligent humans on record made a mistake, after investigation it was discovered that the Trial Plate was cast too fine.QED indeed!
At some point, some claim surrounding the time of the Hanseatic League, traders functioning as go betweens would issue receipts to merchants for whom they stored gold, which would be redeemed by other merchants who received these pieces of paper.This was the distant beginnings of the development of paper money as a receipt backed 100% by tin or silver or gold.
Later institutions grew that became what we would recognize as a bank – a firm in the business of taking deposits of value, storing them, and transferring them upon demand by the owner.Banks made money by charging fees for the service, the “money supply” was finite and measurable (if not known), and the world at least functioned, albeit with some wild swings in fortunes.
One of the points of the foregoing is that using metals, even gold, on a day to day basis has its drawbacks.It leaves one subject to attack in the streets, bent under a load of metal in the pocket, and forever trying to determine if that piece of eight is for real.Enter paper money.
In xxxx in yyyyyyy, the first genuinely recognizable paper currency was issued by zzzzzzz.While this still had 100% backing it was finally useable on a day to day basis.This certainly didn’t look like a dark path at the time – metal behind the currency after all, but it was this event that put us all on the slippery slope we are on today.
When gold was loaned to sovereigns by what we would today call bankers, there was a huge amount of counterparty risk, but the relationship was clear – the king still needed gold to run the country.
As governments consolidated their hold on the issuance of paper money however, temptation began to rear it head.After a knock down drag out Presidential campaign in 1892(?) fought mostly over the choice between silver and gold as the backing for US currency, William Jennings Bryan lost and gold won.In 1900 the U.S. adopted the gold standard for its currency.
At this point is was considered a requirement for contract in US dollars to have a gold based provision – that if the amount of US dollars required to complete the contract did not hold the same value in terms of gold, then the creditor could demand additional US dollars or payment in gold.
The Federal Reserve Act of 1913 accelerated the slide, and then in the midst of the depression, Franklin Roosevelt really put the hammer down.In 1933 he banned the export of gold, the holding of gold by individuals (including confiscation), and the gold linked contracts were legislatively ruled to be invalid.The currency was still backed by gold but no one could enforce the provision.
In 1944, The Bretton Woods agreement set out to form a new standard and set par values for currencies in terms of gold and obligated member countries to convert foreign official holdings of their currencies into gold at these par values.The Bretton Woods agreement also established the International Monetary Fund and the World Bank. These two institutions would be the police for countries attempting to print more currency than their gold reserves would allow.
On August 15, 1971, then President Richard Nixon closed the gold window, which in effect took the U.S. dollar off the gold standard. Since that time, there has been no correlation between gold and the U.S. dollar.
In 1973, gold was allowed to float and by June gold reached a price of $120 per ounce. One year later December 1974, Congress lifted the ban on gold purchases by individuals, and soon U.S. based investors were buying gold for their investment portfolios.
One other point of interest… In 1999, the European Union issued the euro currency backed by the new European Central Bank, which holds 15% of its reserves in gold.
Invest in Gold: A Case For Gold In Your Portfolio
Diversification, and asset allocation are portfolio buzz words, that while they might sound new, are terms that have been used for decades by portfolio theorists.
Using portfolio diversification can greatly reduce the overall risk of your investment portfolio. This thought has been proved time and time again from Henry Markowitz to J.P. Morgan’s Risk Metrics.
So, what better addition to your soon to be diversified investment portfolio than a position in gold?
Gold and the U.S. dollar (and dollar denominated assets) generally move in opposite directions and that’s been the case for years. With the dollar in a long-term decline, offsetting this with some gold simply makes good investment sense in order to maintain purchasing power and for appreciation.
Since 2001, for instance, gold has risen 78% and the U.S. dollar has declined 30%,(using the dollar index).
If we go further back in time, we see that the dollar has lost about 95% of its purchasing power since 1913. And since 1971, when the U.S. removed the dollar from the gold standard the dollar has fallen 70%!
Invest in Gold: One Last Thought…
No paper currency in the world has ever survived. They’ve all eventually become worthless. Gold has not. And while we don’t believe the dollar will become worthless, we do believe it will continue to depreciate as it has since coming off the gold standard in 1971, and this should indicate a continuation of the gold rally that began in 2001.
Related articles on Investing in Gold:
Can’t Go Home Again – 03/21/2006
by Justice Litle “What if gold were to climb to new highs, breaking the $1,000-an-ounce barrier, and never return from whence it came? With apologies to Thomas Wolfe, what if the bankers can’t go home again?”
The End of Dollar Hegemony, Part I – 02/22/2006
by Hon. Ron Paul of Texas “During the 1970s the dollar nearly collapsed, as oil prices surged and gold skyrocketed to $800 an ounce. By 1979 interest rates of 21% were required to rescue the system.”
A Golden Imagination – 02/12/2006
by The Mogambo Guru “In case you want to test your imagination, Sprott Asset Management says that they can easily imagine $80,000 per ounce. And now, I am imagining it and having pleasant little daydreams about it, too.”
Related links on Investing in Gold:
Kitco.com – one of the world’s premier retailers of precious metals.
World Gold Council– The global advocate for gold.
Gold-Eagle– An informational site that provides articles, analysis, and charts about gold investment trends.
The Daily Reckoning Gold Page –The Daily Reckoning is a freewheeling Web site for libertarians,
gold bugs and doom enthusiasts of every stripe.
The Gold Rush – A complete compendium on the California Gold Rush.
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