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Metals on the March
(March 1, 2004) Precious metals roared March in like a lion, with platinum soaring over $900 for the first time in decades, silver trading above a 21st century-high $7, gold back over the $400 mark, and I paid $2.07 for unleaded this morning. A year-long commodities run continues, and we hear from an old voice in the gold market..
Back in 1968, the same year that the dollar became unmoored from its long-standing single price of $35 per ounce, Timothy Green wrote an excellent book about gold entitled The World of Gold, “The inside story of the mines, the markets, the politics, the investors.” This informative book did more than any other single volume to explain the workings of the world gold market to American who were just discovering gold at the time.

1968 was watershed year, politically, culturally, and financially, and it was also the year in which gold lost its traditional link with the U.S. dollar. First a two-tiered gold pricing structure was introduced by the U.S. Treasury in an attempt to slow a run on the dollar. But the dollar continued to wobble, and gold prices inched up as investors tip-toed away from the U.S. currency (sound familiar?), until finally in 1972 the dollar was allowed to ‘float’ freely against gold.

In a nutshell, monetary chaos ensued, and the inflationary 1970s began in earnest. Eight years later, gold peaked at some $800 per ounce amidst a Mideast crisis, rising oil prices, and a world-wide fear about the soundness of the dollar – this really does sound familiar, doesn’t it?

We got to thinking about old times when, out of the blue so to speak, we heard from Timothy Green again this past weekend. In the letters section of the February 28/29 Financial Times, he writes in answer to a column on gold from the previous weekend’s edition. We quote the bulk of his letter here:

“In suggesting there is a “modest” case for buying gold (The Long View, February 21-22) Philip Coggan omits the pivotal change in 1968 when a fixed price gave way to a floating one."

"For the first time investors bought gold expecting a rise rather than seeking a stable benchmark. Profit, not protection, became the motive. That fueled the run from $35 and ounce to $800 by 1980."

"By then, no one had any idea what the price ought to be; gold was becoming a casino chip. Today, in a new environment of dollar weakness and terrorist fears, I suspect the aberration of the $800 price has at last been overcome. A price of about $400 makes sense."

"Gold is winning back its traditional reputation as a “safe haven.” That has been its best credential over the past 5,000 years. The price was often stable for centuries at a time – most famously for 200 years after 1717, except during the suspension of cash payment in gold during the Napoleonic wars when the Bank of England, with no constraint, printed too many notes."

"Gold’s image is also built on its untarnishable beauty, which made it a symbol of wealth and power as much as cash money."

"…Today the fabrication of gold in jewellery and industry exceeds new mine production every year (the balance comes from scrap and central bank sales).”

What Mr. Green writes today is absolutely consistent with his conclusion to the 1984 edition of The New World of Gold:

“In my own view, what gold should do in the 1980s is reestablish some kind of consistency and stability in its price. Otherwise, what Roy Jastram christened the “Golden Constant” is in danger of becoming the golden roller coaster. And that undermines all of its traditional virtues. The great strength of gold throughout history, quite apart from its beauty and versatility as a metal, has been not that you make money by holding it, but rather that you do not lose. That ought to remain its best credential.”

Mr. Green in 1984 was in essence scolding gold when he wrote about what gold “should do,” that is, be constant and stable in price. Of course, in 1984 gold certainly had shown a roller coaster-like performance over the previous few years.

But bemoaning a lost ‘consistency’ and speaking of how gold 'should' perform in our current Age of Fiat is, I believe, denying gold's role as a store of value when our government-authorized medium of exchange (the dollar) seems increasingly to be failing in that role.

When the Bank of England, as Mr. Green puts it, ‘printed too many notes’ during the Napoleonic Wars, this was a temporary expediency – gold was still money, and money, gold. There was no question that the paper notes were a wartime substitute. And like central banks are wont to do, the Bank of England just went a little overboard. But when those paper guineas were finally redeemed and retired, England went back to doing what it did best: coining the products of the world's mines into money, hard money, what was referred to as specie, the ‘cold cash’ of gold and silver.

Today, things are different. The term ‘cold cash’ has no meaning in a world in which money is either paper or electronic impulses. Use the word ‘specie’ in conversation, and you’ll receive a blank stare. Our so-called dollar, for the past 35 years running, derives its value from the nebulous phrase “full faith and credit of the federal government.” Parse that phrase, and you find that our ‘dollar’ is defined by nothing more than the whims of politicians and bureaucrats.

Yes, gold prices were once stable for hundreds of years at a time, but those were times in which gold WAS money. What Mr. Green ignores is that to speak of the ‘price of gold’ when governments defined their currencies in terms of weights of gold is virtual nonsense, akin to saying that a gallon has shown remarkable consistency in its ability to be worth four quarts throughout history. A gallon isn’t WORTH four quarts, a gallon IS four quarts, by definition.

There was a time in the U.S. (roughly from 1793 to 1933) when an ounce of gold was $20.67. To say that it was worth $20.67 was redundant, since the dollar was defined by its weight in gold.

But our dollar started to fall apart in 1934, when FDR decreed that an ounce of gold was $35, but U.S. citizens could no longer own gold. In 1972, Nixon decreed that the dollar was no longer defined by gold at all. In 1974, President Ford signed legislation allowing U.S. citizens to own gold once again, but the dollar’s official link to gold prices was, as the kids say, history.

Today, Timothy Green asserts that, given today’s monetary and political environment, $400 gold is about where it should be. And if you can assume that today’s modest U.S. investment demand for gold won’t grow, and that the Fed and Treasury might possibly abandon their tolerance of an ever-weakening dollar, perhaps $400 is reasonable.

But consider today’s oil prices, inflationary outlook, U.S. trade deficits, growing dollar surpluses in China, Japan, and elsewhere, and the current worldwide disaffection towards all things American, including our currency. Remember that today’s $400 price was first reached 25 years ago. Throw in the inherent fragility of fiat currencies throughout history, and you can certainly make the case that gold priced at $400 is neither a casino chip nor a roller coaster, but in fact is the sole remaining thing of value that can still be had at 1979 prices.


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