Larry Gets A Lesson On Gold

IRENE: Hello. Yes, I am a gold bug. I like gold for many reasons. It is a universally recognized form of money and the oldest form of savings. Gold, unlike paper currency, is not someone else's liability. Finally, gold cannot be printed in unlimited quantities merely on the whim of a politician or central banker. I sleep much better at night knowing that there is real substance to my wealth and not just some vague promise from a bankrupt government.

LARRY: But gold won't pay a dividend like a stock, a coupon like a bond, or interest like a savings account. And isn't it true that anyone who owns gold, prays that there is a bigger fool out there somewhere to buy it from you one day, because there is no guaranteed price for gold, like there is for a certificate of deposit at a bank.

IRENE: The bank, or government, can guarantee the price of your savings but they cannot guarantee its value, that is to say, its purchasing power. In the 1950's a gallon of gas cost 25 cents and interestingly enough, that same silver quarter from 1950, will still buy a gallon of gas today.

LARRY: Interesting, but what does that mean exactly.

IRENE: What it means is that although the prices of things may go up, their relative values stay the same.

LARRY: What is so special about gold? Why aren't diamonds good as money?

IRENE: Diamonds, like gold, are an easily portable store of value. However, unlike gold, a diamond cannot be cut into two without losing some of this value. A 2-carat diamond is worth more than two 1-carat diamonds. Gold is divisible, diamonds are not.

LARRY: OK. I can see that, but why gold? Warren Buffett once said that, "gold gets dug out of the ground in Africa, or someplace. Then we melt it down, dig another hole, bury it again and pay people to stand around guarding it. It has no utility. Anyone watching from Mars would be scratching their head".

IRENE: Those same Martians may continue scratching their heads when they see a perfectly sound pine tree get cut down, turned into pulp to make paper, which is then coloured with ink.

LARRY: While your wit may make people laugh, it doesn't answer my question.

IRENE: Gold emerged as money for the simple fact that it was the most tradable commodity. That is to say, it exchanged between sellers and buyers with the smallest exchange costs. Even today, it is still extremely liquid. An ounce of gold and twelve hundred pounds of lead have the same value. Which do you think would be easier to sell?

LARRY: So if gold is so great, why do we use paper?

IRENE: Monetary gold has a fascinating history. During the pinnacle of the Gold Standard era in the nineteenth century, gold coin circulated alongside paper notes. The two forms were interchangeable. As the nation states prepared for the First World War, they began removing gold coin from circulation, in part to amass war funds. During the war, paper notes were issued to the citizens. Afterwards, the world went unto a pseudo-gold standard, whereas US dollars and British pounds could also be held in reserve accounts, in addition to gold. Other countries could convert their dollars or pounds into gold at specified exchange rates. But the temptation for countries to inflate their currencies beyond levels the underlying gold could support, proved too great, and the system collapsed. In the United States, gold ownership was outlawed. In Europe, gold wasn't outlawed but you had to have enough money to purchase a 400 ounce banking bar. Smaller amounts were not available. After the Second World War, a new international system was developed whereupon only the US dollar would be convertible to gold, at 35 dollars to the ounce, and only by non-American citizens. All other currencies would trade within an accepted trading band to the US dollar. As time moved on, the US Federal reserve printed too much money in an effort to pay for America's Great Society and the Vietnam War. Foreigners became anxious and demanded gold in exchange for their accumulated dollars. France even deployed a battleship to New York harbor to receive their gold. On August 15, 1971 President Nixon closed the so called gold window, completely severing the last remaining tie between paper money and gold. Some economists believed that the price of gold would fall as it would no longer be supported by the dollar. Instead the opposite happened, and the dollar no longer supported by gold collapsed in value, thus driving up prices. The market price of gold increased more than twenty fold by 1980. In order to restore confidence in the dollar, Fed Chairman Paul Volcker raised interest rates to the neighbourhood of twenty percent. His strategy worked, although it caused an economic recession. People began using dollars and they sold their gold. So did European central banks. Gold fell out of favour for nearly twenty years, until the end of the century. Today, we see the same parallels, too many dollars and a gold price that has been increasing for several years. Only this time, the numbers are much, much larger.

LARRY: You sound like one of those crazy people that believe in conspiracy theories.

IRENE: There is nothing crazy about it. Gold puts power back into the hands of the people. They are no longer dependent upon the whims of central bankers, treasury officials, and Wall Street. Gold used as money is not merely an accounting device, but a real form of property that maintains its value over time without government decree. In the early 1960's, Alan Greenspan, the maestro of central bankers, explained why the ruling class has a hysterical antagonism towards gold. It is because gold and economic freedom are inseparable. Gold provides protection from the ruling class and their constant manipulations of the markets and our money. Our government is broke. It owes several decades worth of domestic savings. No nation in history has ever paid back debts of this magnitude without resorting to debasement of the money. More times than not, the debasement of the money results in the collapse of the social order. In ancient Rome, they reduced the content of the denarius coin from being nearly pure silver to less than two percent. This ended its use for international trade in the Mediterranean and likely contributed to the fall of the Western Roman Empire. Louis XIV tried to print his way out of debts incurred through various wars with disastrous results. Weimar Germany experienced hyperinflation through over-issuance of their currency to pay for World War One reparations. Chiang Kai-shek's nationalist China printed massive quantities of paper money, after consolidating the previously private Chinese banking system and funding a war against Japan over Manchuria. And there are many others. Former Soviet republics, Argentina and other South American nations, and most recently Zimbabwe, have all suffered from a collapsing currency. Aside from an invasive war, hyperinflation is the worst social calamity to befall a nation.

LARRY: That will never happen here.

IRENE: Let us hope not. But risk analysis would suggest precaution against a catastrophic event such as this, even if considered to be improbable.

LARRY: So what does one do?

IRENE: Buy gold.

LARRY: That's it!

IRENE: Yes!

LARRY: You can't eat gold.

IRENE: That is true. How do you best like your twenty dollar bills - with ketchup or mayonnaise?

LARRY: Very funny. Hah!

IRENE: Gold has retained value for 5000 years of human civilization, and despite being completely demonetized in 1971; it is still widely regarded as a store of value. Paper currencies on the other hand, continue to depreciate and eventually become obsolete. Typically this occurs because the size of debt becomes too large to service.

LARRY: But haven't we heard that debts don't matter. We owe it to ourselves.

IRENE: That expression may sound innocuous but not once it is understood that the "we" is a very different group of the people than those represented as "ourselves".

LARRY: A sobering thought indeed. Unfortunately we are out of time. Miss Smith, it has been an interesting conversation. Thank-you for coming.