A Gold Bug’s Life

[Publisher’s note: We’ve been having this great ‘gold vs paper money’ debate for some time now. In fact Port Phillip Publishing’s spiritual founder Bill Bonner has been thinking, writing about and buying since it was in the doldrums in the late nineties.

(By the way, our deal with Penguin Random House Australia to mail The New Case for Gold to readers who request it is still in place. But there are only 7,000 copies. And over half are gone already. If you want to reserve one of the ones that remain, click here.)

In this essay we give Jim Rickards a well-earned breather. Instead we go to a 12-year-old Classique from Bill, written in 2004. He takes a typically elegant look at the long history of the yellow metal and shows us why our loyalty should still lie with this steadfast currency… Enjoy…]

Gold and dollars both have a future — but gold’s future is brighter

Mr. James Surowiecki wrote a wise and moronic piece on gold in the New Yorker. His wisdom is centred on the insight that neither gold, nor paper money are true wealth, but only relative measures, subject to adjustment.

Gold or not, we’re always just running on air,’ he wrote. ‘You can’t be rich unless everyone agrees you’re rich.

In other words, there is no law that guarantees gold at $450 an ounce. It might just as well be priced at $266 an ounce, as it was when George W. Bush took office for the first time. That was just four years ago. Since then, a man who counted his wealth in Kruggerands has become 70% richer.

But gold wasn’t born yesterday…or four years ago. Mr. Surowiecki noticed that the metal has a past, just as it has a present. He turned his head around and looked back a quarter of a century. The yellow metal was not a great way to preserve wealth during that period, he notes. As a result, he sees no difference between a paper dollar and a gold doubloon, or between a bull market in gold and a bubble in technology shares.

In the end, our trust in gold is no different from our trust in a piece of paper with ‘one dollar’ written on it,’ he believes. And when you buy gold, ‘you’re buying into a collective hallucination — exactly what those dot-com investors did in the late nineties.’

Pity he did not bother to look back a little further. This is, of course, the moronic part. While Mr. Surowiecki has looked at a bit of gold’s past, he has not seen enough of it. Both gold and paper dollars have history, but gold has far more of it. Both gold and dollars have a future too. But, and this is the important part, gold is likely to have more of that too.

As rich as Croesus

The expression, ‘as rich as Croesus,’ is of ancient origin. The king of historic Lydia is remembered, even today, for his great wealth. Croesus was not rich because he had stacks of dollar bills. Instead, he measured his richness in gold. No one says ‘as poor as Croesus,’ do they? We have also heard the expression, ‘not worth a continental,’ referring to America’s Revolutionary-era paper money. We have never heard the expression, ‘not worth a Kruggerand.’

Likewise, when Jesus said, ‘Render unto Caesar that which is Caesar’s,’ he referred to a denarius, a coin of gold or silver, not a paper currency. The coin had Caesar’s image on it, just as today’s American money has pictures of Lincoln, Washington or Jackson on them. Dead presidents were golden back then. Even today, a gold denarius is still about at least as valuable as it was then. America’s dead presidents, whose images on printed in green ink on special paper, lose 2% to 5% of their purchasing power every year. What do you think they will be worth 2,000 years from now?

A few years before Jesus, Crassus, who had made his fortune on real estate speculation in Rome, decided to put together an army to hustle the east. Alas, such projects almost always meet with disaster; Crassus’s was no exception. He was captured by the Parthians and was put to death in an unusually cruel and costly way. But he did not end his days with paper money stuffed down his throat…and certainly not dollar bills. No, they poured molten gold down his gullet — or so the story has it.

Gold has a long history. And during its history, many was the time that humans were tempted to replace it with other forms of money — which they believed would be more convenient, more modern, and most importantly, more accommodating. After all, gold is hard to find and hard to bring up out of the earth. As a result, its quantity is always limited — by nature herself. Paper money, by contrast, offered irresistible possibilities. The list of bright paper rivals is long and colourful. You will find hundreds of examples, from assignats to zlotys. But the story of paper money is short and always sad. Since the invention of the printing press, a new paper dollar or franc can be brought out at negligible cost. Nor does it cost much to increase the money supply by a factor of 10 or 100 — simply add zeroes. It may seem obvious, but adding zeroes does not add value.

Still, the attraction of being able to get something for nothing has been too great to resist. That is what makes goldbugs so irritating: They are always pointing it out. Even worse, they seem to enjoy saying that ‘there ain’t no such thing as a free lunch,’ which comes as a big disappointment to most people.

Once people were able to create ‘money’ at virtually no expense, no one ever resisted doing it to excess. No paper currency has ever held its value for very long. Most are ruined within a few years. Some take longer. Even the world’s two most successful paper currencies — the American dollar and the British pound — have each lost more than 95% of their value in the last century, with is especially remarkable since both were linked by law and custom to gold for most of those years. For the dollar, the final link to real money was not cut until August 15, 1971. That was when the world found out what the greenback was really worth — nothing much.

Whatever promises the Feds made with regard to the dollar, they could unmake whenever they wanted.

Some paper currencies are destroyed almost absentmindedly. Others are ruined intentionally.

But all go away eventually. By contrast, every gold coin (and silver, for that matter) that was ever struck is still valuable today — and the coins almost always have more value than when they first came out of the mint.

Bill Bonner


Limited Special Editions of Jim Rickards’
The New Case for Gold

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James G. Rickards is an American lawyer, economist, and investment banker with 35 years of experience working in capital markets on Wall Street. He is the author of The New York Times bestsellers Currency Wars and The Death of Money. Jim also serves as Chief Economist for West Shore Group.

We have printed and are shipping just 7,000 Special Australian Edition copies of his latest book The New Case for Gold. (All you need is a valid Australian mailing address.) Don’t miss out. To reserve your copy, click here.

Money Morning Australia