"Everything you need to know about gold"
Any analysis of gold must have a correct premise. And terms used in that analysis must be clearly understood. For example…
“Are you pro-gold?” Just exactly what does that mean? Is it a political or moral issue? In other words, does someone’s position on gold indicate ideology or lifestyle choice? Can a political liberal be pro-gold? And if someone answers the original question in the affirmative, does that mean they are anti-something else?
Warren Buffett is right – and wrong – about gold. And many others are, too.
Among their various characterizations of gold are the following: it is an unproductive asset; it doesn’t ‘do’ anything; it just sits there; it’s too volatile; stocks are a much better investment.
And, of course, they are right. Up to a point.
Is silver real money? I don’t think so. But I know that my proclamation will likely draw vociferous contradictions from others who consider themselves “hard-money advocates”.
That’s okay. Let’s look at the facts.
The average cost for a loaf of bread in 1930 was ten cents ($.10). The average cost for a gallon of gasoline was also ten cents.
With gold priced in U.S. dollars at $20.00 to the ounce, you could at that time purchase two hundred loaves of bread or two hundred gallons of gasoline (or some combination thereof).
Twenty dollars of paper currency OR one ounce of gold valued at $20.00, usually in the form of a U.S. Double Eagle ($20.00 gold coin, legal tender), were equal in “purchasing power”.
Over the next four decades the cost for a loaf of bread/gallon of gasoline continued to increase such that in 1970 the respective costs were twenty-five cents/thirty-six cents. An ounce of gold (at $40.00) would purchase one hundred sixty loaves of bread/one hundred eleven gallons of gasoline. That is considerably less than the two hundred units of either item which could have been purchased in 1930. But the numbers are even worse when we look at what twenty dollars of U.S. paper currency would buy in 1970: eighty loaves of bread/fifty-five gallons of gasoline. Both gold and the U.S. dollar lost purchasing power over the forty-year period 1930-70 but the U.S. dollar was the “biggest loser”.
Time for a bit of history to help us understand what had happened historically over the course of that forty-year period. In 1933, President Franklin Roosevelt issued an executive order prohibiting private ownership of gold by U.S. citizens and revaluing gold at $35.00 to the ounce. Also, U.S. paper currency would no longer be convertible into gold for U.S. citizens. Foreign holders (primarily foreign governments) could continue to redeem their holdings of U.S. dollars for gold at the “new, official” rate of $35.00 to the ounce. But what does that really mean?
If you are a foreign holder of U.S. dollars, you had just been told that your stash of “money” (in the form of U.S. currency) was now worth forty-one percent less than previously. It was a tacit admission by the U.S. government that they had been “inflating” the money supply aggressively as evidenced by the cumulative effects of that inflation showing up in the cost of goods and services (i.e. average cost of loaf of bread/gallon of gasoline).
The Depression (1930s) and World War II (1940s) “conveniently” received much of the blame. But things progressed reasonably well (economically speaking) throughout the fifties and sixties. By the late 1960’s and early 1970’s foreign governments were demanding returns of their gold on deposit here in the U.S. Some of that gold was the result of new redemptions of the accumulation of U.S. dollars which they held and which were promised as redeemable in gold.
In 1968, the United States Government again revalued gold “officially” at $40.00 to the ounce and at the same time acknowledged a “free market” price for gold which could operate on its own, independently. However, the U.S. would not recognize the free market price in any official dealings/transactions.
By 1971 things were getting a bit dicey. Foreign governments wanted their gold, but the U.S. did not want to release it. Or, they didn’t have it. Probably some combination of both. So, in August 1971, President Nixon suspended any further convertibility of U.S. dollars into gold by non-U.S. citizens. All hell broke loose. Literally.
Prices of goods and services in the United States began rising rapidly (historically speaking) and the U.S. dollar price of gold peaked in 1980 at $850.00 to the ounce. The average price for gold in 1980 was $615.00 to the ounce.
By 1980 the average cost of a loaf of bread was $.50 (double what it was in 1970) and the average cost of a gallon of gasoline had settled out at $1.19 (several years after the Arab Oil Embargo of early 1970’s). The above stated average U.S. dollar price of gold ($615.00 to the ounce) would purchase twelve hundred thirty loaves of bread or five hundred sixteen gallons of gasoline. And the good old U.S. dollar? Twenty dollars in U.S. paper currency would buy forty loaves of bread/seventeen gallons of gasoline.
Ten years later, in 1990, a loaf of bread had increased to $.70 and a gallon of gasoline to $1.34. With gold at $338 USD/oz you could purchase four hundred eighty-two loaves of bread/two hundred fifty-two gallons of gasoline. Twenty U.S. dollars would buy twenty-eight loaves of bread/fifteen gallons of gasoline.
So where are we today? The average cost of a loaf of bread and a gallon of gasoline are approximately the same – about $2.50. With gold at $1300.00 to the ounce you can purchase five hundred twenty loaves of bread or five hundred twenty gallons of gasoline which is nearly one hundred sixty percent MORE than the amount you could have purchased with one ounce of gold in 1930.
And twenty dollars in U.S. currency will purchase eight loaves of bread or eight gallons of gasoline which is ninety-six percent LESS than the amount you could have purchased with twenty dollars in U.S. currency in 1930.
What else do you need to know? Get some gold.
Kelsey Williams is the author of two books: INFLATION, WHAT IT IS, WHAT IT ISN’T, AND WHO’S RESPONSIBLE FOR IT and ALL HAIL THE FED!
HISTORY OF GOLD
Gold emerged as money of choice through competition. Many other things (beads, grains, various industrial metals, etc) were tried throughout history. For one reason or another they didn’t work consistently over longer periods of time.
The first gold coins appeared around 560 B.C. Over time it became a practice to store larger amounts of gold in warehouses. Paper receipts were issued certifying that the gold was on deposit. These receipts were negotiable instruments of trade and commerce which could be signed over to others. They were not actual currency but are a presumed forerunner to our modern checking system.
The warehouse proprietors (‘bankers’) decided they needed to find a way to increase their profits. Earning fees from their depository and safekeeping services wasn’t enough. Since most of the gold remained in storage and most transactions involved exchange or transfer of paper receipts for the gold on deposit, they decided to issue ‘loans’ of the gold/money to others and charge interest. The cumulative amounts of gold loaned out could not exceed the amount of gold held in storage. And, hopefully, not too many depositors would ask to redeem their physical gold at the same time.
By this time, there were reasonable indications of just how much gold needed to be kept available to meet the ongoing, day-to-day withdrawal demand. The warehouses (banks) began issuing loans in the form of receipts backed by the gold held on deposit. Which shouldn’t be a problem as long as people continued to trade with their paper receipts. And occasional redemptions of receipts (withdrawals of gold from storage) were met with smiling faces. Business as usual.
It seemed to be a workable system. But apparently the ‘bankers’ were not content. They soon started issuing more loans/receipts for gold which did not exist. Of course they saw no need to inform anyone of their actions and the receipts still stated that they were redeemable in fixed amounts of gold. And when some wanted to take possession of their gold on a physical basis they could still do so. Up to a point.
Questions arose, however, as to the value of the paper currency. More and more individuals, companies, and countries opted for real money – gold. There simply wasn’t enough gold to meet the redemption demands. And to whatever extent it was available, the banks and the government didn’t want to release it.
GOLD IN THE 20TH CENTIURY
As late as the early twentieth century, U.S. paper currency was issued with a clear statement specifying that it was redeemable for specific amounts of gold (and silver) at fixed rates. In addition, gold (and silver) circulated concurrently with U.S. paper currency and were interchangeable. One was as good as the other. Supposedly.
In 1933 President Roosevelt issued an executive order “forbidding the hoarding of gold coin, gold bullion, and gold certificates within the continental United States”. Then, in 1971, President Nixon suspended convertibility of the U.S. dollar into gold by foreign nations.
For the past fifty years there has been no fixed convertibility of U.S, dollars (i.e., paper) into gold (i.e., money).
What we call money today is really just paper which we can use to buy real money – gold; if we’re smart.
Kelsey Williams is the author of two books: INFLATION, WHAT IT IS, WHAT IT ISN’T, AND WHO’S RESPONSIBLE FOR IT and ALL HAIL THE FED!