By Michael J. Kosares

This year marks USAGOLD's 20th year on the World Wide Web, and this newsletter has been part and parcel of our online presence from day one. In fact, we published this newsletter in hard-copy form long before the internet came along. So it is that we took the occasion to rummage around News & Views' creaky attic and dust-off the group of golden vignettes you see immediately below. All were chosen on the basis of their being as relevant today as they were at the time of first publication – timeless and useful stuff you can store in the memory banks for the long run. We hope you enjoy reading this retrospective as much as we did putting it together. I might add that the selected archives for this newsletter are one of USAGOLD's hidden treasures. We invite you to do some rummaging around on your own.

Gold in five easy lessons

1. Don’t buy it because you need to make money; buy it because you need to protect the money you already have.

2. Don’t look at price as a barrier; look at it as an incentive.

3. Don’t buy its paper pretenders; buy the real thing in the form of coins and bullion.

4. Don’t fall prey to glitzy TV ads; do your due diligence instead.

5. Don’t allow naysayers to divert your interest; allow yourself the right to protect your interests as you see fit.

Original publication date: May, 2012

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Question: When is a billionaire not a billionaire?
Answer: When just about everyone else is a billionaire.

In post-World War I Germany, a 20-mark gold coin purchased the equivalent of twenty marks worth of goods and services in the marketplace. At the end of the nightmare German inflation in 1924, that same 20-mark gold coin (weighing roughly one-quarter troy ounces) provided the purchasing power of 14,520,000,000,000 paper marks. Those who track the nominal value of gold by itself take their eye off the prize. The investor who failed to recognize the forces driving the 1920s German gold market and took a nominal profit before the situation was remedied might very well have still lost his or her savings as the inflationary debacle moved to the next level.

Original publication date: December, 2012

Ernest Hemingway: "The first panacea for a mismanaged nation is inflation of the currency; the second is war. Both bring a temporary prosperity; both bring a permanent ruin. But both are the refuge of political and economic opportunists.”

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Yap stone money inflation

Monetarily speaking, everything progressed smoothly on the island of Yap where large stones weighing hundreds of pounds were transported around to serve as money. That is until something unforeseen happened to the value of the money. For centuries, the stones served in exchange because there wasn't much of this type of rock on Yap itself. The depreciation of the stone money began when an enterprising Western businessman realized he could produce stone money cheaply and in copious quantities on a neighboring island and transport it to Yap, where it could be used to procure goods in demand elsewhere. In other words, this oceanic cousin of John Law printed Yap stone money to buy his wares at what might be called a "favorable" discount. By this process, the yap stone money was debased until it became worthless. Little did the citizens of Yap know that they were deprived of their wealth, and their money destroyed, by the process of monetary inflation.

Original publication date: October, 2010

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Copernicus on the debasement of money

I recently ran into this interesting quote from Copernicus included in his "Essay on the Coinage of Money" (1526):

"Although there are countless scourges which in general debilitate kingdoms, principalities, and republics, the four most important (in my judgment) are dissension, [abnormal] mortality, barren soil, and debasement of the currency. The first three are so obvious that nobody is unaware of their existence. But the fourth, which concerns money, is taken into account by few persons and only the most perspicacious. For it undermines states, not by a single attack all at once, but gradually and in a certain covert manner."

Up until I came across this essay a few weeks ago, I was not aware that Copernicus had applied his genius to the insidious effects of currency debasement. This ground-breaking essay probably influenced both John Maynard Keynes (See quote top left) and Thomas Gresham of "bad money drives out good" fame. Ironically both Keynes and Copernicus were referencing currency debasement episodes in Germany. For what might have inspired Gresham, you will need to read the essay. Cobden Center's Ralph Benko says Copernicus' essay "has been translated into English several times yet those translations remained difficult to obtain for students of the monetary arts and sciences.  It has remained mostly the property of elite historians." Above we link Edward Rousen's translation that you might keep company with the knowledgeable elite.

Original publication date: September, 2016

What it would take to make the dollar as good as gold

To make a gold standard work today, the metal would have to be valued at a very high dollar price to address the imbalances already existing in the world’s reserve system, and to make it possible for the new system to function smoothly and equitably. If, for example, one were to value the U.S. gold reserve high enough to cover the U.S. national debt of over $14 trillion, gold would have to be benchmarked at over $50,000 per ounce. To cover the external U.S. debt of $4.3 trillion, it would need to be valued at $16,500 per ounce.

Editor's note: Today, the national debt is pushing $20 trillion and the external foreign-held debt is over $6 trillion. For the U.S. gold reserve to cover these obligations gold would need to be valued in excess of $70,000 and $23,000 per ounce respectively

Original publication date: March, 2011

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Computer software gone mad

With respect to the growing dominance of machines on Wall Street, I recall the old Star Trek episode that involves a visit to a planet where the inhabitants seem to be living in a state of perfect bliss. Captain Kirk knows that this cannot be right. There is no such thing as perfect happiness. As it turns out, the population is controlled not by a loathsome dictator who has drugged the population into compliance, but by a computer that has evolved sufficiently to somehow gain control of their minds. Something must be done, concludes Kirk, to break its hold. Spock comes up with the solution by instructing the computer "to resolve the value of pi" – an impossibility because its resolution, as we all remember from high school math class, is infinite. The computer spends all of its time and devotes all of its resources trying to achieve the impossible and the dictatorial hold it has on the population is released – a trick we might want to keep in mind for the day computers complete their mastery of Wall Street.

Editor's note: Similarly, Financial Times told the story in a recent issue of the text book, The Making of a Fly: The Genetics of Animal Design. It started out selling for $113 per copy at Amazon – that is, until the governing algorithm misfired between two third-party sellers. The price then skyrocketed to $23 million before someone took note and fixed the problem. We forget that computer software, and this applies to Wall Street's trading apparatus as readily as it does the Amazon pricing platform, is only as reliable and intelligent as the code by which it is instructed to operate. The practical equivalent to Mr. Spock's solution in the financial realm is to store significant capital in the form of gold and silver coins detached from potentially rebellious electronic circuitry.

Original publication date: May, 2012

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The PhD standard and what to make of it

"I’m very bullish on gold and I’m very bullish on gold mining shares. That’s because I think that the world will lose faith in the PhD standard in monetary management. Gold is by no means the best investment. Gold is money and money is sterile, as Aristotle would remind us. It does not pay dividends or earn income. So keep in mind that gold is not a conventional investment. That’s why I don’t want to suggest that it is the one and only thing that people should have their money in. But to me, gold is a very timely way to invest in monetary disorder." – James Grant, Grant's Interest Rate Observer

Editor's note: Gold is the pro-money and it is simultaneously the anti-money, depending on how you understand things combined with your perception of where we now find ourselves in financial history. Grant cleverly says, "Interest rates may be almost invisible but there is still plenty to observe. I observe that they are shrinking and that the shrinkage is causing a lot of turmoil because people in need of income are in full hot pursuit of what little of yields remains." All of which brings to mind the 2008 financial crisis and the preponderance of pundits and analysts who proclaimed loudly in its aftermath that they did not see it coming . . . . . .Quite a different story now when the warnings come at every turn.

Original publication date: September, 2016

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Nine lessons on investing your money

We introduced our readers to these nine lessons all the way back in 1999. They were passed along to us by the legendary commodity market analyst R.E. McMaster, formerly editor of The Reaper newsletter. The original source for the nine lessons was a highly regarded money manager who handled accounts for wealthy Greek and Mexican merchant families.

1. It is easier to make a fortune than keep it.

2. Intelligence is an inadequate substitute for wisdom. Wisdom fears, respects the unknown and fosters humility. Intelligence can lead to self-destructive arrogance and ultimate failure.

3. Risk must have premium, and we must understand it well.

4. There is no order. There is no formula. There is no equation that works all of the time. It works just long enough to fool just a few more of us just a little longer.

5. What we fail to remember is that a paper gain is just that. Paper. Worth nothing. Not until we say sell, and not until we get cash. Anything less is just that.

6. When the Bass Brothers in Texas write a check for real money, their money, to buy 25% of the Freeport McMoran Gold Series II, we take notice. When the Fidelity Magellan Fund buys a fifty-million in Dell computer, we yawn. So, should you. It is other people's money.

7. Slick advertising budgets, powerful computers and few slabs of marble do not, by themselves, make a great financial institution.

8. Never invest in anything you do not feel comfortable with or understand well.

9. When a thousand people say a foolish thing, it is still a foolish thing.

Original publication date: June, 1999

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Approaching gold with the right attitude, Part 1

[New Year's Eve] Owning gold and watching the show are two well-advised undertakings. Those two courses of action have paid handsome dividends over the years, both in terms of peace of mind and a healthier balance sheet. In fact, in some quarters, that prescription has created significant wealth. At the very least, it has preserved wealth over the past tumultuous decade while other, more complicated courses of action, have fallen short.

That is why armchair-economist-gold owners like Mr. Spot -- pictured left in his study -- remains content, confident and assured this New Year's Eve. He does not own gold simply to make profit. He owns it to protect the wealth he has already garnered. He keeps in mind the historical cycle described by Alexander Tyler, the 18th century historian and jurist:

"A democracy cannot exist as a permanent form of government. It can only exist until the voters discover that they can vote themselves money from the public treasury. From that moment on the majority always votes for the candidates promising the most money from the public treasury, with the result that a democracy always collapses over loose fiscal policy followed by a dictatorship. The average age of the world's great civilizations has been two hundred years. These nations have progressed through the following sequence: from bondage to spiritual faith, from spiritual faith to great courage, from courage to liberty, from liberty to abundance, from abundance to selfishness, from selfishness to complacency from complacency to apathy, from apathy to dependency, from dependency back to bondage."

He judges that we are now somewhere between the "selfishness" and "dependency" stages of Tyler's cycle, hopes that things will turn around, but keeps his diversification intact just in case it does not.

Editor's note: From time to time, Mr. Spot offers his deep-thinking on the state of the gold market here at News & Views. When asked which assessment he would like us to quote for this issue, he chose the foregoing saying, "I always liked that Alexander Tyler quote. It goes to the heart of the rationale for gold ownership under current circumstances."

Original publication date: January, 2014

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Approaching gold with the right attitude, Part 2

“It is related of the illustrious Sandy McHoots that when, on the occasion of winning the British Open Championship, he was interviewed by reporters from the leading daily papers as to his views on Tariff Reform, Bimetallism, the Trial by Jury System, and the Modern Crave for Dancing,all they could extract from him was the single word ‘Mphm!’ Having uttered which he shouldered his bag and went home to tea. A great man. I wish there were more like him.” P.G. Wodehouse

The fact of the matter, though rarely discussed, is that gold ownership has more to do with personal philosophy than it does with finance and economics -- though this is not an attempt to diminish the role of the markets in our everyday lives. Sometimes we all get overly wrapped up in the drama of the day. Things need to be put in perspective and that’s where gold plays its most fulfilling role. These days opening the morning newspaper or switching on the evening news can be akin to an assault as the media seem to compete on a daily basis to see who will do the best job of ‘shocking and awing’ us. Quite often, we let that assault get the better of us -- the blood pressure rises and the mood sours. McHoots, as Wodehouse describes him, harbored a well-cultivated disdain for that sort of thing. My guess is that McHoots was a gold owner. How could it have been otherwise?

"I am not bound over to swear allegiance to any master; where the storm drives me I turn in for shelter.” – Horace, 65-8 B.C

Original publication date: June, 2003

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The ethics of interest rates

The dramatic breakdown in the real rate of return on dollar-based savings instruments is perhaps the most important financial event of the past decade; save perhaps gold's rise as its most effective counter measure. The absence of a real rate of return makes it impossible to preserve, let alone grow, wealth by traditional means. It destroys incentive and nurtures a culture of economic uncertainty. It promotes speculation and undermines the existing social contract. It makes it difficult for the federal government to obtain financing and for individuals to plan a comfortable retirement. In short, the problems associated with a negative real rate of return run deep and create an environment in which gold demand flourishes.

Original publication date: April, 2014

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For gold owners, the inflation-deflation debate is purely academic

No one knows off which side of the tight wire—hyperinflation or deflationary crash—the economy will fall. Needless to say, neither proposition is very comforting from an investor’ point of view. Yet from the point of view of the gold investor, the inflation/deflation debate is purely academic. Gold will protect and preserve your assets in either instance. Gold is the time-honored, historically proven hedge against economic disasters of all descriptions. Both deflationists and inflationists recommend gold as the portfolio item to hedge against disaster. In a deflationary crash,gold becomes the only asset left standing after all others are destroyed by default. In an inflationary debacle, gold survives the destruction of the currency and retains its value after all other assets are wiped out. Hedge your portfolio with gold and leave the inflation/deflation argument to the economists.

Original publication date: June, 2003

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The seven ages of gold

"The Seven Ages of Gold," says the Official Monetary and Institutions Forum, "contains detailed statistics plotting long-run changes in central banks’ policies on buying and selling gold over seven distinct periods during the past two centuries, each lasting an average of around 30 years. The latest ‘Rebuilding’ Period VII has been underway since the financial crisis in 2008. In these eight years, central banks in both developed and developing countries have shown a new fondness for the yellow metal, rebuilding gold’s importance as a bedrock of most countries’ foreign reserves."

There are three components to the change in central bank activity in the gold market. The first is actual purchases in the open market. China is the primary participant but others, like Mexico and India have been players. The second is the nationalizing of internal production. China, the leading producer, and Russia, the third largest producer, both channel mine production into national reserves. The third is the abstinence from sales and leases. Once a major contributor to the supply, central banks no longer offer metal for these operations in any significant volume. All three components have an important impact on the supply available for ordinary purposes in the private sector like jewelry, investment, etc. Eventually, these trends will affect prices when you consider the second part to this equation, i.e. production has levelled out and there has not been a new discovery of any significance for a very long time.

Editor's note: Central banks play an important role in the supply-demand equation. The fact that we have entered a new 30-year period of "new fondness for the yellow metal," according to this study, is one we thought of singular importance to anyone wanting to understand the longer-term forces at work in the physical gold market.

Original publication date: September, 2016

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Keynes would be buying gold hand over fist

How might Keynes, as famous for his investing prowess as he was for his advice to statesmen, have reacted to these circumstances in his own investment portfolio? Writing in the Wall Street Journal, Richard Hurowitz, publisher of the Octavian report, offers some interesting conjecture on that score:

"Keynes understood that sound money and stable exchange rates were necessary conditions for world prosperity and peace. Contrary to popular belief, he believed that in most cases currency devaluations were counterproductive, their benefits often outweighed by increased domestic costs and the undermining of sovereign credit. ‘There is no subtler, no surer means of overturning the existing basis of society than to debauch the currency,’ Keynes observed in 1919. He consistently argued that a sound currency was critical to a functioning free economy. He understood that such a currency would ultimately create much greater wealth than the endless and vicious cycle of improvisational debasement we see playing out globally today.

Were Keynes alive today, he would likely be arguing along with German Chancellor Angela Merkel for more monetary discipline and a return to a more balanced international system. No doubt, however, his neo-Keynesian acolytes would be dismissing his concerns as hopelessly outdated and reactionary.

Keynes was an economic theorist, but he was also a clear-eyed market analyst, and a passionate and committed speculator for his own account and for Cambridge University. If he took in today’s economic vista of near-zero interest rates and quantitative easing, it is clear that he would be buying gold hand over fist—regardless of what his disciples might think.”

Original publication date: December, 2015

A telephone call from an old client and friend

I had the happy occasion recently of receiving a telephone call from an old client and friend – a physician safely retired near the sea and alongside one of the South's oldest golf clubs. It was good to hear from this student of the markets – one of life's steady and thoughtful practitioners. McHoots probably would have counted Doc, as I will call him, a friend, since he thinks much like the character so skillfully described by Mr. Wodehouse (See above "Approaching gold. . ." Part 2). Back at the turn of the century, Doc foresaw much of what would happen economically in the United States and purchased what he considered enough gold to see him through it.

Vanity Fair's Matthew Hart offers this masterfully written overview of those early years of the 21st century:

"An ounce of gold cost $271 in 2001. Ten years later it reached $1,896 – an increase of almost 700 percent. On the way, it passed through some of the stormiest periods of recent history, when banks collapsed and currencies shivered. The gold price fed on these calamities. In a way, it came to stand for them: it was the re-discovered idol at a time when other gods were falling in a heap of subprime mortgages and credit default swaps and derivative products too complicated to even understand. Against these, gold shone with the placid certainty of received tradition. Honored through the ages, the standard of wealth, the original money, the safe haven. The value of gold was axiomatic. This view depends on a concept of gold as unchanging and unchanged—nature's hard asset."

It was in that time frame, when gold was stuck in the $300 to $400 per ounce price range (a time not unlike our own), that Doc transferred roughly $500,000 of his net worth into gold coins. His goal, like most of our clientele, was not to become wealthy through gold ownership, but to protect the hard-earned wealth he had already attained. After we had exchanged the usual pleasantries, the conversation turned once again to the subject of gold and the reason for his call.

"I still have all the gold I purchased from you," he said simply. "Every ounce of it. It's now worth well-over $2,000,000. I want to thank you again for your book and your advice. It made a great difference to me as you may have gathered."

(Ed note: At the interim top – the $1896 Matthew Hart mentions above – Doc's holdings reached a value well over $3,000,000!)

"That," I said, "is the kind of story we enjoy hearing around here, Doc. I'm happy for you. Happy gold could help you like it did."

"We had some very interesting conversations back in the day," he said with a chuckle, "and gold did for me what we thought it would, what you said it would."

I mentioned to him that the book to which he referred, "The ABCs of Gold Investing - How to Protect and Build Your Wealth with Gold," was now in its third edition and still introducing people to the advantages of owning the metal and advising readers how to go about it. The conversation then drifted to other of life's pursuits for both of us and ultimately to the purpose of his telephone call – a fresh gold transaction. We completed our business and I left the conversation with a strong sense of satisfaction. We get a steady stream of phone calls like Doc's, but it is always good to hear real-life tales about gold's role in preserving our clients' assets.

The fact of the matter, though rarely discussed, is that gold ownership has as much to do with personal philosophy as it does finance and economics -- though by that I do not mean to diminish the importance of financial markets, or politics for that matter, in our everyday lives. Things, though, do need to be kept in perspective and gold helps toward that goal -- once one understands its true nature. In many ways, gold ownership, as Doc would likely attest, is a rational portfolio decision that suits the times, but it is also a life-style decision. As Richard Russell, the venerable purveyor of the Dow Theory Letters puts it, "I still sleep better at night knowing that I hold some gold. If or when everything else falls apart, gold will still be unquestioned wealth." And one that helps you spend a quiet summer enjoying family and friends no matter what happens on Wall Street or in Washington D.C.

Editor's note: It is fitting to end this retrospective with Doc's story. We'll let it speak for itself.

Original publication date: July, 2015

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Michael J. Kosares is the founder of USAGOLD and the author of "The ABCs of Gold Investing - How To Protect and Build Your Wealth With Gold." He has over forty years experience in the physical gold business. He is also the editor of News & Views, the firm's newsletter which is offered free of charge and specializes in issues and opinion of importance to owners of gold coins and bullion. 

http://www.usagold.com/

Disclaimer - Opinions expressed on the USAGOLD.com website do not constitute an offer to buy or sell, or the solicitation of an offer to buy or sell any precious metals product, nor should they be viewed in any way as investment advice or advice to buy, sell or hold. USAGOLD, Inc. recommends the purchase of physical precious metals for asset preservation purposes, not speculation. Utilization of these opinions for speculative purposes is neither suggested nor advised. Commentary is strictly for educational purposes, and as such USAGOLD does not warrant or guarantee the the accuracy, timeliness or completeness of the information found here.

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