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A sovereign tale of gold's historic undervaluation

 -- Published: Monday, 1 May 2017 | Print  | Disqus 

By Michael J. Kosares

Oil, gold and a hoard of British sovereigns stashed in an old piano

“British officials are trying to trace the owner of a trove of gold coins worth a ‘life-changing’ amount of money found stashed inside a piano. A coroner investigating the find on Thursday urged anyone with information to come forward. . . Anyone wanting to make a claim has until April 20, when coroner John Ellery will conclude his inquest." – Associated Press, London, UK

The above notice was originally posted in the public interest at USAGOLD's online daily newsletter. Unfortunately, as you have just read, the coroner's due date is passed. Thus, if you happen to be the frugal individual who stashed that life-changing amount of money in the piano (a total of 913 old British sovereigns in hand-stitched pouches) and neglected to make your claim, you are now officially out of luck.

When I first read about the gold hidden in the piano, put away no doubt for a rainy day, I was reminded of the settlement between King Ibn Saud of Saudi Arabia and a consortium of oil companies on rights to that country's vast oil riches in the early 1930s. That too involved a stash of British sovereigns – 35,000 of the roughly one-quarter ounce gold coins.

British sovereigns happen to be one of the most sought-after, accumulated and stored pre-1933 gold coins in the world, so it is no surprise that forgotten hoards of the coin turn up every once in a while, nor is it a surprise that Ibn Saud would have asked to be paid in these highly liquid, universally acceptable gold coins.  We sell many thousands of this item annually.  Some go into safe deposit boxes.  Some get buried out on the property.  Some get stashed in the piano.  Most are kept in the event of a social, political or financial breakdown, or some other unexpected calamity, against all of which the gold British sovereign has been a direct hedge for centuries.

At the time of Saudi Arabia's oil concession, British sovereigns were valued at $8.24 each, or $288,365 for the 35,000 coin lot. The price of oil in 1933 was about 85¢ a barrel. A British sovereign, as a result, could buy 9.7 barrels of oil. Today those same sovereigns would bring a little less than $10.5 million at melt value ($298 each/$1265 per ounce gold price) and a barrel of oil is selling for about $52. Thus, today a British sovereign can buy a little less than six barrels of oil — a statistic that gives you an inkling of gold’s current under-valuation. For gold to buy the same amount of oil now that it did in 1933, the price would have to go to $2150 per ounce. It may be no coincidence, and it certainly reinforces the notion of gross undervaluation, that the inflation-adjusted price of gold in 1980, when gold traded at $850, would be in the vicinity of $2400 today. (Please see chart below courtesy of

Daniel Yergin, renowned expert on the oil industry, offered this interesting historical anecdote on the logistics of making that payment to Ibn Saud in his Pulitzer Prize winning book, The Prize – The Epic Quest for Oil, Money, and Power:

“The only remaining problem was how to obtain that much gold. Because America had just gone off the gold standard, Socal’s efforts to dispatch the gold directly from the United States were turned down by Assistant Secretary of the Treasury Dean Acheson. But finally, the Guaranty Trust’s London office, acting on behalf of Socal, obtained thirty-five thousand sovereigns from the Royal Mint, and they were transported on a ship belonging to the P&O line. Care had been taken that all the coins bore the likeness of a male English monarch, and not Queen Victoria, which it was feared, would have devalued them in the male-dominated society of Saudi Arabia."

Had Ibn Saud known that he was sitting on a massive pool of oil that would make Saudi Arabia one of the most important piece of real estate in the world, he might have asked for more. He did however understand the ultimate value of a paper promise, hence the payment in hard, yellow metal. Legend has it that he counted all 35,000 British sovereigns himself. To this day, the Gulf kingdoms becomes squeamish whenever it appears the Fed is printing too much paper currency. With that in mind, I would not be surprised to learn that those 35,000 British sovereigns still reside in the monarchy's treasury.


• With reports circulating in the media that the Trump administration is preparing an executive order to withdraw the United States from NAFTA, I thought it might be interesting to review how much of the silver consumed in the U.S. annually comes from Mexico and Canada.  In a nutshell, according to the U.S. Geological Survey, of the 8100 tonnes consumed by the United States during 2015, 6700 tonnes were imported.  Of that, 54% came from Mexico and 26% from Canada.  In tonnes that translates to 3600 tonnes from Mexico and 2100 tonnes from Canada, or over 70% of the silver consumed (5700 tonnes).  The U.S. Treasury strategic stockpile is less than 500 tonnes. Also, consider the impact of a border adjustment tax in this context.

• Now let's take a look at gold from the same perspective: In 2015, the United States imported 265 tonnes of gold for consumption, according to the U.S. Geological Survey.  Of that, 41% (109 tonnes) came from Mexico and 19% (50 tonnes) from Canada, or 60% of the total consumption.  The United States is in somewhat better shape on gold than silver in terms of domestic availability, i.e., it exports 500 tonnes per year, a somewhat nebulous figure in that it includes outflows from foreign stocks at the New York Federal Reserve. The U.S. produces 200 tonnes per year from domestic mines and holds 8100 tonnes at the Treasury Department.  Nevertheless, Mexico's and Canada's imprint on U.S. gold fundamentals is noteworthy.

• Former Fed chairman Alan Greenspan offered his opinion on the Trump tax plan and it was not exactly complimentary. He says the problem is in the arithmetic, and that the plan will lead to larger deficits and higher interest rates. "You're going to get a very large budget deficit," he said. That perhaps gives us an inkling how Congressional conservatives are likely to react to the plan.

• At publication time, gold and silver are trading at the $1267 and $17.38 levels respectively. Though down from highs achieved in mid-April, gold at current prices has carved out a nearly 9% gain so far in 2017. Silver, which has experienced a sharper downside correction (see chart), is up about 6% on the year. Gold's high for the year thus far is $1289 posted in mid-April. Silver's high was $18.51. By way of comparison, the Dow Jones Industrial Average has eked out a 5.5% gain thus far this year.

• Commerzbank reports a pick-up in gold demand in China. Demand for March was 56% higher than same month last year. Silver demand is also up 42% over last March.

• "Hedge funds," says Bloomberg, "increased their wagers on a gold rally to the highest since November, betting that this year’s 11 percent advance has more to go. Investors are also loading up on the metal through exchange-traded products, pouring $487 million into SPDR Gold Shares [in a single day]. That was the biggest daily inflow into the world’s top bullion ETF in seven months."

• "A Yale University survey found that a majority of investors believe simultaneously that the market is too expensive and that stocks will rise further. The psychology of 'too expensive, but can sell to a greater fool before the crash' is a hallmark of dangerous speculative excess." – John Authers, Financial Times

• “There’s an appetite for storehouses of wealth at this point. Rather than run the risk of having your dollars eroded on a relative basis, you can use gold as a life raft to sort of avoid a sinking ship.” – Peter Sorrentino, chief investment officer of Comerica Asset Management Group

• A good many gold analysts will attribute this past month's sharp rise to the geopolitical environment, which is fraught with danger to say the least and certainly a contributor.  But that’s not the whole of what is driving the gold market in recent days.  A second, and not-to-be-underplayed, factor is the prevailing and publicly well-cultivated policy of the Federal Reserve toward interest rates, up to and including Janet Yellen’s most recent bit of guidance: "Looking forward, I think the economy is going to continue to grow at a moderate pace. Our job is going to be to try to set monetary policy to sustain what we have achieved.”  The markets will read “accommodation” in those words meaning the Fed is likely to make sure the interest rate tracks behind the inflation rate and create a negative real rate of return on yield-bearing assets.  That latter, a negative real rate of return, has underscored, driven and sustained  bull markets for gold in the past.

• George Milling-Stanley of State Street Global Advisors says: "By the end of the year or early next year, I believe gold could test the high end of the range of $1,350 to $1,400." He thinks gold's "tempered rise is actually encouraging" in that it points to a more sustainable rally.

* Analyst Paul Ebeling starts his brief but revealing trek through historical crises by saying: "Gold is known as an inflation hedge, but its role as a crisis hedge is even more important. Gold is anti-fragile, to use the term coined by risk analyst and bestselling author Nassim Taleb." He goes on from there to list the 1930's deflationary breakdown, the Weimar hyperinflation of the 1920s and the Cyprus banking crisis of 2013 as examples of different types of crises in which gold owners won out.

• CFTC Commitments of Traders showed gold net longs at a five-month high through April 18.


RELATED READING: Past few days a fractal event for the gold market. . . .An opinion piece originally posted at USAGOLD's online newsletter and receiving considerable attention across the world wide web. Even the powerful entities that try to manipulate the gold price must answer ultimately to free market forces. . . . .

• "Since the beginning of 2017, the US dollar has struggled against nearly every major currency, calling into question the idea that the US dollar is still in a bull market. Indeed, since the dollar made its cyclical high on the first day of 2017 trading, it has put in a series of lower highs and lower lows no matter how you measure it. The possible trend change is no doubt aided by President Trump  and several of his cabinet members making public statements to the effect that the US dollar is “too strong”. We’d also remind readers that any sort of deficit spending is likely to be financed from foreign sources, since US domestic savings is already at a low level. Such a scenario would add to the pressure on the dollar." – Bryce Coward, Gavekal Capital

• Paul Tudor Jones, the widely-followed hedge fund manager, says that low interest rates instituted by central bankers around the world have ballooned U.S. stock market valuations back to 2000 levels, right before the dot-com bubble burst and shares plunged – a situation he said should be "terrifying" to central bankers, including the Fed's Janet Yellen.

• Gold analyst, Switzerland's Egon von Greyerz, in an article titled If You Understand History and Economics You Understand Gold: "How can ordinary people ever understand the importance of gold when they are continuously fed with false and distorted facts. The latest publication to publish false and ignorant propaganda on gold is the British weekly magazine the Economist. The article begins with a graph of gold starting in September 2011. Anyone who knows anything about gold recognises that this is the time when gold reached a peak of $1,930. Between 1999 and 2011 gold had gone from $250 to $1,930 which is an increase of almost 700%. During the same period, the Dow was virtually unchanged and the UK index, the FTSE 100 was down 3%. So whilst gold was up 8x during those 11 years, stock markets were static but the journalist did not mention this. Instead, he starts the graph at the very top of gold after an 8 year rally."

• Writing for Forbes magazine, Olivier Garret cites the 'Father of Logic' on
why gold makes the best money: "Aristotle, a Greek philosopher, student of Plato, teacher of Alexander the Great, and the father of the field of logic, listed four characteristics of any sound form of money.

1. It shouldn’t be perishable. That’s why—despite all claims to the contrary by preppers—stocked, canned food doesn’t make good money.

2. It should hold a large amount of value compared to its weight and size. That’s why flat-screen TVs don’t make good money.

3. It should be easy to separate and distribute, as well as re-combine. That’s why artwork doesn’t make good money.

4. Intrinsic value. It has value in and of itself; it doesn’t derive its “worth” from something else. That’s why unbacked paper currencies (aka, all of the modern world’s currencies) don’t make good money."

• Jesse Felder (The Felder Report) puts the prospects for gold succinctly: "Finally, from a fundamental standpoint, gold has perhaps never been cheaper relative to financial assets than it is today. In other words, once it does break out there is plenty of potential to the upside."

• 8 of the 17 reasons why you should own gold:

• Gold has no counter-party risk in a 2008-style crash.
• The continual devaluation of the US dollar is inevitable.
• Gold will eventually return to its true historic role as money.
• The destruction of government balance sheets, continual devaluations, and the widespread implementation of zero interest rate policies probably will result in hyper-inflation.
• Central banks are nearing an inflection point where they no longer can supply the gold necessary to prevent rising gold prices.
• Gold has survived governments, leaders, parliaments, central bankers, economic stupidity, graft, corruption, and wars.
• Investment demand for gold is rapidly accelerating. The western world is in the early stage of a panic and “gold rush.”
• There is growing recognition that many paper gold products are not backed by physical gold.

... Follow the link to see the rest of the list. It's a good one . . .
GoldSeek/Gary Christenson

• The quiet crisis, aka the Amazon Effect, is decimating the retail industry – a compelling example of Joseph Schumpeter's creative destruction. Over the past six months about 89,000 Americans have been laid off in the retail trade, and that is only the most obvious of the problems the on-going process has created. More of the side-effects are sure to surface in the future. The question is: "What ultimately will come of it?" In a recent Wall Street Journal feature, Garry Kasparov, the Russian chess master, digs deeply into his chess match defeat at the hands (or should I say algorithms) of Big Blue, the famous IBM computer.

"During my 20 years at the top of the chess world, from 1985 to 2005, chess-playing machines went from laughably weak to the level of the world champion. It was a startling transformation to experience firsthand, and it was impossible not to feel unsettled, even threatened, by their rapid progress. These are the same sensations that many are feeling today, as intelligent machines advance in field after field. Few people will experience the dramatic, head-to-head competition against a machine that I experienced, of course, but the sensation of being challenged, surpassed and possibly replaced by an automaton, or an invisible algorithm, is becoming a standard part of our society."

• Black Rock's Larry Fink says the slowest economy in the G-7 is the United States. The whole world is going through a growth spurt. We are not,” he said. “We are growing slower than France. That is pretty terrible.” Fink was commenting on the Commerce Department's report of a .7% annualized GDP growth rate for the first quarter of 2017.


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 of 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. If you would like to register for an e-mail alert when the next issue is published, please visit this link.

- Opinions expressed on the 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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