Dateline: 11/11/97

Call it the Sadim Touch! (Midas spelled backwards.) Whenever I touch gold it turns to lead. In over 25 years of being in and out of gold and precious metals investments, I have yet to make any money to speak of. And yet...and yet...it still holds a fascinating allure for me. Not so much as an investment but as symbol. My interest in gold has been, and still is, ideological.

I never knew much about, nor cared much about gold until 1969 when I read a little book called Capitalism: The Unknown Ideal as a university student. It was the radical sixties. I was a Commerce student at Montreal’s McGill University. I had fallen in with the Maoist faction, attending an occasional meeting. (I thought one of the Maoist girls was kind of cute.)

The VP of the Commerce Undergraduate Society warned me that these people were dangerous and under surveillance by the RCMP and that I should read Atlas Shrugged by Ayn Rand before I got sucked in by their philosophy. By then it was summer and in August I came across Capitalism in a bookstore. The author’s name rang a bell and so I bought it. The rest, as they say, is history. I became an ideological capitalist. Materially I was still pretty poor.

In that tract of Ayn Rand’s there is one essay by a then economic consultant called Gold and Economic Freedom. It was my first introduction to gold as philosophy. The author is much more well known today. His name is Greenspan. Alan Greenspan. Oh! You’ve heard of him!

Shortly after that I read another little book that explained money, inflation and banking in terms I hadn’t seen before but which made the subject truly comprehensible for the first time. That book was Harry Browne’s How to Profit From the Coming Devaluation. It remains the single best work on money that I’ve ever read. Browne’s view was and is part and parcel of orthodox libertarian philosophy. I subscribed to that view for many years, but have since rethought the matter.

In the rest of this week’s feature I’ll explain that view of money. But as the title hints - all that glitters is not gold! In Part Two I will explain my current thinking on gold. And in Part Three I’ll look at gold and precious metals as an investment and their place in your portfolio. (Yes I still have precious metals investments though my patience is being sorely tried by the amount of money they are costing me!) These articles won’t run consecutively. I will run my Monthly Mutuals Analysis on schedule, and may throw in a book review or something else as well in between.

The Philosophy of Gold

Money is a medium of exchange and a store of value. It brought humanity out of primitive barter society into civil society. As Greenspan puts it in Gold & Economic Freedom, "the existence of such a commodity is a precondition of a division of labor economy." Without it, "men had no means to store value, i.e. to save" and "neither long range planning nor exchange would be possible."

Greenspan goes on to explain that money must be a luxury good, that is, something relatively scarce. Thus, in post-war Europe, cigarettes served for a time as money because of their scarcity. Over the ages, precious metals became accepted as money because of their scarcity, their homogeneity and their divisibility. It was easy to divide gold into equal size and weight coins or wafers. They were portable.

Eventually kings and other rulers took control of money and became the sole minters of coinage. Dishonest rulers sometimes cheated the people by a practice known as clipping - shaving tiny bits from the gold coins and melting the shavings into new coins for their own profit. The untrained eye did not detect the altered coins until it was too late.

Honest rulers countered this practice by introducing the ribbed edging on coins. This edging made it impossible to clip coins and demonstrated to the people the faithfulness and dependability of the ruler's coinage.

As society and commerce grew, it became impractical to carry around heavy bags of gold to make transactions. As Browne explains it, warehouses started storing gold and issuing receipts to the owners. These warehouses were the first banks and the warehouse receipts were the first paper currency. As long as the receipts represented real gold, actual stored value, this was a sound and honest practice.

But then governments started issuing fiat money - paper currency that is not backed by gold. Either they issued warehouse receipts (bank notes) in excess of the actual amount of gold held in storage, or they dispensed with gold altogether and made the issued paper legal tender by legislative fiat. Without the physical restraint of having to have the actual gold in storage, governments could and did issue money at whim. Thus was born inflation.

In a brilliant chapter called What is Inflation?, Browne introduces the hypothetical case of a couple of perfect counterfeiters (he suggests it is the reader and himself in partnership). They go into a town and spend $20,000 in crisp new $20 bills. They leave town with $20,000 of goods. The townsfolk thank the visitors for their extravagant spending and think their lot improved by the passing through of the strangers. But has it?

As Browne puts it, "It’s obvious we have benefited from the situation. We traded paper dollars that have no real value for products that have real value."

But "assuming that no one ever learns our little secret," he asks, "has our gain actually hurt anyone else?"

Think about it a bit. Who loses? The merchants don’t. The bills are perfect and are just passed on to others in purchases, change or deposits in the bank. If we as the counterfeiters aren’t hurt and the merchants themeselves aren’t directly hurt, who, if anyone is?

The answer is everyone is hurt a little bit. Think of it this way, says Browne. Before we came to town, it had a certain amount of goods owned by the people of the town. After we leave it has fewer goods, and more money to bid for those goods. Less supply (fewer goods) and more demand (more money) means prices will rise. Inflation! That is the cost of perfect counterfeiting.

The conclusion is obvious. When governments inflate the money supply (i.e. - issue paper money in excess of actual value stored) we have inflation. Prices rise. You can see why I like Browne’s book. The theory is elegant, straight forward, logical and is just plain common sense.

This, in a nutshell then, is the gold bug's theory of money. Gold is money. Paper currency ought to be warehouse receipts representing actual tangible gold in storage. When governments cheat and issue more paper than they actually have gold, they are creating inflation and are practicing a modern version of the ancient dishonest practice of coin clipping.

In fact, one economist, Walter Block (a personal friend of mine), goes so far as to defend counterfeiters in his book Defending the Undefendable. He argues that since governments are themselves counterfeiting "real" money, i.e. gold and silver, a counterfeiter is only copying what is already counterfeit! And how could we object to that?

But while I like the gold bug's analysis and still find it seductive in its clarity and elegance, in recent years I have come to the conclusion that the hard money advocates are at least partly wrong. And where they are wrong has tremendous implications for gold as an investment. Be sure to stay tuned for Part 2!

Hard Money Advocates on the Internet

There are a great many economic advisors and pundits who subscribe to the above theory. Many of them, such as Harry Browne himself, Douglas Casey, Howard Ruff, Jerome Smith, John Pugsley, James U. Blanchard and others are fairly well known and publish expensive advisory newsletters. (I have subscribed to a number of them over the years.) Some of them are on the internet. They are fascinating reading whether you agree with them or not. Here are some links to the best hard money newsletters and hard money sites on the Web.

The Privateer Gold Pages: - this Australian site is one of the most interesting and lucid hard money pages around. It's run by a former room mate of mine and ex-patriate Canadian, Bill Buckler, Jr.. He's a very hard core advocate of the gold standard.
Gold Newsletter Archive: - Thirteen back issues of the Gold Newsletter from April 1996 to April 1997 are currently archived and it looks like more will be added. This is the grand daddy of all gold newsletters. Published by James U. Blanchard III of the Blanchard Mutual Funds. Some very interesting reading here.
The Markets are Screaming "Sell Stocks and Buy Gold!": - this article by Jim Blanchard is featured on the site promoting his annual New Orleans Investment Conference. The conference is over but the site's still there. Check out the bios of the speakers to meet the who's who of the hard money movement.
The Silver Bug's Corner: - Vancouver based Stockscape Technologies produces this report (as well as hosting the above Gold Newsletter by arrangement with Agora publishing.) Silver historically has traded at a ratio to gold of 1 to 30 but is currently at a ratio of about 1 to 60 which leads many precious metals analysts to believe huge profits are in the offing when the situation "corrects" itself.
Stockscape Newsletters Page: - a collection of newsletters, many of them precious metals oriented are hosted here by Stockscape. Others are planned. Fascinating stuff here, some of which I'll cover in greater detail in a future article on newsletters.
Gold & Silver Reserve, Inc.: - this company offers e-gold, an online "bank" that stores physical gold on your behalf just like the warehouses Harry Browne discusses. You can use it for online commerce with other hard money types. The page linked to here presents their hard money philosophy.
Kitco: - this Montreal based company has one of the most authoritative precious metals sites on the internet. Lots of facts and figures going back over a hundred years. Also has a discusssion forum and daily precious metals price quotes.

See my Gold and Precious Metals links for more!

See my Bookstore to find out how you can order the books mentioned in this article online!

All That Glitters: Part 2
All That Glitters: Part 3
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