what Jay Taylor says on Gold during 1930 Great Depression
a clip taken within the overall article on GoldEagle.com
/ jim
full article:
gold-eagle.com
relevant clip:
CAN GOLD REALLY DO WELL IN A DEFLATION?
A very astute investor on the west coast and a friend of mine sent me the following e-mail message this past week. He is worried about our contention that gold can do well in a deflationary environment. That is a troubling concept to many investors who have only experienced gold performing well in an inflationary environment during the 1970's. For the benefit of all subscribers here is my friend's question followed by my response.
"With respect to the most recent hot-line update:
"As Ian Gordon has pointed out, gold does very well during the inflationary Kondratieff summers when inflation is THE problem. But it does even better during the Kondratieff winter, when deflation implodes a country's currency to oblivion."
"As I observed previously, Prechter is in direct contradiction to this premise, based as best as I can see, on following the course of events and charts from the LAST Kondratieff in 1930's ..
"Some resolution is needed between the contention on the one hand that Homestake and gold was a good hedge and a profitable position in the 30's deflationary depression, and on the other hand Prechter's claim that gold did not start to rise until the economy began to recover in the 30's.
"Perhaps the difference lies in the fact of the underlying debt which the U.S. is in this time around .. but that is pure speculation on our parts that 'this time is different' if Prechter is correct (?).
"This needs to be nailed down, it seems to me. As I said before, the divergence between yourself and Prechter is worrisome especially since you both seem to accept the Kondratieff cycle/validity, but come to divergent conclusions on the issue of gold."
My Response:
In fact the price of gold was fixed for Americans at $20.67/oz. Then reflecting the realty of the global market forces of supply and demand for gold, after taking the gold from the American people, Roosevelt devalued the dollar by increasing the leading monetary asset of that time, namely gold by nearly 69% to $35/oz. The depth of the depression was commonly believed to have been in 1932 or 1933. In January 1934, the price of gold was increased by decree from Roosevelt to $35, so it is correct to say that gold did not rise before the economy bottomed out. However, IT IS NOT CORRECT TO SAY THAT DEMAND FOR GOLD DID NOT RISE UNTIL AFTER THE ECONOMY BOTTOMED!
In fact, quite the contrary was true. In 1932 Hoover's Secretary of the Treasury reportedly warned his boss that so much gold was being demanded from the U.S. Treasury by U.S. citizens and from people abroad in exchange for paper dollars that the U.S. Treasury would soon lose all of its gold. That's why on January 31, 1934, Roosevelt forced American citizens to give up their gold or face a $10,000 fine and 10 years in jail. And as an aside, I think it is interesting to note that one day after the gold was stolen by the government from the American people, Roosevelt increased the price from $20.67 to $35. And get this! With the 69% revaluation of gold from $20.67 to $35, the government booked a $2 billion profit which it socked away in THE EXCAHNGE STABALIZATION FUND which according to GATA to this day is being used to manipulate the gold price.
But the point I am trying to make is that in the midst of the deflation, people were trashing paper money and demanding gold. Why? Because they KNEW, just as Japanese people today know that their money would not be safe in the bank. They instinctively opted for gold - an asset money rather than paper money which is a liability money!
Prior to the confiscation of gold, many Americans began gold and also Homestake Mining shares as a proxy for gold, just as investors are now doing. From 1929 through 1940, the closing year end prices of a share of Homestake Mining shares were as follows:
1929 - $78.50
1930 - $80.625
1931 - $128.00
1932 - $150.00
1933 - $315.00
1934 - $376.00
1935 - $486.063
1936 - $422.00
1937 - $471.00
1938 - $513.50
1939 - $468.00
1940 - $$404.00
While the DOW was mercilessly hammered in the Great Depression, Homestake Mining relentlessly appreciated.
CHART
Again, bear in mind that these huge increases in the price of Homestake came when major DEFLATIONARY forces were taking place. American bought gold shares as a proxy for gold because they were not allowed to by gold. But gold was in huge demand as money around the world when the value of the dollar was actually buying more! The fact is that as huge numbers of people and businesses were defaulting on their dollar obligations, people preferred to get paid in gold rather than paper because gold was an asset money while money that would retain its value even as massive defaults rendered paper money worthless.
JAPAN IN 2002 - According to Miningweb.com, demand for gold in Japan is dramatically for reasons that are very similar to reasons for a rise in demand for gold in the U.S. during the 1930's. Japan is about ten years ahead of the United States in its Kondratieff winter. It has been in a decade long deflation which, along with a permissive monetary policy like that of the U.S. has lead to an increasingly insolvent banking system. Understanding this danger to their money, the Japanese people are opting to store value in the form of gold rather than electronics credits and checking accounts in the banks. So in fact, the Japanese people are acting very rationally by turning their yen and dollars and other currencies into gold.
The Miningweb reported last week that "Year on year figure show imports of 60.5 tones of gold or more than three times higher than in the first seven months of 2001. It had tailed off a few weeks ago, but in July demand began to rise dramatically once again. The fear is that as the U.S. economy slows, Japan's fortunes will plummet still further because exports to America has been about the only bright spot for Japan. So despite a horrid deflation in Japan now for many years, people demand gold they know it will retain value even as paper money vanishes into the thin air from whence it came.
In my view, the message is quite clear. Gold will rise when people lose confidence in paper money. That process is well under way in Japan and Argentina (see chart below showing that the peso price of gold soared more than 260% THIS YEAR) and elsewhere though it has only just barely begun in the U.S.
As the world's reserve currency, the U.S. will be the last paper currency to fall, but when it does, there will be no place to hide accept gold and to a lesser extent perhaps silver and other commodities which also hold some intrinsic value. Now, as we expect the Dow and other stocks to plunge to valuations akin to other bear market bottoms ( at least another 50% or more from current levels) and as the economy continues to tread downward, we think gold will have its day. And because sooooooo much paper money has been created and soooooo much debt in the process, I fear defaults levels will be cataclysmic. And because so many units of currency have been created, not only in the dollar but in virtually every currency around the globe (this time there is no currency tied to gold), the price of gold vis-à-vis paper money will shoot to the moon. Accordingly, it may be possible that many if not most of the penny gold stocks listed on page 16 of our monthly newsletter will be quoted in numbers akin to those of Homestake in the mid 1930's. As such, those who own gold should be better able to offset paper losses, which will be beyond comprehension to most investors. |
