To ALL:-
As the URL I have given two posts earlier seems difficult to access at times, I am posting Lord Rees-Mogg's opinion on gold in full.
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November 20 1997
OPINION
That which glisters may not always be a sensible investment -
but we continue to be fascinated by it
Is gold only for fools?
In the past fifteen years an interest in gold has not been a
good way to make money, but it has been a good way to
think about money. Probably the most successful and
certainly the most powerful of central bankers in the 1990s
has been Alan Greenspan, the chairman of the Federal
Reserve. His understanding of the world's monetary system
was partly built on his study of the old gold standard. In 1966
he wrote a paper Gold and Economic Freedom, in which
he argued that "in the absence of the gold standard, there is
no way to protect savings from confiscation through inflation".
He was still something of a gold theorist when I met him in the
Nixon years.
Now that inflation has been slowed, the public has become
less worried about it. Nevertheless, in Britain the subtle theft
of inflation continues to reduce the purchasing power of
money; by 20 per cent since 1990, by 57 per cent since
1980 and by 98 per cent since 1914. The century of paper
money has been a century of depreciation. The rate of decline
may vary in the future, but the decline itself can be expected
to continue. Greenspan's statement of 1966 may seem almost
other-worldly but it has, in fact, proved correct.
The recent fall in the gold price has taken gold back through
an interesting landmark. The purchasing power of an ounce of
the metal is below where it was before Britain went off the
gold standard in 1931. If one takes the purchasing power of
gold in 1930 as 100, the purchasing power today stands at
91. The history of gold prices shows a centuries-old pattern
which, in his book published in 1977, Professor Roy Jastram
called "the Golden Constant". He established that the general
level of prices had historically moved above and below the
gold price, but had always been drawn back towards it.
The gold value of a sovereign now has much the same
purchasing power as it would have had in 1972, 1874, 1857,
1821, 1794, 1776 or 1723, or, indeed, in 1649, the year
Cromwell cut off the head of Charles I. In 1997 we can see
gold once again performing its strangest trick of all, and acting
as a long-term measure of value. It has behaved in this way
for an amazingly long time. Although the two metals have
since diverged because of changes in mining technologies, the
ratio of the prices of gold and silver was the same in the first
year of the reign of Queen Victoria as it had been in the last
year of the reign of the Emperor Augustus.
Nobody can study the history of gold without becoming
fascinated by these long-term price relationships. Gold is at
present on the cheap side of its historic value in Britain;
farmland in England has usually been worth between five and
ten ounces of gold an acre, according to the quality of the
land. At œ170 an ounce, that would give a price of œ850 to
œ1,700 an acre, which is at present on the low side. On the
other hand, œ20 an acre, which was then equivalent to five
ounces of gold, was normal for farmland throughout the
agricultural depression from the 1870s to the 1940s.
When gold had its last great boom, it went to $800 an ounce.
That was the result of a worldwide panic about inflation in the
1970s and early 1980s. Now all serious investors have given
up on it. The goldbugs still have a sentimental nostalgia for the
days when one could actually make money out of
gold-related investments, but they have prophesied so many
false dawns that their arguments no longer have any place in
sober investment analysis. No investment fashion has been so
thoroughly exploded as gold; most people think that there will
no more be another gold boom than there will be another
boom in tulip futures in The Netherlands.
One cannot be so sure about the future of this mysterious
metal. Roy Jastram gives a table of the purchasing power of
gold, starting from 1600. It has certainly outperformed paper
currencies.
Year Purchasing Power of Gold
1600.............125
1650.............97
1700.............120
1750.............111
1800.............76
1850.............111
1900.............143
1950.............103
I suppose that one might have been pretty gloomy about the
outlook for gold in 1800. William Pitt might fall; Napoleon
might invade; Nelson might lose at Trafalgar; Wellington
might lose at Waterloo; Rothschild and Barings might lose
control of the gold market. Yet gold's purchasing power rose
by 50 per cent in the next 50 years and doubled in the next
century. From the present level of 91, the index could repeat
that performance in the 21st century, or it could just remain
its constant self, as it did in the 17th.
Even the stock market performance of gold investments does
not all go one way. I have recently had an intriguing letter
from Andrew Lampert, well known in the gold world as a
director of Midland Walwyn, a Toronto investment firm with
the courage to have a gold bias. He sent me a chart of the
share price of Homestake Mining, an American S. gold
producer, measured against the Dow Jones index. Ten
thousand dollars invested in Homestake in 1892 would now
be worth a little over $1,000,000; $10,000 invested in the
Dow would be worth a little less than $1,000,000. But the
experience in between would have been very different.
Homestake outperformed the index from 1892 to about
1910, underperformed from 1910 to 1929, outperformed
spectacularly in the 1930s, and underperformed in the 1940s,
1950s, and early 1960s. "The Dow Jones traded around the
1,000 level from 1966 to 1982 and Homestake appreciated
by 466 per cent. In the past 15 years, the Dow Jones has
gained a massive 645 per cent against Homestake moving up
by just 8 per cent." Perhaps the pendulum will eventually
swing again; pendulums often do.
Most people think of gold as a protection against inflation,
and expect it to rise in inflationary periods, but fall with
deflation. Roy Jastram examined the UK and American price
record to 1976, and reached these rather unexpected
conclusions:
"1. Gold is a poor hedge against major inflations.
2. Gold appreciates in operational wealth in major deflations.
3. Gold does maintain its purchasing power over long periods
of time."
The current purchasing power of gold in Britain is close to the
historic lows of the Civil War, the collapse of the South Sea
bubble, the American War of Independence, the Napoleonic
wars, the First World War and the General Strike. Gold may
not be cheap, but for the British it hardly looks expensive -
not unless we are expecting a war, a crash or a general strike
in the near future.
It looks very different in Asia. The South East Asian
economies of Thailand, Malaysia and Indonesia have all
devalued against the dollar in the past six months; so has
South Korea; the big Japanese devaluation has continued. In
terms of all of these currencies, gold has been static or firm. It
has not done as well as the dollar, but it has served its
traditional function of acting as a stable reserve. It has also
met its textbook desciption of being both a real asset, such as
property, and a liquid one, such as cash.
At present, the dollar is king of the world currencies; most of
the Asian currencies have devalued against it and even the
euro has been prospectively devalued against it, 18 months
before it has even come into existence. Sterling has also
appreciated, and has been stronger than the dollar itself. Yet
some commentators fear that the Asian devaluations may be
the first of a wave of competitive global devaluations, like
those in the 1930s, which included Europe and America. In
the 1930s almost every currency was devalued in terms of
gold.
Several of the world's central banks have recently been
selling gold, on the argument that the dollar offers both
appreciation and an interest yield, while gold has depreciated
and provided no income. So far they have been right, but
what will they do if the dollar itself has to be devalued?
Already, the United States has a trade deficit and is far from
competitive in cost with Asia. At some point in the future, the
dollar may be seen as unsustainably overvalued. Then
presumably the dollar price of gold will start to rise - the
2,500-year history of gold as a store of value may be far
from finished.
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