IN A MONETARY CRISIS, GOLD WORKS.
IT ALWAYS HAS, IT ALWAYS WILL.
Here’s another “blast from the past” from our Executive Vice President, Glen O. Kirsch. As Glen shows, gold has always helped the prudent person survive a monetary crisis. With new ones looming on every horizon, it’s a lesson we all should remember today.
For 5,000 years man has sought gold. It has been said that as much as three-quarters of the earth’s land surface was first explored because of man’s insatiable desire for gold.
Since the dawn of time, one of the major uses for gold was as adornment. It made (and still makes) spectacular jewelry. But very quickly, gold began to assume its primary role – that is, as a reliable and predictable store of value. In other words, as money.
Man’s desire for gold has been surpassed only by his stupidity at trying to manipulate money. There are numerous historical examples of the terrible consequences of this folly. Some historians believe that it was not Attila the Hun who caused the fall of the Roman Empire. Rather, it was the debasement of the gold and silver coinage, through plating, clipping and counterfeiting.
The world then settled into a long period of economic stagnation which we now know as the Dark Ages. This was followed by the Renaissance and the Age of Enlightenment. However, there was nothing enlightened about one “advancement” during this period – the invention of paper money. This was a new twist on man’s age-old effort to manipulate the quantity of money. The results have been disastrous.
The French Revolution in the late 1790s has been linked to a failed debasement of the French franc. History is riddled with the bodies of paper currencies. The errors of the past are repeated again and again.
Sooner or later, almost all governments succumb to the temptation of currency debasement. Like drug addiction, once begun it is hard to stop. Paper currencies make this easy (and computer entries make it easier still). Most governments refuse to stop the flood of fiat currency, even when they know the result will be the debasement (and ultimately the collapse) of their monetary system.
And here comes that lust for gold again. The search for gold fueled the discovery and exploration of North, Central and South America. In the United States, “manifest destiny” did not just happen. It was fueled by the California gold rush in the mid-1800s and in Alaska later that century. The chase was on worldwide, with the world’s largest gold discovery taking place in South Africa in the late 1800s.
So we have this interesting and complicated series of events overlapping - a quest to find more gold and man’s attempt to manipulate money. Throughout the past two centuries, gold and paper money have competed for the primary monetary role.
When I started in the business in the late 1960s, the dollar was as “good as gold.” The U.S. had emerged from two world wars as the strongest economic power on earth. We had accumulated the largest gold stockpile in history. The result was a stable dollar that everyone in the world, it seemed, preferred to their own currency.
With the system working so well, government just couldn’t leave well enough alone.
In 1933, FDR banned gold ownership for U.S. citizens. Millions of gold coins were confiscated and melted down. The ban lasted for 42 years, with the right to own gold finally restored in 1975. It has taken many years for some Americans to recognize the essential role gold should play in a portfolio. But still, most Americans do not appreciate gold as an asset class.
I can remember the collapse of the London gold pool in 1968. A gold buyer at that time was generally an immigrant from Europe, many of whom remembered the German hyper-inflation of the 1920s. The Reich Mark had failed and another paper money experiment bit the dust. Gold prevailed. That was a classic example of gold working in a crisis.
But, we don’t have to look back that far to see how gold can be the ultimate money. Back in the 1970s, I was a CEO of Deak-Perera (Washington), Inc. in Washington, DC. They were the premier foreign currency exchange company at the time, with outlets in virtually every major gateway city and airport in the U.S.
When the flood of refugees from Vietnam began pouring into the United States, the State Department asked Deak-Perera to become the exclusive foreign exchange/precious metals dealer at the various refugee camps. We would eventually purchase literally tons of gold from refugees, many of whom arrived with all their worldly possessions jammed into a suitcase or small bag. Some people presented stacks of piasters, Vietnam’s former currency. We had to tell them that their paper money was absolutely worthless.
Others had been wise enough to put their trust in gold. Many refugees clutched small golden wafers, called taels, which were popular throughout Southeast Asia. When they presented their taels, we were able to exchange their gold for U.S. dollars on the spot. Their foresight gave them the wherewithal to begin a new life in the United States.
The lesson is clear: In a monetary crisis, gold is the very best insurance you can have. This is true whether it’s the gradual erosion of purchasing power, as we are seeing now with the U.S. dollar, or the sudden, catastrophic plunge of a currency due to economic, social or political unrest which has occurred many other times in many other countries.
Gold works. It has before, it will again. Make sure you heed this lesson of history.
Glen O. Kirsch