Gold: Back to the Future?
Barry Downs and Bill Matlack
A long time ago the store-of-value aspect of money was taken seriously by world governments and economists. The era coincided with a gold standard begun in 1717 by the British; in 1785 the Americans adopted a bi-metallic standard of silver and gold. In 1900, the US switched entirely to a gold standard.
The US maintained convertibility of the dollar into gold until 1933 when FDR banned US citizens from owning gold, but the US continued to honor convertibility by foreign central banks until Nixon closed the gold window to foreigners in August 1971, ending the Bretton Woods era and leaving the US dollar as the world's only reserve currency. The dollar from that point on has been no more than an "IOU Nothing", to quote economist John Exter.
With the dollar tied to gold there was virtually no inflation from 1785 to the formation of the Federal Reserve System in 1913. In fact, 20 years before he was appointed Governor of the Federal Reserve, then private businessman Alan Greenspan released a very profound statement summing up the reality of a sound money/credit system tied to gold: "As the supply of money increases relative to the supply of tangible assets in the economy, prices must eventually rise. In the absence of the gold standard, there is no way to protect savings from confiscation through inflation. There is no store of value."
In light of Alan Greenspan's almost total disregard for the dollar's integrity over his past 17 years at the Fed, and the inflation which has ensued, it is hard to believe he would stand by his statement of 1967. However, reports of conversations with the Fed Chairman indicate he recognizes gold as money and privately still embraces the gold standard.
Debasement of the dollar during the 90 years of Federal Reserve management is recorded for the world to see. Goods and services obtained in 1913 for $100 would cost $1840 today, and the loss of the dollar's purchasing power goes on unabated.
Since the 1930's, the application of Keynesian economics, later joined by Milton Friedman's monetarism, has centered on maximizing economic growth via the expansion of debt and paper money created by fiat. Central bankers have intellectually demonetized gold, and the 34,000 tons of the yellow metal central banks claim to have left in their vaults is in reality 50% less as the result of the forward-selling schemes of the last twenty years.
Conventional wisdom economists express optimism that the world's evolved money/credit system without gold is sound and that central bank managed economies are here to stay. The problem is that the regular cycles of natural economic contraction are being dealt with by unprecedented fiscal and monetary stimulus, pushing debt to unsustainable levels. At present, it takes $4 of debt stimulus to get only $1 of GDP growth. With total credit market debt (government, corporations, and individuals) at $34.62 trillion, debt is over 300% of GDP and still growing. Total credit market debt had reached 260% of GDP in 1929, on the eve of the Great Depression. US total credit market debt has doubled over the past five years, alone.
The recovery of the gold price, which began four years ago, is perhaps forecasting a paper money economy and world debt pyramid essentially out of control, which eventually will be hit with unmanageable natural economic forces. It would come then as no surprise in the years ahead to witness gold, with its 5000 year history as money, again embraced for its monetary discipline against a background of severe economic upheaval.
In the meantime, prudent investors are encouraged to look beyond the soothing reassurances of Wall Street's conventional wisdom to the early-stage investment opportunities in a primary gold bull market.
July 22, 2004
Research Comment
Precious Metals
Barry Downs**
(775) 852-3875
Bill Matlack**
(201) 217-5680
bmatlack@aegiscap.com
**Barry Downs and Bill Matlack are stockbrokers specializing in gold and mining equities with Aegis Capital Corporation, a registered broker/dealer, in New York, New York.
Company Risk Disclosure
In addition to the risks involved in investing in commodities generally, we also highlight the following risks that pertain to this commodity. Gold is highly levered to the relative strength of the U.S. dollar, the U.S. balance of trade, and inflation generally, as well as to political and economic stability worldwide.
Analyst's Certification
We, Barry Downs and William Matlack, hereby certify that the views expressed in this report accurately reflect our personal views about the subject commodity. We also certify that we have not, are not, and will not receive, directly or indirectly, compensation for expressing the specific recommendations or views in this report.
General Disclosure
The research analysts (or their household members) who prepared this research beneficially own gold securities and physical gold. Aegis Capital Corporation ("Aegis") or an affiliate expects to receive and intends to seek compensation for investment banking services from gold equity issuers within the next 3 months. The analysts who prepared this research report may be compensated based upon (among other factors) investment banking services.
The opinions, estimates and projections contained herein are those of Aegis as of the date hereof and are subject to change without notice. Aegis makes every effort to ensure that the contents have been compiled or derived from sources believed reliable and contain information and opinions, which are accurate and complete. However, Aegis makes no representation or warranty, express or implied, in respect thereof, takes no responsibility for any errors and omissions which may be contained herein and accepts no liability whatsoever for any loss arising from any use of or reliance on this report or its contents. Information may be available to Aegis or its affiliates, which is not reflected herein. This report is not to be construed as an offer to sell, or solicitation for, or an offer to buy, any securities. Aegis, its affiliates and/or their respective officers, directors or employees may from time to time acquire, hold or sell securities mentioned herein as principal or agent. Aegis may act as financial advisor and/or underwriter for certain of the corporations mentioned herein and may receive remuneration for same. TO U.K. RESIDENTS: The contents hereof are intended solely for the use of, and may only be issued or passed onto, persons described in Part VI of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2001.
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