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Gold and The Lessons of History
Dear G&G Reader,
Todays's article is by John Pugsley...it adds more zeal to why you should be Purchasing Gold & Silver now and FOREVER!
"Lenin said the day would come when gold would serve to coat the walls and floors of public toilets." —Premier Nikita S. Khrushchev
Ancient, mysterious gold is being pushed to the forefront of investors' minds these days, as the inflationary policies of the worlds' central banks meet uneasily with the deflationary pressures of the housing industry's collapse. Most expected this year's air of uncertainty to push gold prices into the stratosphere, and all seem to be relatively shocked by the yellow metal's lackluster performance thus far.
But for me it's all just déjà vu...perhaps for you too. We've been here before. Not just during the great gold bull market of the 1970s, but way back in the 1920s, and the 1860s, and the...well, let's not go back to Ancient Rome.
Since gold and freedom have had a long, torrid, and often clandestine affair, the market's current attraction to the yellow metal makes it apropos that gold looms large in discussions.
We hear predictions of US$1,000 or even US$2,000 an ounce. Well...before you or I are swept along in the excitement, let us analyze this euphoria through the lens of economic principles, and ponder the lessons of history.You may have profited, as I did, in the tumultuous gold bull market of the 1970s. It was heralded in advance by my late friend Harry Browne, who saw it coming and showed investors how to get rich in his prophetic best-seller, How to Profit From the Coming Devaluation. I, too, joined the ranks of "gold-bugs," writing enthusiastically about the metal's glory...along with Jim Dines, Doug Casey, Howard Ruff, and many others.
With hindsight, and with gold prices currently stagnating, can we learn anything from history? Tracking the ‘real' price of gold offers some clues.
In 1915, the dollar was defined as one-twentieth of an ounce of gold. Paper currency consisted of gold certificates that could be exchanged for gold on demand. The ‘double eagle,' the US$20 gold piece, was one ounce of gold.
In 1915, US$20 would buy a lot. Wages were 35 to 75 cents an hour, or US$500 to US$1,000 per year. A man's tailor-made suit cost US$25-$30 (with two pairs of trousers), while a Sears & Roebuck ready-made, but stylish pure-wool worsted suit sold for US$16.50. A movie ticket cost 15 cents (10 cents for kids).
Adjusted by the CPI, what cost US$20 in 1915 would hypothetically cost over US$450 today. Meanwhile, an ounce of gold that equaled US$20 in 1915 would cost US$726 as of this writing. What happened? It's known as fiat money creation.
What Happens When Paper IOUs Replace Solid Metal Currency
The prices of goods and gold diverged because the newly created Federal Reserve gave banks free reign to expand loans, massively inflating the quantities of gold certificates in circulation, with no increase in the banks' gold reserves. As the gold IOUs flowed into the economy, boom times arrived. Prices rose and stocks and real estate soared.
Sadly, as the masses discovered, the "roaring twenties" were fueled by paper promises. In 1929, the stock market crashed, unemployment rose, people became fearful of banks, and the public began turning in their bank notes for the gold they had deposited. Of course, most banks didn't have enough gold to cover the outstanding notes, one by one they failed, and the economy plunged into the Great Depression.
The bankers and politicians were quick to blame the free market, greed, and gold itself. Roosevelt, elected in 1933, closed the banks to stem a rising wave of bank failures, abruptly revalued gold to US$35 ounce (depreciating everyone's dollars by 75%), and outlawed ownership of gold by U.S. citizens.
It was easy to rob American citizens at gunpoint by confiscating their gold, but what about foreigners? They could still choose between U.S. dollars and gold. The answer was to play the same game the Fed had played 30 years earlier: promise to redeem dollars in gold. In 1944, at the historic United Nations Monetary and Financial Conference at Bretton Woods, New Hampshire, every participating country pledged to keep its currency within a percentage point or two of an agreed dollar value providing the U.S. indemnified foreign central banks against a depreciating U.S. dollar by backing the dollar with Treasury gold. The dollar became the world's reserve currency.
Credit Swells and Gold Freezes
The credit expansion began again, and the price of gold remained frozen at US$35 an ounce for another 27 years. Again, as happened in the 1920s, consumer prices began to rise. But just as worried Americans had begun to run to the banks in the 1930s, the rest of the world began a run on U.S. Treasury gold. In 1971, with Treasury holdings perilously low, Nixon abrogated the Bretton Woods agreement and gold, free of government chains at last, soared to US$800 an ounce in 1980.
At that price, it was wildly above its historic exchange value with other goods, so it was inevitable that the lines would converge again, and they did.
Politicians depend on fiat currency to fund wars and giveaway programs, and therefore always disparage gold. In 1924, in the euphoria of the Federal Reserve money bubble, John Maynard Keyes denigrated sound-money advocates by calling the gold standard a "barbaric relic." Even after a half century of turmoil caused by fiat money, in 1975, Secretary of the Treasury William Simon continued to argue against gold due to its "destabilizing effects" on the world monetary system. The IMF formally sought ways to "insure that the role of gold in the international monetary system is gradually reduced." Gold sales by both the IMF and the Treasury were undertaken to suppress the price and discourage investors.
Gold is a commodity...a tangible, useful mineral extracted from ore and refined for use. The very fact of its unique properties (divisibility, durability, scarcity, and its recognizable luster) make it an unmatched medium of exchange, and also a safe haven for citizens. Thus, it will always be a threat to the creators of fiat money.
What's Next for Gold?
History teaches that gold will hold its value relative to other goods. In terms of inflating currencies, all goods, including gold, will hold their relative value to each other, and rise relative to currency. Right now, for the last 6 years the price of gold has risen more rapidly than other prices, and is now higher than the norm.
Since 1980, consumer prices have risen by almost 150%. Many analysts today assume that gold will repeat the price pattern that occurred in the decade of the 1970s, and argue that gold could go as high as US$2,000...or higher.
"Warren Buffett once said that what we learn from history is that people don't learn from history." I say people don't know their history to learn from.
Thus, it's probable that the current bull market in gold is not over in spite of the fact that gold's dollar price relative to goods is higher than the historical norm. The public has yet to discover just how much world currencies, and particularly the U.S. dollar, have been inflated in recent months and years. As this becomes apparent, dollar holders will, as they did in the 1930s, and again in the 1970s, try to redeem those dollars for tangible goods. Price inflation will return with a vengeance, and probably soon.
What are the best ways to own gold?
For myself, owning physical gold in the form of coins and bullion for conservation of purchasing power, and seeking out the shares of undervalued and overlooked gold mining companies for investment and speculative growth are the best choices.
So, how can you purchase Gold & Silver at a 25-35% discount. I came across this company called Public Gold, and they literally work like Sams Clubs does in comparison to Wal-Mart. Public Gold gets the Gold & Silver from the US Mint at a discount because they purchase the coins in bulk. Because of this, they can sell the coins at a steep 25-35% discount to its members. Now, you do not have to be a member to purchase the coins but the discount from being a member far outweighs the cost.
For more details on how to start purchasing Gold & Silver right away, click the link below to start purchasing "real" money.
Tax & Financial Consultant, RFC
866-361-3872 toll free fax
"What we learn from history is that people don't learn from history."
LEGAL NOTICE: This work is based on SEC filings, current events, interviews, corporate press releases and what I've learned as a financial consultant. Nothing herein should be considered personalized investment advice. It may contain errors and you shouldn't make any investment decision based solely on what you read here. It's your money and your responsibility. Also, please note that due to our commercial relationship with Publc Gold, G&G Associates may receive compensation from a membership purchased at www.publicgold.com/gngpreciousmetals.