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"Gold-backed
money retained its real value for 350 years in the United
States and Great Britain. It's only just
clawed back to that level for investors today..."
BY THE TIME the War of the Spanish Succession was finished in
1715, the French King - who admitted that he "loved war too much" -
owed the equivalent of £300 million.
Across the Channel, Great Britain
owed only £49 million. Which might have looked a
little like financial victory. But then, the United Kingdom's
population was only one-third the size of the French. And those debts -
priced in "hard money" weights of gold or silver, both in even
tighter supply than they are today - were almost 20 times the sum England had
defaulted on four decades before.
But hey, that's
inflation for you! Or more properly, that's inflation as it's commonly
understood - an absolute rise in the price level. In this case, the cost of
running the state and murdering Frenchmen.
Whereas in 2009,
three centuries later, the UK Treasury will extend its debts by £118
billion this year alone. That's not only 2,500 times what it owed in 1715 in nominal pounds. It's
also twice the entire national debt that forced the last Labour
government to beg an emergency loan from the International Monetary Fund
(IMF) thirty-three years ago.
Now that's real
inflation for you! And for everyone else too, unfortunately.
"From the time
the United States
went off the Gold Standard in 1933 the wholesale price level has gone up by
760%," noted Professor Roy Jastram, author of The
Golden Constant, in December 1981.
"Since England
abrogated the Gold Standard in 1931, her price index number has risen by over
2,000%."
Both in the US and
UK, the general price level since Jastram spoke to
the Security Analysts Society of San Francisco has more than tripled again. All
told, here in London, the British Pound has
lost 98% of its purchasing power since that fateful September day when the UK government
lost its nerve, and the The World Lost Sterling's Gold Standard
forever.
"Before that, the two countries had a combined
history of 350 years of long-run price stability," Jastram
went on. "The price level was the same in the United States in 1930 as it had
been in 1800. In
England
the price index stood at 100.0
in 1717 (the first year of her gold standard) and it
was at that figure again in 1930."
And all thanks to the magic of gold - that "golden
constant". Right?
 
To be sure, the
gold-backed Pound did a phenomenal job of preserving its purchasing power for
the 200 years starting when Sir Isaac Newton - he of the Laws of the Motion,
but also Master of the Royal Mint in 1717 - established the Pound Sterling as
a certain weight of silver.
Newton thus, since
the two were interchangeable as cash payment, also set the Pound as a smaller
weight of gold ("a pound weight of fine gold is worth fifteen pounds
weight six ounces seventeen pennyweight & five grains of fine
silver" to be precise) which over time, won out over silver as the
arbiter of currency value worldwide.
As our chart shows
(hat tip to Statistics.gov.uk for the long-run inflation data), tying money to gold
delivered ups and downs in the price level. But overall, costs stayed
remarkably steady for the 70 years starting in 1844 - back when the Bank of
England was granted monopoly power to issue the currency.
Then
the guns of August blew a hole in the Pound's convertibility. Despite a brief
rally after the ill-advised move to restore the old Gold Standard in 1926, Sterling's long-run value
just continued to tumble, as Jastram points out.
As
for gold, its purchasing power also suffered during Europe's
second "Thirty Years War" (in Winston Churchill's phrase), at least
when held outside of government hands. Banned from owning it in the United States, private individuals could
scarcely trade it for profit in London.
Pretty much all of Britain's
bullion had already been nationalized long before (right as the Gold Standard Reached
Its Zenith, in fact) and now
it was needed to buy arms and munitions from across the water.
Don't you know there was a war on? Or as Marc Faber put
it in his Gloom, Boom & Doom Report last fall (Is there a way
to preserve wealth?, Oct. 08), "I can see the gold bugs jumping off
their seats and protesting that gold has kept its value (purchasing power)
over the course of history. But the problem is that the owners of the gold
also changed over time.
"So, when Timur sacked Aleppo and Damascus
in A.D. 1400, it didn't help to have your savings in gold," the Swiss
private-client fund manager adds. "You lost your life and your
gold. Women had a better chance of survival and got a one-way ticket to Samarkand."
Luckily for investors and savers with something less than
their lives or liberty to lose 500 years later, the US and UK governments
liberalized gold ownership just in time for Gold Prices to shoot higher on a tide of government-wrought
inflation in the 1970s. (It's also worth noting that, in line with how gold
owners could survive the four-decade US ban starting at the depths of the
Great Depression - and actually benefit from the revaluation of gold that
accompanied it - Marc Faber advises holding physical gold overseas, free from
the political and/or social risks of your own domestic jurisdiction.)
Finally cut free from artificial government values by Richard Nixon in 1971, gold broke back above its old Gold Standard par
in terms of UK
purchasing power in 1973. It then spent almost 16 years - after accounting
for inflation and changes in gold prices - worth more than it had been
throughout the late 19th century, the high-water mark of gold's international
power as the only true, single, irrefutable currency.
And amid the current bull market in gold, its real value
for UK
investors only just broke back above that level again, just as 2008 turned
into 2009. For US investors, gold recovered its 1900 value at the start of
2007.
That's the nature of
a mean-reverting asset, of course. It reverts, if given time (and free
ownership, priced in a free market) to its long-run average value. But that
does also mean that the average itself will have to revert as well.
Because the starting
point of any particular data series - not least if pegged by mankind, even
the genius brain of Sir Isaac Newton way back in 1717 - might not necessarily
be "correct" for the long run that follows. We can't judge the
"true" value of gold simply from its historical start.
What if that apple
bruised more than Sir Isaac Newton's head? Conclusions to follow in Part
III...
Adrian Ash
Head of Research
Bullionvault.com
City
correspondent for The Daily Reckoning in London,
Adrian Ash is head of research at http://www.bullionvault.com/#24hgold – giving you direct access to investment
gold, vaulted in Zurich,
on $3 spreads and 0.8% dealing fees.
Current gold price, no
delay | FAQ
| Detailed outlook for
2007
Please
Note: This article
is to inform your thinking, not lead it. Only you can decide the best place
for your money, and any decision you make will put your money at risk.
Information or data included here may have already been overtaken by events
– and must be verified elsewhere – should you choose to act on
it.
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