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L: Doug,
we’ve talked about cars, cows, and cash, but the investment world
thinks of you as a gold bug, so let’s give that a go; why gold?
Doug: Sure.
First of all, it’s because gold is actually money. It’s an
unfortunate historical anomaly that people think about the paper in their
wallets as money. The dollar is, technically, a currency. A currency is a
government substitute for money. Gold is money.
Now, why do I say
that?
Historically,
many things have been used as money. Cattle have been used as money in many
societies, including Roman society. That’s where we get the word
"pecuniary" from: the Latin word for a single head of cattle is
pecus. Salt has been used as money, also including in ancient Rome, and
that’s where the word "salary" comes from; the Latin for salt
was sal (or salis). The North American Indians used seashells. Cigarettes
were used during WWII. So, money is simply a medium of exchange and a store
of value.
By that
definition, almost anything could be used as money, but obviously, some
things work better than others; it’s hard to exchange things people
don’t want, and some things don’t store value well. Over
thousands of years, the precious metals have emerged as the best form of
money. Gold and silver both, though primarily gold.
There are very
good reasons for this, and they are not new reasons. Aristotle defined five
reasons why gold is money in the fourth century BC (which may only have been
the first time it was put down on paper). Those five reasons are as valid
today as they were then. A good form of money must be: durable, divisible,
consistent, convenient, and have value in and of itself.
L: Can
you elaborate on that?
Doug: Yes,
and from them, we can draw inferences that will help us anticipate the fate
of the dollar.
First,
let’s take durable. That’s pretty obvious – you can’t
have your money disintegrating in your pockets or bank vaults. That’s
why we don’t use wheat for money; it can rot, be eaten by insects, and
so on. It doesn’t last.
Divisible. Again,
obvious. It’s why we don’t use diamonds for money, nor artwork.
You can’t split them into pieces without destroying the value of the
whole.
L: If I
paid for a new Ford GT with the Mona Lisa, what would be my change – a
small canvas by Picasso?
Doug:
[Laughing.] That’s right. Maybe you’d get millions of those
paintings of Elvis or Jesus on velvet.
Consistent. The
lack of consistency is why we don’t use real estate as money. One piece
is always different from another piece.
Convenient.
That’s why we don’t use, for instance, other metals like lead, or
even copper. The coins would have to be too huge to handle easily to be of
sufficient value.
Value of itself.
The lack here is why you shouldn’t use paper as money.
Actually,
there’s a sixth reason Aristotle should have mentioned, but it
wasn’t relevant in his age, because nobody would have thought of
it…
L: It
can’t be created out of thin air.
Doug:
Right. Not even the kings and emperors who clipped and diluted coins would
have dared imagine that they could get away with trying to use something
essentially worthless as money.
L: I
think we can forgive Aristotle for the oversight.
Doug: I
think so. At any rate, these are the reasons why gold is the best money.
It’s not a gold bug religion, nor a barbaric superstition. It’s
simply common sense. Gold is particularly good for use as money, just as
aluminum is particularly good for making aircraft, steel is good for the
structures of buildings, uranium is good for fueling nuclear power plants,
and paper is good for making books. Not money. If you try to make airplanes
out of lead, or money out of paper, you’re in for a crash.
That gold is
money is simply the result of the market process, seeking optimum means of
storing value and making exchanges.
But it’s
not something that suits governments, because paper money is an excellent
means for governments to tax people indirectly, surreptitiously, through
inflation. That’s one reason central bankers love paper money, but
also, phony economic theories, like those of John Maynard Keynes, hold that
the government not only can but should meddle with the economy, and the
ability to print paper money gives them a means to do that.
In today’s
world, not only do people around the world take it for granted that paper is
money, but that it should be so.
But it’s
all nonsense. It’s one reason for taking a gloomy view of humanity
– people will believe almost any kind of claptrap, if the story is
retailed by those in authority.
After the current
system collapses, as every paper money system in the past has collapsed, some
form of money will have to replace it, and it’s almost certainly going
to be gold.
L: There
are already experiments with digital gold currencies. E-gold got taken out
behind the woodshed by the feds, but GoldMoney.com seems to be doing well. Do
you believe those could see widespread adoption, as paper currencies lose
their credibility?
Doug: Sure.
You know, in the 19th century, the "paper money" you carried in
your wallet was called bank notes. Why? Because they actually were notes from
your bank representing a specified amount of real money on deposit. People
carried these things because they were much more convenient for large amounts
of money than chests of gold. Dollars today say "Federal Reserve
Note," not "XYZ Bank Note" on the back, because they
aren’t redeemable for anything besides more Federal Reserve notes.
That’s why today’s paper money substitutes are called fiat
currencies; they have zero intrinsic value and are not redeemable for
anything, but are accepted because the government will put you in jail if you
don’t. It’s a fiat accomplished by force, not real value recognized
by those who accept the notes.
Things like
GoldMoney.com are simply modernized, updated versions of bank notes. They are
basically transferrable warehouse receipts that represent amounts of gold you
have on deposit someplace. I do recommend GoldMoney.com, incidentally,
because it allows you to hold your gold in digital form, outside the U.S. And
to my understanding, these accounts are not reportable under current U.S.
rules. It’s an excellent alternative to storing large amounts of gold
in a safe deposit box.
L: But
will people believe in them? Will the public accept them so they can be used
in everyday transactions, as paper money is used now? Hundreds of years ago,
people accepted bank notes because they knew the reputations of the banks
issuing them (when you traveled, you went to a reputable local bank, which
knew the reputation of the bank that issued your notes, and the local bank
could issue you new notes in local currency, etc.). There was no central
authority to certify these notes. But today, people don’t think that
way. They think it takes a government to assure the value of money.
Doug:
You’re quite correct on that – a sea change in thinking will have
to take place. Of course, anyone in Zimbabwe can tell you a
government’s guarantee is not necessarily worth anything. A collapse of
the dollar – the worlds’ de facto reserve currency – could
spark such a change in that way of thinking. With GoldMoney.com or the Perth
Mint – another worthy alternative – it’s a question of
predicting the solvency of an actual company, and we have tools for that. I
believe this is exactly what is going to happen in the future. As far as
I’m concerned, either of these outfits is more reliable than, say,
Citibank. And gold is far more desirable than the dollar. So I’d rather
have a thousand ounces of gold stored with GoldMoney.com than a million
dollars deposited at Citibank.
The dollar will
be phased out of the world economy, because everyone can see that it’s
a hot potato. This Chinese have two trillion of them. They want to get rid of
them because they aren’t stupid, and they can see what the ultimate
fate of the dollar is. This is true of every country around the world at this
point; their central banks know they are sitting on hot potatoes, and they
are going to want to unload them.
What’s
going to happen is that one or more countries are going to institute a sound,
stable, gold-backed currency. Ten years ago, Mahathir Mohamad of Malaysia
tried to get Islamic countries to return to hard money, adopting the gold
dinar and the silver dirham, which are defined in the Koran as specific
weights of gold and silver. It didn’t work because of mistrust between
the players; the governments of Muslim countries are, as a group, almost
universally corrupt. But I think it’s entirely possible, nonetheless,
that something like that might arise in the Islamic world. After all, they
believe that the Koran is the actual word of Allah, and there is a resurgence
of Islamic fundamentalism everywhere.
According to
press reports, the Chinese government is actually encouraging Chinese people
to accumulate gold at this point. They might go for a gold-backed yuan
– it would put them on the map as an international monetary leader. The
press also reports that the Russian government has been consistently buying
large amounts of gold. We might even end up with a gold-backed ruble.
Meanwhile, the
U.S. government is creating trillions more dollars per year. This could
result in the entire world monetary system being overturned. But
there’s no reason for anyone to trust any of these other governments
more than they trust the U.S. government. And rightly so; they
shouldn’t trust any currency that doesn’t come with a guarantee
of redemption for something specific. And as Aristotle and history have shown
us, gold is the best choice.
L: So
the question now boils down to, what is gold really worth in terms of
today’s dollar? How do we compute that?
Doug: Well,
aside from a few Spanish galleons at the bottom of the sea and dentures
returned to the earth after a lifetime of use, pretty much all of the gold
ever mined and refined is still sitting on the surface of the earth
somewhere. Nobody really knows how much that is, but the most reasonable
estimates I’ve seen are something like six to eight billion ounces.
That happens to work out to about one ounce of gold for every human being on
the planet at this time.
Out of this, the
U.S. government reports that it has 265 million ounces of gold in its
treasury. If we divide the money supply by the number of ounces the U.S.
could back its paper with – and here we’d have to decide what
measure of money supply we want to use. Nobody, including the Federal
Reserve, actually knows how much money they have floating around out there.
It would seem that there are about six trillion dollars outside the U.S.
alone. Let’s estimate that M0 in the U.S., the narrowest measure of
money supply that consists of just notes and coins, amounts to one trillion.
So, 265 million into seven trillion gives you about $26,420 dollars per ounce
of gold.
Now, if we add in
the total obligations of the U.S. government, which it will either need to
print more money to meet, or it will have to default on – that’s
about 100 trillion. If those dollars are printed, that would give us $377,430
per ounce. The same ratio for M1 would give you about $6,226 per ounce and M2
would give you $31,320 per ounce.
All of these
numbers are far, far above the current level of roughly $1,000 per ounce. And
that’s the answer to the question you started this interview with. Why
gold? Because it’s got only one way to go: up. It seems to me that
everyone should have a very significant portion of their wealth in gold.
That’s not
just for safety, security, and prudence, though those are reasons enough, but
because gold is cash in its most basic form. Better yet, even though
it’s quadrupled since its bottom in 2001, it’s also still an
excellent speculation. I can see somewhere between three and ten times your
investment in current capital. And there’s no limit to the upside in
dollars, depending on how rapidly the government destroys the currency.
To my view, that
offers an exceptional combined opportunity; by buying gold, you protect your
wealth but also have enormous speculative upside.
L: Plus,
as you like to say, gold is the only asset class that is not also
simultaneously someone else’s liability.
Doug:
Absolutely right. And in a world as financially unstable as today’s,
you just don’t want to hold on to someone else’s liabilities any
more than you have to. Especially if that’s a liability of an entity
like the U.S. government.
L: Got
it. You should own gold because it’s money, because of its security,
and because it’s an excellent speculation. In our publications,
we’ve been telling readers that they should have as much as 1/3 of
their portfolio in gold, 1/3 in cash, and 1/3 in investments that could do
well in times of crisis, including gold stocks, commodities, certain kinds of
real estate, etc. Do you think those are still the right proportions? That worked
out very well for our readers last year. Those who actually followed our
advice would have had 1/3 in gold and 1/3 in cash, so even if they lost 50%
of their remaining third, they would still have only been down 16.67% by the
end of the year. But that was then, and there were signs of short-term price
deflation, and now things are different. How should we be deployed today?
Doug:
That’s still a good balance, but if you start really thinking of gold
as cash, and the dollar as a merely temporarily fashionable means of
exchange, you’ll find yourself loading your portfolio with much more
gold and gold proxies. That will protect you against the very rapid loss of
value the dollar faces in years to come. Inflation is going to truly get out
of control.
The only reason
to hold any dollars at all right now, other than what you need for a few
months’ living expenses if you live in the U.S., is that there is still
a possibility of a very short-lived but catastrophic deflation. That could
make the silly things worth more in the short term and give you liquid
capital to deploy quickly into other asset classes. But certainly within one
year, I would start moving more money out of dollars and into gold and other
investments, possibly including well-positioned real estate and stocks that
could benefit from the destruction of the dollar.
And once again, I
want to emphasize, especially for Americans, that it’s not just a
question of what you have and what you’re doing in the market, but
where you’re keeping these things. Everyone, not just Americans, should
try to have half of their gold, cash, and investments outside of their
countries of citizenship and/or residence. You don’t want all of your
assets within easy reach of whatever government considers you its milk cow.
L: Good
reminder. Well, we’ve talked a long time again, but briefly, what are
the best ways to own gold?
Doug: I
prefer gold coins to bars. They are more recognizable and convenient. You can
walk into a coin shop in many places around the world, and they will recognize
your Gold Eagles, Krugerrands, Philharmonics, etc. Dealers, or the public,
may not recognize the hallmark of some bars.
For larger
amounts, I like GoldMoney.com, as I mentioned above, and I believe Kitco
offers secure and convenient accounts accessible online. I also think highly
of the Perth Mint Certificate program, especially for those who feel more
secure with some sort of government backing (though government involvement is
a reason to run in the opposite direction, in most cases). And, of course,
there are various banks that will store gold for you in vaults in London or
Zurich, that sort of thing. We cover these sorts of things in Casey’s
Gold and Resource Report.
L: Okay,
then, one last question: how about the gold stocks – where do they fit
into this picture?
Doug:
That’s a whole new conversation, we can cover it next week. For now,
I’ll sum it up with three words: leverage to gold.
L: Very
well then – I look forward to our next conversation. Thank you for your
time.
Doug: A
pleasure, as always.
You don’t
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economic storms. One of our current favorites has been so consistent in
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and S&P tanked – that we dubbed it "48 Karat Gold." Click
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Doug Casey
Caseyresearch.com
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