Shakespeare calls it a saint-seducer and king-killer. “Yellow, glittering, precious” he wrote, gold “will make black white, foul fair, wrong right, base noble, old young, coward valiant.” It is, he says, the “common whore of mankind”; and he mused, “What can it not do and undo?”
Gold: Hit or Myth?
Gold! For sixty centuries people have fought wars, killed, cheated, lied, and stolen for it. We have taken it as a medicine; we’ve decorated our bodies with it; we’ve even sent it to the moon in complex circuitry.
People lose their lives for it, hide it beneath floorboards, put it in graves, make coffins from it, and smuggle it across borders in every imaginable way and in every human orifice. In Japan, businessmen pay $2 a minute to bathe in a 313½ -pound solid-gold bathtub shaped like a phoenix because each immersion is supposed to prolong life. In Calcutta, beggars pan for gold in gutters outside jewelry shops where tiny grains are rubbed from gold ornaments to test their authenticity. A Hawaiian auto dealer recently offered two ounces of gold with every new car. A Boston bank will give a bounty of 400 ounces of gold to anyone who can persuade a friend to deposit $1 million for a decade. And Scandinavian Airlines flies gold devotees to a remote mining camp above the Arctic Circle so they can pan for gold.
Gold has an aura and mystique that defies logic. Not as scarce as platinum, it is still more expensive. But it can be easily counterfeited. And there are many similar shiny substances – particularly the pyrites – that miners call “fool’s gold.” Centuries ago alchemists sought in vain for ways to turn baser metals into gold. And scientists today, tinkering with the atomic structure of matter, are closer to achieving the alchemists’ dream than anyone ever thought possible.
As world governments print more paper money to pay their debts as inflation rapidly erodes the value of this paper, gold once again occupies the center stage. During periods of prosperity and stable prices, gold is like a spore – almost lifeless but having immense innate vitality. Upset that stability and you hype the gold market. The Investor’s Encyclopedia of Gold notes that this metal is the “only simultaneous defense against both inflation and deflation. On the up side, gold, being a commodity, will appreciate in free-market price along with all other commodities. On the down side, in the event of a deflationary blow-off, gold, being money, will buy more of everything as prices fall. Thus, gold is the only universal hedge.” Silver and platinum, the encyclopedia observes, because they seldom function as money, are much “weaker defenses” during a period of deflation.
But if holding gold could cure everyone’s financial woes, wouldn’t the gold rush go on forever? Obviously, it hasn’t. The overall gold bullion market in the United States – where gold buying was legalized in 1975 – has been a flop so far. The official date for gold’s arrival here was December 31, 1974, but the public had already gorged itself on gold coins during ’74, and people were confused by the variety of ways to invest in gold once bullion selling began. Actually, there are now as many ways to “play” gold as there are positions in the Kama Sutra. To mention a few – besides coins, shares in gold-mining companies, and bullion – you can buy warehouse receipts, shares in a bullion fund, and gold features. And the sharpies in the gold market are devising more ways to take your money.
In truth, gold has not always been “as good as gold.” Let’s see what history shows us: in 1934, when private ownership of gold in the U.S. was prohibited, its price was raised from $20.67 to $35 an ounce. Forty-one years later, the price is now hovering over $170 an ounce and it even went as high as $197 an ounce in Paris in 1974. Big windfall, eh? Hardly. Gold remained at $35 an ounce until 1968 when Wester nations signed the Smithsonian Agreement in Washington – a Pollyannaish dream that envisioned a two-tier system where gold would sell for a stable price of $35 an ounce among central banks (later raised to over $42 an ounce and since revalued to the market price by some nations) and float uncontrolled in a free market. It turned out to be hogwash, because human nature will arbitrate any two different markets out of existence eventually; if you can buy an apple for five cents and sell it for as much as twenty-five cents elsewhere, the temptation and the motivation is great — no matter what the formal agreement. By 1971, sure enough, the United States was forced to untie the dollar from our rapidly diminishing gold stocks (down to $12 billion from $22 billion in 1945) when foreign investors demanded gold for their bucks. Successive devaluations (real and de facto) followed and the price of gold has risen in their crest. Thus, over the past five years, owners of gold have quadrupled their money — assuming they bought gold in 1971 — despite a downturn in mid-1974 and early 1975 and a relatively static price since then. “A bonanza for them, but hardly a reliable hedge over the long haul,” points out University of Chicago economist Milton Friedman.
Charles Stahl, an economic consultant who has long specialized in precious commodities, says the number one enemy of gold is compound interest. At 12 percent, he notes, money doubles in about six years; at 10 percent, in about seven years. “So, unless the increase in the price of gold can do better than that, there is very little incentive for an investor to hold gold.” Actually, holding gold in any form (coins, contraband bullion brought illegally into the country or held overseas, or jewelry) prior to legalization was a washout before 1971. But the meteoric rise in the price since then has been an irresistible lure for many Americans. Until late 1964, Americans were prohibited from speculating in gold coins; a collector could buy and trade, but not a speculator. But a change in the law two years ago permitted the collection of gold coins minted prior to 1960 or coins restruck after that year with pre-1960 dates. As a result, Americans rushed into the gold coin market in 1974, a year before they were permitted to buy gold bullion, and snapped up over three million ounces of these coins — chiefly in Mexican pesos and Austrian koronas.
Not surprisingly, many neophytes were fooled. Unscrupulous dealers overcharged up to three times the coins’ value, and many of these coins were fakes. And in the wake of this glitter glut, the price of gold plunged 28 percent from spring to mid-summer of ‘74, but shot back up as the date for legalization of bullion buying approached. The gold industry’s only authenticating laboratory, the American Numismatic Association Certification Service in Washington, D.C., estimates that one out of every three gold coins sold is not authentic. Many fake “Spanish colonial coins” supposedly found as sunken treasure were counterfeits, “minted” overseas; a “1733 pillar dollar” sold for$15,000 by a Florida dealer now under Federal investigation was purchased by the dealer for $10 plus postage from a “mint” in Southeast Asia. Also, thousands of fake American double eagles “minted” in Lebanon have been flowing into the United States over the past two years. John Seaholm, a New Paltz, New York, art professor, told Forbes magazine he had to sell his home because a $13,500 investment he made in gold coins turned sour. And Allen Park, Michigan, store manager Ervin Molzan handed over his $25,000 life’s savings in return for coins that experts suspect are worth only $900. “I feel stupid,” he says.
Molzan should not feel so embarrassed because he has a lot of company, lots of people have been tricked into buying worthless gold or overpaying for it, and few of the so-called monetary specialists really understand the situation. The late Ralph Rotnem, a sage Wall Street analyst, used to say that only two men in the world understood gold — and they disagreed. Indeed, most of the time-honored precepts about gold have fallen by the wayside in recent years. As soon as too many people begin accepting certain maxims about gold, the results are inevitable. They agree the price will rise; they buy precipitously; demand outstrips supply; and the price does rise. Then, like lemmings rushing into the sea, they decide the price will fall and all hurry to sell. But there are few buyers and the plunge in value wipes them out. Central banks can be just as taken in by their own reasoning. After they untie their currencies from gold, they assume the price of gold will fall. But during periods of monetary crises and economic unrest, some merchants or black-market operators will demand gold. American tourists discovered this several years ago when a few European hotels refused to accept dollars. This is why goldbugs insist that paper money is worthless and that gold is forever.
A recent incident in Vietnam dramatizes this thesis. Vietnamese pilots of small private planes evacuating refugees from the central highlands of South Vietnam during the spring offensive of the Vietcong and its northern allies demanded — and in many instances received — taels of gold (1.2 ounces) as payments. They would not accept piasters, the local currency. “It’s not surprising,” says Sidney Brown, a vice-president and economist at Deak & Company, a big international foreign-exchange dealer in New York. In one week during evacuation, piasters went from 1,100 to the dollar to 1,600 to the dollar. “And that was the asking price,” notes Brown. “There were no bidders.”
When citizens lose faith in their government, they also lose faith in its money, Brown says. “In countries torn by war, gold becomes the unofficial medium of exchange. During World War II, refugees fleeing from countries overrun by conquerors had to pay gold to corrupt officials. When the first contingent of U.S. soldiers landed in North Africa, our generals didn’t carry U.S. dollars, but pieces of gold. They used them to pay off the French naval commanders in Algeria who conveniently forgot their allegiance to the Petain regime. Merchants in France hoard gold in their mattresses to protect them against frequent changes in government. Farmers in India hide gold in jugs and vases because, seeing starvation and death around them, they are hedging against Armageddon.”
Many Americans have sharply criticized the government for not permitting them to hold gold bullion prior to 1975. In the forefront of these critics are the goldbugs, a small coterie of advisers who’ve been pushing gold in one form or another since 1960. Jim Dines, a leading gold bug and publisher of the Dines Letter, admits people haven’t yet rushed into the gold-bullion market. A recent and well-publicized daylong gold seminar he planned at Manhattan’s Carnegie Hall was postponed because of the lack of interest although tickets for the event were pegged at from $20 to $50 instead of the usual $250 Dines gets for a two-day seminar. Dines found only 500 takers, and Carnegie Hall seats 2,800. And although Dines himself purchased gold bullion at nearly $195 an ounce — the opening price the day of U.S. legalization — and it has since fallen below $170 an ounce, he is not disappointed.
Early in 1975 France revalued its gold holdings to $170.40 (since dropped to $167) an ounce from the previous “official” price of $42.22 an ounce. “Gold cannot go much beneath the price set by France, and at the current quote it is practically a risk-less speculation,” he maintains. Dines, a trim bachelor who holds a law degree and once worked for military intelligence, says he was “seduced” by the stock market when he was a $75-a-week law clerk. At forty-three Dines is semiretired and works only three days a week.
Like most goldbugs, Dines relishes his Cassandra-like role. “The next time there is a dollar crisis — and you’d better believe there will be one — the price of gold will skyrocket,” he says. “Americans will buy gold because they will say, ‘this much I don’t want to lose.’”
But some economists worry that governments can manipulate the price of gold either openly or secretly. It’s known that the Soviet Union is selling a lot of gold these days to finance its wheat purchases; and these sales are not reported to the West. So far this year the United States has publicly sold some of its gold stocks twice, helping depress the price. Also, both Italy and France have indicated they may sell gold if their economic situations worsen. “Because governments own so much gold, it makes gold investments very risky,” contends A. James Meigs, a Wall Street economist formerly with the Federal Reserve Bank in St. Louis. “Who knows what governments are going to do? I am distrustful of politicians because sometimes they don’t know what they will do until it happens.”
Dines retorts that governments are “powerless” to prevent the rise in the price of gold over the long run. “The little man will have his say eventually; he knows that paper money without backing is rubbish,” Dines says.
Right now the little man is confused. If he wishes to invest in gold, the choices are numerous:
- Direct ownership of gold bullion as coined bars (stamped from rolled sheets to exact weight and then struck with a raised legend or design).
- Direct ownership of bullion as cast bars (poured from melted gold, filed to exact weight and stamped).
- Holding of jewelry, art objects, ornaments, or decorative items of gold.
- Holding of gold-bullion coins (originals or restrikes such as the Panama Balboa or the South African Krugerrand).
- Holding of numismatic coins, valued well above gold content for rarity, market demand and attractiveness (old Roman and Spanish coins are examples).
- Trading of gold futures in commodity markets. There currently are two such markets in New York, two in Chicago, one in London where brokers sell both “spot” (today’s gold at today’s price) and “forward” gold (tomorrow’s gold at today’s price), and one in Winnipeg which opened in 1972.
- Investment in stocks of gold-mining companies, mutual funds of such stocks, or mutual funds which themselves buy gold bars (one, Bars of Gold, early in ‘75 shelved plans to go public, blaming “negative publicity” about gold and “the government’s campaign to persuade people not to buy gold”).
- Gold bullion for delivery at the bullion broker’s vault, at a bank vault, or at a warehouse in the U.S. or overseas.
- Trading in gold-delivery contracts, warehouse receipts, or bank certificates indicating ownership in bullion. Like mortgages and loans, these IOU’s are being traded and discounted in small, unregulated markets by sophisticated investors.
Each market, of course, has its advantages and disadvantages. Bullion buyers must assay their bars before dealers will buy it back. Assayers test the gold to make sure it’s all there and authentic. “The stamp on a gold bar is child’s play to duplicate,” warns Rudolf Hanau, a vice-president for Consolidated Refining, a company which turns out gold bars. “Also, checking gold’s specific gravity isn’t foolproof; tungsten has the same specific gravity. A sandwich of tungsten inside gold would test okay.” To avoid shaving a bar, some firms are enclosing them in plastic envelopes with seals that are difficult to duplicate.
“Today’s gold market is no place for the novice – unless he’s a masochist in search of a golden fleecing.”
Also, as noted, coins can be counterfeited. But if genuine, coins don’t require an assay costing from $50 to $100 before they can be sold to a dealer, and they give collectors genuine pleasure. Buying shares in gold-mining company stocks is safer because the market is regulated; flimflams are less frequent. But in every country where gold is mined for the U.S. market (U.S., Canada, South Africa, and some Central American and South American nations), there are peri Is: blacks have threatened to flood the mines in Africa; government taxation and ecological pressures raise mining costs in North America, penalizing the mining companies and hurting their stock.
Gold shares are also subject to the vagaries of the stock market and can be extremely volatile. In one day during September 1974, some gold stocks fell as much as 30 percent. An investment adviser who followed them, E. George Schaefer, had mailed a special delivery bulletin to subscribers of his weekly letters the previous weekend, warning that the “present atmosphere” wasn’t conducive to holding gold shares. His bulletin received wide publicity, and a torrent of gold-mining shares was dumped on an already nervous stock market where the only bright note since 1971 had been the gold stocks. Schaefer reversed his advice within a week, but the criticism he received from other market advisers for his flip-flop apparently was too much for him. Two weeks after sending out the bulletin, he jumped from the fourteenth floor of his Indianapolis apartment house, leaving a suicide note for his family. “Unfortunately, his bulletin was widely misunderstood,” says Indianapolis attorney Lawrence Hinds, a close friend. “What George was concerned about was that too many of his subscribers were going deeply into hock by buying gold stocks on margin. He just wanted them to take a breather. He never expected the reaction he got. The value of his own estate decreased by over 30 percent.”
In any gold market, therefore, it’s easy to see why there are so many shouts of caveat emptor, and why overreaction is the order of the day. Because the Securities and Exchange Commission in Washington does not require registration of investment programs in coins or bullion as it does for stocks, New York State Attorney General Louis Lefkowitz is backing a proposed state law that would require gold sellers to be licensed. Lefkowitz has good reason to look askance at the gold market. He has already uncovered three fraudulent mail-order operations in coins and bullion. In one case, a promoter advertising in foreign language newspapers promised to double the money of investors in one month; he’d had no experience in buying or selling gold. Another firm illegally diverted money from bullion accounts to buy land. And a third firm, Royal Mint, failed to deliver a half million dollars in orders to 130 investors throughout the country. Lefkowitz obtained a court writ to bar Royal Mint from continuing to sell gold, but it had already gone bankrupt. He charged it with engaging in a “Ponzi scheme” where money received from one investor was used to pay off others (Con man Ponzi took the American public for $8 million a half century ago in much the same way). Lefkowitz charged that “when the business of Royal Mint ground to a halt, the terminal investors were left with huge losses.” Some cases are tragic. A seventy-year-old widow from Palisades Park, New Jersey, lost over $24,000. “I haven’t any life insurance and that money was to pay for my last agony — sickness, death, funeral bills, and the rest to the hospital in which I die,” she sighs. An elderly Laredo, Texas, man writes: “The possibility of any available funds for reimbursement would be a godsend. When one stakes his life savings at age seventy-three, there is not much time for recovery.”
Complaints about gold frauds have also been growing at the President’s Office of Consumer Affairs. “Despite the many advance warnings to consumers, there have been a lot of rip-offs,” says Ms. Andrea Schoenfeld, a deputy director there. “In Denver, a fraudulent assayer in league with a dishonest promoter got a bank to issue them a huge loan using low-quality gold as collateral. One Western coin exchange was selling interests in gold coins it didn’t have. And in the Midwest — believe it or not — a visiting businessman bought a bar of ‘gold’ from a fly-by-night salesman and the gold turned out to be lead clad in gold leaf.”
Arthur Vuozzo, a fifty-one-year-old electronics engineer from Massachusetts, who lost more than $5,000 — 10 percent of his savings — when Royal Mint went out of business, says he learned a costly lesson. “I found out that no matter where you see an ad, never pay for gold by mail unless it’s first transferred to the bank where you do business.”
Aware of the pitfalls in an unregulated market, some legislators tried to delay the legalization of gold but failed. U.S. Representative Henry Gonzalez of Texas, who is chairman of a House banking subcommittee, tried to get a bill passed that would have delayed it for six months. “Unless Congress acts, a lot of Americans are going to buy gilded lead bricks,” he warned. But other Congressmen view legalization as a way to feather their own nests. Muckraker Jack Anderson reveals that U.S. Representative Phi I Crane of Illinois in 197 4 tried to push through a bill that would compel the Treasury Department to get Congressional approval before it sells gold. This would help restrict gold selling and push up the price. Anderson points out that Crane owns a $15,000 collection of gold coins and introduced his bill, which didn’t pass, only a little while after buying twenty-seven Austrian koronas for $5,000.
Some financial specialists are so enamored of gold, they are pushing for restoring the “gold clause,” which in the early part of this century was a common attachment to loan agreements, bonds, and mortgages. The clause provides that when payment is due, it can be demanded in gold at a fixed rate. These specialists point out that stronger currencies are backed by more gold. For example, from 1970 to 197 4, Switzerland’s currency gained 51 percent in value against the dollar, and its gold at current value is equal to 76 percent of its money supply. During the same period, the Italian lira lost 7 percent against the dollar; Italy’s gold, even at today’s price, covers only 17 percent of its money supply.
Constitutional lawyers are now debating whether legalization of gold in the U.S. again opens the door to the gold clause, even though Congress in 1933 outlawed it “hereafter.” Henry Mark Holzer, a teacher of constitutional law at Brooklyn Law School, is a strong backer of the gold clause. In a speech he made before a monetary conference that was reprinted in the Wall Street Journal, Holzer argues that the right to gold clauses is as inalienable as life, liberty, and property. The U.S Treasury has publicly stated that the gold clause restriction continues despite legalization but admits that the courts will be the final arbiters. Some people are indignant at this ambiguity. “When push comes to shove, the individual apparently has no inalienable rights,” wrote T. P. Dillon of Monroe, North Carolina, to the Journal. “Let’s face it: the central government of our home of the brave and land of the free is broke, busted, insolvent, and financially irresponsible.”
Since the dollar’s value continues to erode (some OPEC nations have refused dollars and have asked for SDR’s — a new international backup for paper money — for their oil) and since some foreign currencies are growing stronger (Switzerland recently imposed a 40 percent penalty on converting other currencies into Swiss francs kept on deposit there), Holzer and his supporters are surely whistling in the dark. To permit gold clauses would help bankrupt American industry and commerce. Actually, many gold bugs complain that legalization of gold is just a bone that has been thrown to the public — and too late at that. Franz Pick, one of the most irascible and outspoken critics of the U.S. Government, says the only way for the United States to stop inflation and make the buying of gold by the public unnecessary is to float a $500 billion bond issue with a coupon and principal linked to the cost of living. The bond’s interest of 2½ percent a year should be free of all taxes and the bond should not be redeemable for at least twenty-five years. “Brezhnev and Mao would put all their money into it,” he says. “That’s because it’s real value and not the mini-dollars being turned out in Washington.” Pick says the Federal Government is purposely frightening investors away from gold. The Treasury sold 754,000 ounces of gold in January 1975, ostensibly to “calm down” the new gold market. And another sale of close to 500,000 ounces was made last June — much of it going overseas. “This time we wanted to improve the U.S. balance of payments,” says a Treasury spokesman. “Do you know who are the gravediggers of the nation?” asks Pick, fully expecting to answer his own question. “They are the treasurers who sell shitty bonds which they hope to pay back with ‘monkey money.’ “
Most U.S. banks have been less than enthusiastic about selling gold. Midlantic Banks in New Jersey gave up after only three months in the business. Brokerage houses aren’t having much luck, either. “Should you buy gold?” asks a slick booklet put out by Merrill Lynch, Pierce, Fenner & Smith. The booklet is careful to point out that gold doesn’t produce income and has no guarantees for capital appreciation. So far, the customer response has been close to a whimper for the nation’s largest brokerage house. “We’re making only about five or six sales a day of five to ten ounces each — hardly worth our while,” admits Bryan Hall, a broker in Merrill Lynch’s Hollywood office. But only twenty miles north of the Merrill Lynch office, business is booming at the Golden State Coin Exchange. “Most of our clients are people who don’t want to expose their names to the public,” confides Allan Stuppler, co-owner of the California store. “They stash the bullion or coins away in safety deposit boxes and forget about it. We do better because banks are afraid gold sales will deplete their cash reserves and brokerage houses tremble about gold sales hurting the stock market.” Stuppler calls gold the best hedge against disaster. “We believe in gold,” he says. “The banks and brokers don’t have their hearts in it.”
Critics of gold buying accuse its boosters of promoting self-serving fears of economic chaos. Comments Robert Bael, a portfolio manager for Sperry & Hutchinson, the huge trading stamp company which does a lot of investing with its cash flow: “We sometimes talk in theoretical terms about gold going to $500 an ounce or $1,000 an ounce through free market forces. It seems to me that we would then be in a world created by massive negative redistribution of private wealth, if there were any left. It could be a world of deprivation, of famine, of social chaos, and political disorder. And it could be a world of increased control and diminished human freedom. If you really believe it’s coming, you should buy a few pounds of gold, some bags of silver coins, and a shotgun … and then leave for the hinterlands.”
Who actually buys gold? Dr. Henry Jarecki, chairman of one of the world’s largest bullion dealers, Mocatta Metals, puts buyers in five categories: the industrial user, the speculator, the investor, the traditional hoarder, and the apocalyptic hoarder. “In France, for example, where traditional hoarders are numerous, 25 percent of the average middle-class citizen’s estate consists of some sort of gold assets,” he notes. “The apocalyptic hoarder equates Watts with St. Petersburg and expects some day to escape rioting masses by throwing gold coins in their midst,” states Dr. Jarecki, who ought to know since he’s also an associate professor of psychiatry at the Yale Medical School. Jarecki moved into the gold market through his use of computers for diagnostic statistics. His computer know-how has aided him in gold and silver arbitrage — the quick and accurate offsetting of different prices around the world to make a profit.
Will gold always retain its fascination for the human mind? Dr. Jarecki turns to the wall of his office with a Dickensian twinkle in his eye. There hangs a huge blowup of a cartoon from “The Wizard of Id.” The much maligned and extremely short king stands on his balcony, speaking to his dejected and buffoonish subjects gathered below. “Remember the golden rule,” says the king. Below, the king’s credo is spelled out: WHOEVER HAS THE GOLD MAKES THE RULES.
Interestingly, considering this article first published 50 years ago as of this new Legacy post, gold hit an all-time high this past week … at $4,000 an ounce. At least we have an answer for that final question here: YES! Gold will always retain its fascination for the human mind.
