March 5, 2010--Gold Bugs

I have a friend here who is buying gold. Gold coins. He is a smart guy and savvy investor; and when I ask him why he keeps buying them, since I am skeptical about the wisdom of this, he says, "When things are this uncertain in the economy gold is the best thing to have. In fact, it's not only a safe investment but in the past year or so when other forms of investment have fallen, the price of an ounce of gold has nearly doubled."

"But aren't there buying and selling costs?" I asked, "And what about storage?"

"There are some of these," he said with a wink. And then, patting me on the back while racing out to buy three more Krugerrands, added, "And if it really hits the fan, I have an attache case full of them which should keep me in good stead. Further," he leaned closer to me and whispered, "if you want my real opinion," I indicated that I did, "the best thing for the United States and the rest of the world would be for us to go back onto the gold standard."

Since this latter comment took me into unfamiliar territory, I called my brother-in-law who knows about all things financial and asked him what he thinks about gold.

He chuckled and said, "It would take me an hour to tell you all the reasons why that would be a disaster--for example, it was tried in the 1920s and contributed mightily to economic stagnation and eventually the Depression. But rather than your taking my word for it, read Liaquat's Ahamed's book Lords of Finance. It covers that period of history as well as anything I've read, very much including the move by the victors and the vanquished of the First World War to restore the gold standard. He has no axe to grind and it's readable," he meant for someone such as me without much background in the history of finance, "and when you finish reading it call me again and then we'll really have something to talk about."

So I got a copy and, by only page 13, was brought up short by a stunning footnote. It read:

The totality of gold: The total amount of gold mined until 1913 was calculated to be 750 million ounces, or 22,500 tons. . . . Because a cubic foot of gold is estimated to weigh about half a ton, this would amount to 45,000 cubic feet, equivalent to a cube with sides about 35 feet.

All the gold mined in human history up to that point could be stored in a small bungalow? I did some cross checking and this seems to have been true. So very little in quantity on the eve of World War I upon which to base the world's monetary system. This seemed incredible to me. But, again, it was true.

That's the point, isn't it, to back currency with something scarce and of enduring value, which is of course related to its rarity and to the fact that we can't very easily go out and smelt more of it.

After the War to End All Wars (a grandiose and tragic absurdity which subsequent history more than amply demonstrated), with most of Europe under pressure to repay the enormous and irresponsible loans combatants sought to advance their military aspirations (sound familiar?) as well as the onerous reparation burden that was applied to Germany (still not fully paid off nearly 100 years later), the U.S. and England felt pressure to join the other major powers and go back onto the gold standard; and, as already noted, this contributed at first to a stock market bubble and shortly after that to financial panic and the crash that led to the Great Depression.

Gold, according to Ahmed and the myriad sources upon which he draws, put all the Western economies into "straightjackets" that took away their ability to be nimble when it came to adjusting interest rates and their money supplies as the bottom began to fall out of the developed world's economies.

I am about three-quarters of the way through Lords of Finance but still that 35 foot cube of gold has been haunting me.

Convinced that this factoid is true, still, I continue to wonder, though that was all the gold there was in the world in 1913, how about by 2010? How much gold is there now? Clearly, enough to keep minting my friend's Kugerrands as well as to convince him and many others concerned about government spending, expansion of the world's money supply (to go further into debt we and others need to print more and more paper money), inflation, and the concomitant expansion of ours and other's national debits. There is enough gold to convince him and them to call for using gold again to back the world's paper currencies.

So I looked it up and found that by the end of 2009, up from the 22,500 tons in 1913, all the world's gold today, all the gold mined during the entire history of the world totals 161,000 tons. And again, since one cubic foot still weighs half a ton, how many cubic feet is that, and how large a structure would we need to house all of it?

161,000 tons is the equivalent of 322,000 cubic feet and it would take a building only 68 by 68 by 68 feet to hold every last ounce and karat of it. A place not much bigger than a McMansion.

Knowing this hasn't made it any easier for me to sleep at night. I would feel much more comfortable about things if we had enough gold to need, say, Madison Square Garden to house it all. That would feel like a lot of gold. And, I can't help but wonder, living here for the winter between Palm Beach and Boca Raton, if the folks who keep track of the world's gold supply have included all the bling still on display in spite of what Bernie Madoff inflicted on so many of my neighbors.

Just a thought.