Wickware Quarterly – Spring 2011
Maybe it’s time to consider trading your cash for gold, because a growing chorus of experts believes it is not only the most reliable store of value, but may once again become the world’s reserve currency.
The words blare from television screens and jewelry store windows: “We pay cash for gold!” Across the land, the surging price of gold — from around $250/oz a decade ago to $1,500/oz recently — is turning forgotten trinkets into veritable treasures. And while the sellers must be pleased with their windfalls, one has to wonder who really benefits.
“The value of the U.S. dollar will be precisely its intrinsic value, namely zero, precisely zero,” said Dr. Marc Faber a few weeks ago on CNBC. The contrarian investor, money manager, and author of The Gloom, Boom & Doom Report is a legendary “gold bug” — an investor who believes government-issued “fiat money” has no value, and that gold and other hard assets are the only true stores of value.
It’s easy to forget that paper money was backed by a real, physical precious metal throughout much of history — from late antiquity, through the Byzantine empire, to the 1873 adoption of a gold standard by the United States. In 1941, the world’s major industrial states adopted the Bretton Woods system, which set the exchange value for all currencies in terms of gold. That meant that, as recently as the 1960s, the owner of a U.S. Federal Reserve Note could redeem it for gold, and a dime was composed of 90% silver.
Free money
In 1971, under pressure of mounting budget and trade deficits, President Nixon decoupled the dollar from gold, which permitted the government to print money freely without the need to back up each dollar with a quantity of gold held in a vault somewhere. And that’s why Faber believes the paper is now worthless.
Whether you agree with his assessment or not, there’s no denying that an abundance of dollars has contributed to a severe erosion in value relative to precious metals. According to Faber, the dollar-denominated Dow Jones has fallen by more than 80% over the last 10 years when measured in gold or silver terms.
Former presidential candidate and editor of Forbes magazine Steve Forbes thinks a return to the gold standard may be the only way to restore faith in the dollar.
“The Fed has been on a bender since the early part of the last decade, printing too much money,” he said at a recent lecture, adding that within the “next five years, for the first time since the 1970s, the dollar will be re-linked to gold. Gold provides a stable value, as much as you can, in this imperfect world.”
Our view
Forbes is not the first person to predict a return to the gold standard. Even if it never happens formally at the government level, it’s already happening informally as investors trade their cash for gold. Either way, we’re confident that people will always find ways to keep and exchange value.
The Fed has been on a bender since the early part of the last decade, printing too much money.”
