February 20, 2012
During February 1962, fifty years ago, I was fortunate to be assigned to Citibank, Johannesburg for a two year training assignment in foreign branch operations.
South Africa was synonymous with gold mining and our bank , on Fox Street, faced the Johannesburg stock exchange where the shares of gold mining companies traded actively.
Our Assistant Manager was on a two month London home leave, and our Managing Director, Don Hykes, thought it would be to my benefit if he invited me, the only other USA Citibanker in South Africa, to a lunch for four at The Three Vikings Restaurant ( a meal which I still savor…….. 50 years later ! ).
The other guests were Citibank’s President, George Moore, on a vist from 399 Park Avenue, and Harry Oppenheimer, ( son of Sir Ernest Oppenheimer ), and Chairman of Anglo American Corp, the world’s largest mining conglomerate which included South African gold mines, copper mines in Rhodesia and the famous DeBeers Diamond mining complex. My boss, Don Hykes, was famous in his own right as the first American dropped behind Japanese lines in China during the war. He was born in China to missionaries and could speak fluent Mandarin. When Hong Kong fell on Christmas day 1941, he personally surrendered the vault keys of Citibank to the Japanese . He would later be exchanged and then join the OSS. There was a book in progress about his exploits and talk of a motion picture with Jimmy Stewart playing Don Hykes.
The main luncheon topic centered on the relationship between gold and the US dollar, then pegged at $35 per ounce. The Oppenheimer argument was that at $35 the price of dollar / gold was totally unrealistic and should be at least $50 if not set free to float. The Moore argument was that there was really no practical need to change anything because the world had accepted the US dollar as a reserve as good as gold.
Now lets jump ahead 50 years to see how this all played out.
Annual USA inflation since 1962 has averaged 4.14% and a 1962 US dollar valued for inflation would now cost $7.31. At $35 per ounce in 1962, the inflation adjusted price of gold should now be $255.85 per ounce…..but it isn’t. The price of gold is now $1,737.67. That difference would indicate that President Moore’s confidence in the dollar has not been confirmed by free market action over the past 50 years.
What accounts for the difference ? Fear of the future.? Distrust of USA monetary and fiscal policy ? Is it also that a rapidly growing Asia has such a strong cultural attachment to gold? We do know that soverign investors such as China are loaded with US Treasury debt and need to diversify. Today it seems as though no country wants a strong currency because it puts export pricing at a tremendous disadvantage and people out of work. Ask the Swiss, who threaten to actively drive down their currency !
With no currency as good as gold, ……….advantage …………..gold !
The Dow ended February 1962 at $708 while it closed last Friday at $12,949.
So, in non-inflation adjusted terms, gold has increased by a multiple of 49.6 times its 1962 price while the Dow has increased 18.29 times. Does that mean the Dow has some catching up to do, or is gold overvalued.? Or, neither ?
Going back to 1962 , it clearly would have been a good move for me to have invested in gold then. But, the closest I came to owning gold was failing to take advantage of the offer made to me at Robinson Deep, a gold mine close to Johannesburg. I was told that if could pick up a gold bar with one hand and make it to the door without dropping it the bar would be mine!
At that time, and in that context, what should I have done about gold ? If that 1962 luncheon had taken place today, and if I cared to, it would be easy to buy physical gold via an ETF….”GLD” .
The big question is whether gold will continue to climb from here ? Or, is it about to rollover. ? Should I heed the wisdom of Warren Buffett who considers gold more a speculation than an investment because it has no practical use, no financial innards or cash flow to dissect. Or, should I pay more attention to the discrepancy between China’s actual gold imports and its purchases ? Is the world politically all clear or is there a threat out there that will make people refuse paper , plastic and computer money and insist on physical gold and / or diamonds.
My course is right down the middle. I want to own financial ” physical “ gold, via the ETF…” GLD”, not gold coins because I don’t think things will get that bad in whatever time I have left. If I had 25 plus years in front of me you can be certain I would be purchasing physical gold including coins and jewelry.
But, I don’t have 25 years in front of me. So I am doing what the Chinese are doing. I am investing in physical gold ( but via the ETF..” GLD”) as a hedging vehicle based on the tremendous amounts of new paper currency being created by the world’s Central Banks… AND trading around occasional spikes in the fear index.
Richard Gore ,aka Richie, Dick RMG and Smiley from Woodlawn.