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. 

Regards,

Richard Gore ,aka  Richie, Dick RMG  and Smiley from Woodlawn.

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