Date: 12/28/2022
Author: Mr. X
No investments are quite as political as precious metals.
Many believe, not without reason, that money is not legitimate unless it is backed by precious metals.
Some of the greatest political disputes in American history revolved around the issue of whether dollars should be backed by gold, silver, both, or neither.
Arguably the greatest speech in American history, William Jennings Bryan’s address at the Democratic National Convention in Chicago in 1896, was about what some might consider a rather dull subject. He was arguing about whether the United States should back the free coinage of silver at a ratio to gold of 16 to 1. Before you start to unpack what all that means, (tl;dr, it just means more money and circulation and thus more relief for debtors), this is how the future Democratic nominee put it.
You come to us and tell us that the great cities are in favor of the gold standard. I tell you that the great cities rest upon these broad and fertile prairies. Burn down your cities and leave our farms, and your cities will spring up again as if by magic. But destroy our farms and the grass will grow in the streets of every city in the country…
If they dare to come out in the open field and defend the gold standard as a good thing, we shall fight them to the uttermost, having behind us the producing masses of the nation and the world. Having behind us the commercial interests and the laboring interests and all the toiling masses, we shall answer their demands for a gold standard by saying to them, you shall not press down upon the brow of labor this crown of thorns! You shall not crucify mankind upon a cross of gold!
By all accounts, the crowd reacted with screams of support, some people even throwing their clothes into the air. Bryan was a great speaker, but even the greatest orator couldn’t have created such a reaction unless people truly believed something fundamental was at stake.
It was.
Money, when all is said and done, is about faith. You are accepting pieces of paper in the assumption that others will regard them as valuable too. When you’re suspicious of the government, you don’t want just pieces of paper. You want something that has been held to be universally valuable in human history.
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Governments generally don’t like this competition.
It astonishes me that many people don’t know that President Franklin Roosevelt actually outlawed private ownership of gold in excess of $100 (about $9,000 today) in 1933 via an executive order. The next year, the Gold Reserve Act outlawed private ownership above that figure. Some pictures you see from the Great Depression of “bread lines” are actually people lining up to turn in their gold. After taking the gold, the feds set a new price, which encouraged gold around the world to flow into the United States as a safe haven. Gold ownership was only fully legalized in the 1970s.
This may sound crazy because now it seems that everyone is demanding we buy shiny rocks. Every website, tracking ad, and short video before something I want to watch on YouTube is promising me a “Special Report” (which apparently no one else can see) about how the dollar is going to collapse and only gold and silver can save us. It’s especially prominent on the political right.
For example, Dr. Sebastian Gorka was former Deputy Assistant to President Trump and is now a conservative commentator. He’s endorsed one specific gold company. Conservatives pushing for gold ownership isn’t new. Politico was chortling about it in 2009. Yet given that gold was up about 27% in 2009 and 2010 annually, those who bought, held, and sold before 2013 had the last laugh.
The specifics change, but the core argument remains the same.
When Bryan spoke, the economic progressives of those days wanted to encourage more “cheap” money by allowing currency to be backed by silver. More fiscal conservative leaders like President William McKinley wanted “sound money.” However, when FDR confiscated gold, it was to allow the Fed to increase the money supply. In time, President Richard Nixon would take the United States off the gold standard altogether, because the demand for dollars was so great that it was making imports cheap and exports expensive. President Nixon’s unilateral action led to economic chaos and remains controversial to this today. Ultimately, it led to today’s global market where many currencies are allowed to “float” and compete against each other – a system that also allows central banks more direct control over monetary policy.
There’s an assumption that money backed by gold and silver is somehow more honest, or moral, than “fiat” currency backed by a government. This isn’t really true.
Money linked to a limited supply can prevent massive inflation, but there’s nothing inherently useful about gold and silver except that they are reasonably efficient ways of transporting wealth throughout history. Gold and silver are also not magically exempt from spikes in supply. The spoils of the Spanish conquests in the New World sparked what historians call the Spanish Price Revolution, a wave of inflation from the later 1500’s until the early 1700’s.
Yet we just can’t do without gold and silver. Historically, they have come to represent not just physical wealth but even metaphysical, spiritual, or religious principles. We talk about a “Golden Age” or “Silver Age” in everything from the rise and fall of civilizations, to sports, to comic books. Gold and silver are symbols burned into the collective unconscious of the human race, so they will never quite lose their luster. However, they are still fundamentally built on faith just like any source of value.
One popular online theory holds that powerful actors are deliberately throttling the price of silver. The solution to defeat these oligarchs, some say, is to buy physical silver, thus creating a silver squeeze that will supposedly make owners rich. As with AMC, Gamestop (GME), and other “meme stocks” during the pandemic boom, a commonly held belief creates value, even if it is based on false premises. Value is a social construct – something is valuable because people believe it is valuable. In different situations, different things are valuable. Precious metals are simply the things that throughout history have been commonly associated with wealth.
Before you even start pondering the difficulty of central planning, the failure of the Soviet Union, or the mysteries of how common ownership will make the state “wither away,” we can dismiss Marxism out of hand because Karl Marx’s Labor Theory of Value is flat wrong. Hundreds of hours of labor can still create something that is worthless, whereas a second’s worth of “labor” can lead to you finding something valuable on the ground.
Gold and silver have some industrial uses, but not many. If anything, I’ve strongly favored silver because of its increasing industrial importance. Gold too can be used in electronics because it is a good conductor and silver can be used in solar panels, among other uses. Yet let’s not kid ourselves – when gold and silver are up, it’s because people are losing faith in the system.
Generally, we’ve seen gold and silver follow stocks. However, as the market has struggled recently, gold and silver have done better. As of this writing, gold was above $1,800 an ounce and silver was above $24 an ounce.
Those who read Rogue Investing Daily can probably quote from memory what I say over and over again – stack physical silver, a little each week, and then forget about it.
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On August 24, I said to prioritize silver over gold. It was $19.12 then. On September 28, I said to start stacking silver if you haven’t already. It was just under $19 an ounce then. Early last month, I checked in again on silver, and it was over $21.20 an ounce. Now it’s surged even further.
This could be mining’s moment. The federal debt is now over $31 trillion. Debts and deficits haven’t mattered for a long time, but there does come a point when these numbers really start mattering. The dollar remains triumphant now simply because there is no credible rival. In fact, one could argue that the main reason for American support to Ukraine is to defeat Russia’s attempt to create the much-touted “multipolar world order,” which would be heavily interested in creating a competing global currency. For some time, it looked like China was going to step up as the challenger with its digital yuan – but the Chinese economy and political system looks far weaker than it did two years ago. We can’t even say with confidence what’s happening with COVID-19 in the country because it’s no longer reporting the daily death count.
I don’t think the dollar will fall anytime soon, perhaps not even in the next decade.
Yet as the deficit increases, even tighter monetary policy can’t support the dollar indefinitely. It may actually make things worse, because the United States will have to pay more just for the interest on the existing debt. It won’t matter now. It will matter a lot in about a decade.
The Russian effort to build a “multipolar world order” is mired in the muck around Bakhmut. The efforts by Russia, China, and some members of the BRICS economic group to set up a new financial order will fail unless Russia wins on the battlefield. Given that Russia is fighting an army defending its homeland and with practically unlimited support from all of NATO, that’s going to be a tall order. President Putin’s best hope is simply to take the Luhansk and Donetsk People’s Republics, keep the land corridor to Crimea, “freeze” the conflict, and hope that recession and energy concerns will at least slow down or stop Western aid. That’s a desperate gamble and there’s no sign of it working so far. In the United States, despite some dissent on both the left and right, support for Ukraine among elected officials is monolithic.
For the long term, stack and forget remains the best strategy. However, for those who have been stacking for just the last month, it may be a time for choosing. The stock market is wildly volatile right now, and 2023 is probably going to be worse. The UK will be in recession, Europe probably will be in one, and the United States may only escape by the narrowest of margins. This is not the “Roaring Twenties” the so-called experts were predicting when President Joe Biden took over.
If you were buying in late September when silver was $19 an ounce, you’re now looking at a gain of over 25% in about three months.
That’s not bad in these market conditions and it’s not unreasonable to sell given that gold and silver will likely follow stocks if 2023 starts off with a decline. You can take that profit and be content, or even sell part of your holdings. If you’ve been stacking all along, you should have quite a bit now.
However, hang on to some. This may be a long, slow, and even boring play but it’s for the highest of stakes. The United States of America is likely to remain the global military and financial hegemon for the rest of the decade, so don’t expect a collapse in the dollar anytime soon. Yet a decade isn’t that long a time period, and the prospects of the debt ever being reduced are laughable.
If you have the time to wait, wait it out. If you don’t, take some of the (sound) money and run.
Gold and silver are not magically exempt from other economic rules, or are they a proof of political or moral virtue. They are commodities like any other and they are having their moment. As a hedge they are invaluable; as an investment, gains like this in such a short time are rare.
Tech is stumbling, energy companies may be near the top, crypto is, well, you know, and firms are running away from ESG. Take the profits while you can if you need something now. If you’re hoping for the epic payoff when King Dollar finally loses his throne, you’ve got a lot longer to wait. If you’ve got the time, stack and forget it. Gold and silver aren’t going anywhere.
Just make sure you take your profits before things get too out of hand. After all, if things really go south, the government can take it from you. They’ve done it before.
Mr. X is an investment analyst working in the Washington DC area who specializes in the intersection of business and public policy. After fifteen years working in politics, he writes on a classified basis for RogueInvesting.com to bring you news on what those with power are debating, planning, and doing.
