Gold will become money again(Read article summary)
Until recently, it was unfathomable to many that gold would become a more preferable currency than the US dollar
Reuters / File
On the night our documentary I.O.U.S.A. made its nationwide premiere in August 2008, the film was followed up by a live panel discussion, broadcast via satellite. Our friend David Walker, the former US comptroller general and â€śstarâ€ť of the film, took partâ€¦along with several other luminaries.
At one point, the question was asked: Might Americaâ€™s trading partners one day sell off their US Treasury holdings?
Impossible, said Warren Buffett. In fact, he insisted, they couldnâ€™tâ€¦because theyâ€™d need to convert it into some other currency, which would be little better than the dollar. No one else chimed in to challenge the assertion.
â€śBuffettâ€™s answer assumes that there is no alternative,â€ť author, friend and local Baltimore resident Bill Baker writes in his 2009 book Endless Money: The Moral Hazards of Socialism, â€śbecause for generations, all the worldâ€™s currencies have been backed only by the promise that governments would accept them in payment of taxes.
â€śBut that ignores a currency that has been used effectively by man for thousands of years: gold. China and other countries might exchange their US dollars for it now.â€ť
Indeed, China is quietly building its gold reserves. They totaled 600 metric tons in 2004. Then in April 2009 came an announcement theyâ€™d grown to 1,054 metric tons. And the buzz from Beijing is that the central bankers want to grow that stash another tenfold.
Meanwhile, China has trimmed its US Treasury holdings for three months in a row. The January total was $1.15 trillion â€“ down 1.75% from October.
These are the first steps toward what Baker sees as the â€śremonetizationâ€ť of gold â€“ coming soon to a country near you.
History is a pendulum.
â€śOnce gold and silver had been written into the Constitution,â€ť Baker says, â€śno one might have thought that it would be replaced by paper within 60 years.â€ť But the pendulum swung, the Union issuing its infamous greenbacks during the Civil War.
Then the pendulum swung back, the greenbacksâ€™ critics were â€śable to successfully push for an agenda of gold resumption. But before the London Economic Conference of 1933, the world would be shocked by Rooseveltâ€™s rejection of the gold standard.â€ť The pendulum swung again.
Now, â€śa series of crises such as was the case in Rome might ultimately bring the pendulum back toward gold,â€ť Baker writes.
In other words, weâ€™re approaching the end of the Great Dollar Standard we wrote about in The Demise of the Dollar. The only world anyone below the age of 40 has ever known â€“ in which all the worldâ€™s currencies float freely against each other â€“ is nearly over.
And Baker is investing accordingly.
In late 2010, he began accumulating shares of a tiny gold miner called Orezone. â€śOur cost basis is 78 cents, and now itâ€™s $3.61,â€ť Baker tells us on a wintry afternoon in his office on the outskirts of Baltimore. â€śIâ€™ve sold off two-thirds of the shares that I own, and itâ€™s still one of our largest positions. I canâ€™t keep it down!â€ť
Itâ€™s a good problem to have. And Baker has it because heâ€™s willing to go further afield than your typical money managerâ€¦as far afield as Burkina Faso.
Weâ€™ll pause here to place it on a map, so you can get your bearings. (If you were a geography geek growing up, you might remember it as Upper Volta.)
â€śI read these other quarterlies from these hedge fund managers,â€ť Baker tells us, surrounded by family pictures, CDs of composers like Brahms and rafts of company research. â€śTheyâ€™ll get really absorbed in the macroeconomic picture, but they donâ€™t really know what theyâ€™re doing, so they just buy GLD [the gold ETF].
â€śOr theyâ€™ll hire two all-star Canadian analysts. Then I look at what they own, and they own Gabriel Resources because John Paulson owns it. Itâ€™s safe. Or they bought some big South African company because itâ€™s cheap based on reserves in the ground when they ran it through their stock screener.
â€śThey donâ€™t have a coherent philosophy about really kicking the tires and really finding these companies that people donâ€™t know about.â€ť
Baker does. His firm, Gaineswood Investment Management, has taken sizeable positions in tiny gold miners working well off the beaten paths of the Americas, Australia and South Africa.
Burkina Faso is smack in the middle of a geological formation called the Birimian Trendâ€¦the richest source of growth for gold miners in recent years.
Even better is how many miners in West Africa have consolidated their holdings. â€śIn Canada, you might have a district filled up with 12 companies. One company might have each block, or half a block. But in West Africa, these guys own all of it. Theyâ€™ve got a lot of time, a lot of land, and now theyâ€™ve raised a lot more money, so they can keep going after itâ€¦and weâ€™ll keep getting these upside surprises.
â€śThatâ€™s our philosophy, to find opportunity where, for example, this one outfit has found 1.2 million ounces of gold. But with all the new discoveries theyâ€™re making, theyâ€™ll probably come out and say we have 2, 2.5, and next year theyâ€™ll say, well, we have 3, 3.5, 4â€¦ and it isnâ€™t over yet, because of this whole giant region thatâ€™s been unexplored.â€ť
Before we go any further, weâ€™d better make something clear: Bill Baker isnâ€™t your typical gold bug. Nor is he your typical stock market bear.
â€śThe timing or eventuality of financial calamity is unable to be forecast,â€ť Baker writes in Endless Money. â€śAt best, it might be like a hurricane warning: The tempest may strike here, it may hit there, it may be downgraded to a tropical storm or it may go elsewhere entirely.â€ť
But that doesnâ€™t mean investors should fail to prepare for financial calamitiesâ€¦or the demise of paper currencies. Financial calamities are becoming increasingly likely in this overly indebted world of oursâ€¦and the death of paper currencies is becoming increasingly certain. The best time to prepare is ahead of time.
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