The dollar value of the euro has plummeted, as European leaders have once again failed to restore confidence. But soon the media and the markets will refocus on the dismal fiscal outlook in the U.S., where Congress and the administration face, yet again, the need to increase the debt limit. The stakes are higher this year, because the Bush-era tax cuts expire at year-end and automatic spending cuts will take place if a deal is not reached. In short, the euro and the dollar appear to be in head-to-head competition for the title of “least-bad” currency.
Some lessons are never learned. Below we have reprinted an excerpt from AIER’s Economic Education Bulletin four decades ago, when investors faced similarly unsettling circumstances:
Why Gold? Economic Education Bulletin Vol. XII No. 5 May 1972 American Institute for Economic Research:
“The supposedly ‘responsible men’ in charge of the central banks of the world have had ample opportunity to demonstrate their ability to manage money-credit systems without the discipline of gold. Economists indoctrinated with the Keynesian dogmas and politicians who ‘never had it so good’ (as they have found life to be in the flight from reality induced by prolonged inflating) have collaborated with money managers to erect a great inverted pyramid of paper credit.
Now the end approaches. They, the governments and money managers, have succeeded in making gold relatively the greatest bargain in the world, simply by inflating currencies and thus pushing up the prices of everything else. The economic distortions created in the process are staggering in their magnitude and complexity.
Great inflations are not something new in the world, but heretofore they have not been worldwide. On previous occasions, such as the Mississippi
Bubble engineered in France by Lord Keynes’ spiritual ancestor, John Law, or the South Sea Bubble in England, or the more recent great boom centered in the United States during the 1920’s the scope of the economic distortions was limited by relatively less inflating in other countries. But in the past quarter century, with the aid of U.S. dollars, nearly all nations have participated. Now there are only two alternatives:
1. Either the United States in particular and many other nations as well must deflate drastically for a prolonged period in order to remove inflationary purchasing media from circulation and correct the many serious economic distortions; or,
2. The dollar and most other currencies must be devalued by raising the ‘price’ of gold.”
The accompanying chart depicts the gold price during the decade that followed.
While we will not opine as to whether gold is “relatively the greatest bargain on earth” at present, we are as confident as ever that most investors would be wise to devote five and ten percent of their portfolio to gold related assets.
We revisit this article not as a forecast of impending doom. On the contrary, today’s problems, while they are of a greater magnitude in the amount
of specie involved, are not new to politicians or investors. The choices are the same then as now.
History teaches that policymakers faced with an anxious and angry electorate invariably choose the easy way out, by inflating away the value of sovereign debt. This leaves investors with a Hobson’s choice. One can hold cash and short-term bonds, which provide relatively stable nominal returns but almost certain losses in real terms.
Equities and gold, on the other hand, can outpace inflation over time, but are highly volatile in the short-term. Our recommended portfolios recognize these alternatives and provide a range of options for investors with varying circumstances.
Also in This Issue:
Sound Money, Free Markets, Property Rights, and the Individual Investor
Corporations and Risk Sharing in Capitalist Economies
Should Investors Buy High Dividend-Yield Stock?
The High-Yield Dow Investment Strategy
Recent Market Statistics
The Dow-Jones Industrials Ranked by Yield
Asset Class Investment Vehicles
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