Op-Ed Opposites

November 24, 1997 – Two op-ed articles about Gold appeared last week in two of London’s leading newspapers. The timing is not surprising. Given the low Gold price and the current discussions about Gold’s role in the proposed European Monetary Union, one would expect some editorial opinion. And as is often the case of ‘opinions’, one article was very well reasoned and worth reading, while the other was pretty much a waste of time.

The worthwhile article appeared in The Times on November 20th. It was penned by Lord Rees-Mogg, a gentleman whom I first met some fifteen years ago and subsequently have had the fortunate opportunity to meet on a number of occasions. His books, articles and speeches are invariably very interesting, thoughtful and well researched. I have always found it to be worthwhile to listen to his point of view.

The other article appeared one day later in the Financial Times. Written by Robert Choate, a reporter for the newspaper, the timing was most conspicuous.

I have discussed before the anti-Gold bias of the Financial Times and its affiliated publication, The Economist. It appeared that the editorial staff offered their commentary “Loss of lustre” in an attempt to hurl back a retort, if not to Lord Rees-Mogg directly, then to anyone with something positive to say about Gold, lest any well reasoned article about Gold in the print media go unanswered.

The Financial Times is a reasonably good newspaper. I read it every day, and have done so for years, because their international business coverage is among the best available. However, when it comes to Gold, their bias is so strong that one has to wonder why they even bother to attempt shrouding their anti-Gold propaganda in a cloak of feigned impartiality. Does anyone really believe their overtly prejudiced dribble, particularly when it is factually incorrect?

For example, in referring to the July announcement by the Australian central bank about the dishoarding of a portion of its Gold reserve, the Financial Times reported: “But Australia’s announcement in July that it had sold two-thirds of its official holdings came as a big blow. This was the first time a major gold producer had made central bank sales.” Really? What about the 500 tonnes dishoarded by the central bank of Canada in the late 1980’s and early 1990’s?

Mr. Choate’s ignorance about the importance of Canada as a major Gold producing country and/or its dishoarding of 80% of its Gold reserve speaks volumes about the substance of this article – it is based on specious reasoning designed more to convey an anti-Gold bias rather than to offer any objective appraisal of Gold merits.

Beside the factual inaccuracy, note also the bias in the choice of words used by Mr. Choate. Instead of mentioning that Australia dishoarded 167 tonnes, he chose instead to use the “two-thirds” quantifier. It is a blatant appeal to emotion and perhaps fear.

Two-thirds of anything sounds like a lot, particularly to a reader without the specialized knowledge to understand that the central bank of Australia has always been a relatively minor player in the Gold market. To put their 167 tonnes into perspective, it is only one-third the weight of the dishoarding the market successfully absorbed from the central bank of Canada. I could go on, but what’s the use? It will be more productive to highlight some of the well researched facts and brilliant analysis offered by Lord Rees-Mogg.

The tone of the article is set by its first sentence: “In the past fifteen years an interest in gold has not been a good way to make money, but it has been a good way to think about money.” Just reading that first sentence I knew that his article would be a good one. No appeals to emotion or fear here – just reason.

After quoting Alan Greenspan – in the absence of the gold standard, there is no way to protect savings from confiscation through inflation– Lord Rees-Mogg sets about analyzing the historical purchasing power of Gold. He notes: “The recent fall in the gold price has taken gold back through an interesting landmark. The purchasing power of an ounce of the metal is below where it was before Britain went off the gold standard in 1931.” But this fact is not a cause of concern; rather, it is an opportunity.

Citing the work of Professor Roy Jastram, Lord Rees-Mogg discusses the “centuries-old pattern” that the purchasing power of Gold fluctuates, but is always “drawn back” toward the mean. He goes on to show how Gold “is at present on the cheap side of its historic valuation“, and cites the cost to purchase farmland in Britain as an example.

He then notes that in recent years: “No investment fashion has been so thoroughly exploded as gold; most people think that there will no more be another gold boom than there will be another boom in tulip futures in The Netherlands.” But he cautions prudently not to accept this conventional wisdom on blind faith. “One cannot be so sure about the future of the mysterious metal….It has certainly outperformed paper currencies” since 1600. And further, “Even the stock market performance of gold investments does not all go one way.“

Referring to some research recently presented to him by a director of Midland Walwyn, a Toronto investment firm, Lord Rees-Mogg makes an interesting observation about the share price of Homestake Mining, a blue-chip North American mining company, in comparison to the Dow Jones Industrials Average.

“Ten thousand dollars invested in Homestake in 1892 would now be worth a little over $1,000,000; $10,000 invested in the Dow would be worth a little less than $1,000,000.“

He observes that despite the final result, the experience over these 105 years would be very different between these two investments. Noting that the Dow has been far outperforming Homestake in recent years, he opines: “Perhaps the pendulum will eventually swing again; pendulums often do.“

Finally, Lord Rees-Mogg notes that while: “The current purchasing power of gold in Britain is close to the historic lows“, the picture looks very different in Asia. Gold has done well in terms of the Asia currencies that have recently devalued, and while Gold “has not done as well as the dollar…it has served its traditional function as a stable reserve. It has also met its textbook description of being both a real asset, such as property, and a liquid one, such as cash.“

Citing the trade deficit of the United States and the impact likely to occur on it as a result of the Asian currency devaluations, which make the United States far from competitive in cost of production, Lord Rees-Mogg states: “At some point in the future, the dollar may be seen as unsustainably overvalued. Then presumably the dollar price of gold will start to rise – the 2,500-year history of gold as a store of value may be far from finished.“