NZ Gold Inaugural Article

Why we believe you must 'hold gold' ► 20th May 2006

Money - it has become an obsession! Turn on the television, open your newspaper, listen to politicians [if you've nothing better to do] and the theme never seems to change - the only thing that matters is money. Yet what is money? The answer seems obvious. Its the coins and notes in your pocket, your deposits at the bank, your investments in superannuation schemes and shares and, of course, the big one - all that lovely 'equity' in your house. Indeed, today many people on modest incomes are paper millionaires - by virtue of having purchased a house many years ago that is now worth numerous multiples of what they paid for it.

At NZ Gold we chose to step outside of the house price driven 'circle of financial euphoria' to pursue a more critical examination of money. Call us old fashioned [we shall be flattered] but we prefer to build our understanding of this hugely important subject with a few of the lessons of history under our belts - rather than being dutiful 'believers' in a world where more paper, and more debt, automatically means more wealth.

Without doubt, many of our forebears would find our current concept of wealth difficult to understand. Put more unkindly, many of them would probably laugh in our faces, despairing that the lessons and legacies they left us have been ignored. Why? Because they would struggle to connect our unprecedented levels of personal and national debt with genuine prosperity. They might even gruffly suggest that a giant con was in progress! This conveniently brings us back to our earlier enquiry - what is money? Do we accept the current wisdom, that it is the number of dollar bills that you currently posses - in either physical form as banknotes, via bank deposits and investments, or in nominal 'equity' via your house? Or do we apply more exacting criteria, that require 'money' to demonstrate its credentials as an unimpeachable medium of exchange and enduring store of wealth? If it is the former, then perhaps we should look back in envy at the citizens of Weimar Germany. Commencement of the First World War in 1914 saw the German government borrowing to meet the costs of the conflict. By 1916 the onerous costs of the war were exceeding available borrowings and other sources of income. Of course, Germany expected to win and thus anticipated the prospect of rich financial pickings - which would more than solve the deficit - from those they had defeated. Yet the war was effectively lost, resulting in the victorious powers imposing onerous - even cruel - reparations on a defeated nation with little ability to pay. This was compounded by the huge costs associated with conversion to a peacetime economy. In consequence, the republic's politicians responded in time honoured fashion - they simply printed money!

Prior to the First World War slightly more than four paper Marks were needed to buy one U.S. Dollar. Yet so insane became the expansion of the money supply in Weimar Germany that, by August 1923, almost one hundred million Marks were needed to buy a single dollar. From there the situation descended into a terminal abyss of printing press lunacy with billions of Marks ultimately needed for that one miserable dollar! In his superb book, "The Coming Of The Third Reich" [published by Penguin] author Richard J. Evans cites the example of a woman ordering a cup of coffee for 5000 marks only to be asked for 8000 by the time she had finished drinking it and wanted to pay! Imagine that in today's cappuccino obsessed New Zealand - it would probably lead to a revolution. At NZ Gold we are currently arranging to purchase a small supply of some of the more ridiculously denominated of these paper notes. These genuine artefacts, from a troubled past, will be professionally conservation mounted and will be available for purchase by discerning site visitors - who want an attractive and graphic reminder of what happens when 'money' goes mad! [ordering details will be available shortly].

Folk-law abounds of Weimar Germany's tragic citizens using wheelbarrows to cart round their huge volumes of banknotes. Peoples savings were rendered worthless, and the effect on the national psyche [especially that of the 'middle class'] was so profound that Adolf Hitler emerged as the ultimate beneficiary. Yet they were awash with cash! The problem is that their paper money had failed - spectacularly - as 'an unimpeachable medium of exchange and enduring store of wealth'.

Yet it is not necessary to go so far back into history, and to consider such an extreme example, to see the way in which 'so-called' money fails to meet the criteria for acceptance we have described. At NZ Gold we can remember British Prime Minister Edward Heath's 'dash for growth' during the troubled years of the nineteen seventies. Faced with the external shock of an oil crises, and Britain's crumbling post colonial economy, it was 'business as usual' for politicians - expand the money supply and never mind the consequences! During that period inflation accelerated to levels that had a disastrous effect on peoples savings and, although nothing compared to Weimar Germany, 'money' again miserably failed as 'an unimpeachable medium of exchange and enduring store of wealth'. Indeed, if one considers the twentieth century as a whole, then the Pound Sterling lost around ninety nine percent of its purchasing power - not much fun for people who like to keep their 'wealth' under the floorboards or even in the bank!

Neither has New Zealand been immune from the deteriorating purchasing power of 'money'. A unit of 'money' today buys a great deal less that that same 'unit' would of done even a few years ago and, at NZ Gold, we treat official inflation figures with a large 'pinch of salt'. Indeed, we find it amusing that New Zealand is now meant to have a benign inflation environment - have you noticed mere three percent or so annual price increases as you pay your rates, your electricity bills, school fees, medical insurance, petrol for the car or attempt to buy a slightly bigger house? Moreover, NZ Gold takes great issue with the idea that inflation around three per cent - even if that were a true measure of the problem - can possibly be benign. Because inflation compounds such an allegedly acceptable situation still involves a dramatic loss of purchasing power over the decades. Indeed, using the Reserve Bank's online 'Inflation Calculator' we were able to conclude a 51% decline in the purchasing power of the Kiwi Dollar between fourth quarter 1985 and fourth quarter 2005. Yet the compound average rate of inflation over this time was a pretty unremarkable sounding 3.6%! Thus, we see a situation analogous to the unfortunate frog being boiled from cold in a saucepan. He fails to comprehend he is in great danger because the process is quite insidious. As a consequence he doesn't jump out. By the time he finally realises poor old Freddie the Frog is dead, and by the time many people wake up to the 'theft' of their money through the expedient of inflation, they may be 'financially dead'.

The fundamental problem is that for anything to retain its value over time supply must be strictly limited. This came home to us very clearly during a recent visit we made to the musée du Louvre in Paris. Based in London, during our Christmas holiday and fact finding tour, we forced ourselves to buy some Euros (a subject we shall cover in a subsequent article) and climbed aboard the EuroStar for France. Paris remains a wonderful city, despite recent difficulties, and a winter visit allows one to sample the museums without excessive crowds. The Louvre contains some truly magnificent works of art, including the statue of Venus de Milo and the Mona Lisa. No amount of time spent studying these irreplaceable artifacts seems adequate and their supply is so limited - just one of each - that they are utterly priceless. Yet step into the museum shop, and numerous other outlets throughout Paris, and you can buy unlimited copies and reproductions of Venus and the Mona Lisa. They adorn calendars, books, prints, mouse pads and much else and provide a ready opportunity to buy a 'souvenir' of one's visit. Yet they will never really have any value - in the way that the original does - because they can effectively be produced in unlimited numbers. If Leonardo de Vinci had produced hundreds, even thousands, of identical Mona Lisa's would his work evoke, centuries after it was completed, the sort of admiration and recognition of incalculable value that we find today? We sincerely doubt it!

Therein we find the conundrum of money. Of course, ostensibly it's all rather easy. Simply find something that is universally acceptable as a means of exchange and communication and everyone lives 'happily ever after'. The difficulty seems to lie in finding something suitable, and the fact that governments, kings, despots, etc have always wanted more and more of whatever is considered 'money' at any given time in history. Yet this returns us to our central argument. For something to retain its value it must be in limited supply but, much as we may admire them, old masters and wonderful statues are hardly suitable. Imagine for one minute the horror of handing over your prized painting and expecting some change - only to discover the shopkeeper has hacked a piece off the canvas which he then hands back to you. Thus 'money' ideally needs to be not only limited in supply, but it must also be made of something that is durable over time. Enter Gold - that most extraordinary of substances!

In many respects, to understand the history of Gold (and Silver) is to understand the history of mankind. The two are intimately entwined and both have been prized throughout the ages for their beauty, their remarkable and enduring properties and their capacity to act - as honest money. Essential to this historic valuing of gold is Mother Nature's intense reluctance to surrender her treasure . J.S. & R.W. Murray, in their 1977 book Costly Gold, describe the battle to extract the yellow metal from the river Clutha. They write of "backbreaking, heartbreaking, mindless toil, often for no reward". Indeed, gold has led men into the most terrible of privations, wars, atrocities, and follies - actions that would have been unimaginable had this extraordinary metal been available 'on-demand'. Even today, with sophisticated machinery, extracting gold remains both difficult and expensive and the metal almost seems able to match every technological advance with a corresponding challenge for the mining industry. Compare and contrast with the ready availability of paper money!

Today, even the most impecunious of people seem able to obtain astonishing quantities of credit and this is reflected in accumulated levels of debt - for which there is probably no precedent in New Zealand's history! One only has to look at the nation's horrendous balance of payments deficit to realise that something extremely dubious is going on. Of course, this abundance of new money has primarily found its way into the housing market - inflating prices way beyond the reach of many younger Kiwis - and creating what we at NZ Gold believe is a state of national delusion. Money now apparently appears by magic and your house - just by sitting there and doing nothing productive - will probably earn more than you. At NZ Gold our reading of history tells us that episodes of this kind do not usually end pleasantly for the average person. Maybe hyperinflation will effectively wipe out the burden of your mortgage, but that's not much use if the cost of feeding your family has moved way beyond your reach! To the shame of our politicians they have made us literally dependent on the willingness of foreigners to finance a standard of living the nation has simply not earned. At NZ Gold we are not sure that placing ourselves at the whim of investors from overseas is very wise - even if it does allow the temporary 'feel-good' expedient of buying lots of goodies (which we probably don't need anyway!).

Ultimately, New Zealanders must chose whether or not to take the assurances of our political leaders - that the economy is in fundamentally good shape - at face value. At NZ Gold we do not claim to be soothsayers or great economic experts but we are immensely respectful of history, and it is that investigation of the past that gives us great concern for the future. Contemporary politicians may want you to believe that they have somehow discovered a unique formula - easy money - that will deliver permanent prosperity but we urge you to be more discerning. Stop and reflect that centuries ago Rome's Emperors became experts on debasing the value of money as they battled to meet the demands of the military and the citizenry for ever more spending - sound familiar? They simply reduced the amount of gold and silver in the coins, or produced vast numbers out of base metals. Horrific inflation was the ultimate outcome. Is this really so different to our contemporary 'creation' of paper money that is backed - by what?

An increasing amount of material is available on gold and we look forward to expanding on this subject in both our weekly articles and for sale publications. Interest in the yellow metal is accelerating, especially since the psychologically important price breakthrough of $US500 per ounce. Moreover, as the Kiwi dollar appears to be commencing its long anticipated slide gold may have particular potential for New Zealanders seeking a prudent measure of 'financial insurance'. Indeed, that is where we believe those with an emerging interest in Gold should start - by accumulating a modest holding of the physical metal as their 'money of last resort' - especially now that 'allocated storage' is available through the New Zealand Mint. Our shortly to be released publication "Good As Gold" has been specifically written with the needs of aspirant Kiwi gold investors in mind and will allow readers to share the experiences, mistakes, and observations we have made on our exciting journey of discovery about the precious metals.

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