Is gold underpriced or overpriced historically...?
STOCKS continued mostly going up last week. Gold bounced up and down...but held above US$1,600. Most people would much rather have stocks than gold, writes Daily Reckoning founder Bill Bonner.
Most of the time, they are probably right. Gold pays no dividends. Nor does it invent new things or open up new markets...or do any of the other things that make stocks go up.
And now, most people seem to think that there is a recovery underway...and that the authorities have everything under control. So who needs gold?
According to Kim MacQuarrie's book, Last Days of the Incas, a sailor in the 16th century earned about eight ounces of gold for a year's worth of service.
How much does a merchant seaman today earn? A quick Google search reveals a wage of about $2,500 a month...or about $30,000 per year. That seems a little low, probably not including the value of health insurance and so forth.
And maybe it includes all those sailors from Indonesia and the Philippines, who must earn less than the typical American mariner. So let us say $40,000, which is about the average wage in the US.
Hmmm...eight times $1,600 does not take us very far. Only to about $12,800. So, either MacQuarrie is wrong. Or sailors make a lot more today than they used to. Or the price of gold is far too low.
Sailors were probably not very well paid in the Age of Discovery. We will guess that the average wage was probably closer to an ounce of gold per month. That would be a wage of $1,600 monthly... still low by US standards, but not by the standards of most of the world! By world standards, a sailor probably earns about as much, in gold, as he did 500 years ago.
Those are the kinds of problems and questions you run into when you're trying to figure out whether gold is overpriced or underpriced. All we can tell is that on the evidence of the sailors' wages, gold is probably not far from where it ought to be.
Pizarro hit the jackpot when he conquered the Incas and stole their gold. During a four-month period, March to July of 1553, the conquistadores melted down 40,000 pounds of Inca jewelry, art, tableware and religious items. 20% was sent back to the King of Spain. The rest was divided among the 168 conquistadores.
It was a bloody business – killing thousands of unarmed Incas at Cajamarca, for example. But it paid well. The horsemen in the group each got 90 pounds of 22.5 carat gold plus 180 pounds of silver. If they had just put the gold in a safe place, to be dug up by a distant descendant in the 21st century, the fortune would be worth about $2m.
Last week, gold got a little boost when it became apparent that 1) Europe still faces huge and disturbing financial challenges, 2) governments are ready, willing and able to steal vast amounts of money from bank accounts, and 3) they are also preparing to put on capital controls to prevent you from moving your money to safety.
We maintain a small bank account in France. It is used just to make repairs and otherwise keep up our house there. The woman who handles it sent this message on Friday:
'Don't put any more money in the account. We don't want to get Cyprused!'
How likely is it that the French government will freeze the whole banking sector and skim 10% off of the accounts? Not very. France is not in that kind of a cashflow bind...yet.
But all the countries of the developed world are headed in that direction. They spend more than they receive in tax revenues. And as their debt increases, their interest payments increase too.
Of course, ultra-low interest rate policies – enabled by central bank buying of government debt – keeps interest payments low, for now. But low interest rates don't stay low forever. And as Greece, Spain, Portugal and other borrowers have already discovered, Mr Market can be a real pain in the derrière.
When he insists on higher rates of interest – fearing that he may not be repaid as promised – state budgets get shot to hell. Then, like Cyprus, the feds get desperate for money. They will go after it wherever and however they must.
Which makes saving money dangerous as well as unrewarding. First, the feds suppress interest rates so you get no return on your savings. Then, when they get in a jam, they Cyprus your savings directly.
That's just one of the reasons we keep our eye on gold. If the 16th century sailor had taken his annual pay and buried it under a tree in Extremadura, it might still be there. The lucky treasure hunter would find himself as rich as the sailor who buried it five centuries ago.
The nice thing about gold is that, not only does it hold its value over centuries, it is also a valuable that you can keep out of the banking system. Like jewelry or antique cars, you can keep them at home. Bury them under your own tree. Keep them in your own safe.
If the banking system freezes up or breaks down...you still have them. Pass them to your children. Give them as birthday presents. Or just lock them up and forget about them.
Gold is private money. Dollars, pounds and Euros are public money.
Dollars, pounds and Euros are given to us by governments and central banks. Gold is given to us by the gods.
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