Think Tank

Investing in Gold

You've seen the commercials on television. The ones that tell you that all the gold mined throughout history would form a cube only 18 yards on each side. (If that doesn't sound like much, consider that this block of gold would contain 157,464 cubic feet and would weigh 2.8 billion troy ounces.) And what are those ads selling? Quite simply, they are selling money--because the Krugerrand, the South African gold coin they are pushing, is legal tender in that country and is freely convertible into dollars.

To those of a Marxian bent--either Karl or Brothers--commercials urging people to buy money would seem to indicate that our capitalist, consumerist society has reached an ultimate state of decadence. However, gold is more than money--at least according to its numerous and passionate advocates. To them, gold is stability in an unstable world, a hedge against an increasingly inevitable inflation, an immutable store of value safe from the politicians who long ago learned how to take a few cents' worth of ink and paper and call it a $20 bill.

Before you rush out to convert your rapidly deflating dollars into gold, you'd best ruminate on some questions that are more teleological than economic: Is gold money? And, more important, is money money? Essentially, anything can be used as money. It need meet only a few simple tests: It should be easily portable; it should either exist in quantities limited by nature or--in the case of paper money--be difficult to counterfeit; and, most important, it should be generally accepted as a means of exchange.

Historically, gold and silver--and, to a lesser extent, copper--were money. These precious metals met the above tests quite admirably, and the history of money for 2000 years is the history of the coinage of precious metals. It was, fittingly, Croesus who first minted gold coins, back around 550 B.C. The appearance of paper money is a much more recent event, being coincident with the rise of nation-states and banking during the 15th and 16th centuries. And until extremely recently, currency met the acceptability test only as long as it was clearly backed by precious metals and freely redeemable for them. People's natural distrust of government made them leery of paper money whose quantity was limited only by the good sense and honesty of frequently hard-pressed kings and ministers of finance. The convertibility of money into gold was universally viewed as a reasonable check on the natural peculative instincts of those entrusted with the public treasury. The fact that money has therefore traditionally been defined in terms of gold, the fact that governments have frequently tried to limit the right of their citizens to hold precious metals and the fact that paper money can be easily debased have combined to give gold its unique luster in men's eyes.

Gold thrives on disaster. War, famine, runaway inflation, economic collapse, revolution and milder forms of collective unhappiness have throughout economic history caused people to take refuge in what John Maynard Keynes called a "barbarous relic." At the outbreak of World War One, the major European countries suspended--permanently, as it turned out--the convertibility of their currencies into gold. In 1933, at the bottom of the Depression, Franklin Roosevelt took the U.S. off the gold standard, at least as far as its own citizens were concerned. Foreign central banks remained able to exchange their dollars for gold but at a newly fixed rate of $35 per ounce. This $35 price was to remain the official value of gold in terms of the dollar until 1971, when Richard Nixon devalued the dollar and--more significantly--eliminated the right of foreign central banks to swap their excess dollars for gold. The last vestige of an international gold standard had been removed and, with it, the last governor on the free-market price of gold.

From Nixon's dramatic speech in 1971 to the end of 1974, the free-market price of gold soared from $40 to $195 an ounce. In the same three-year period that the price of gold nearly quintupled, the average price of all listed common stocks fell almost 40 percent. Anyone prescient or lucky enough to have bought gold in 1971, especially if he had sold stocks and put the proceeds into gold, was greatly increasing his wealth while others were being effectively wiped out. Ah, but there's a catch. In 1971, it was illegal for U.S. citizens to own gold directly. (It was, however, legal to own shares of gold-mining companies and gold coins minted prior to 1934, both of which also prospered.) On December 31, 1974, it became legal for Americans to own gold in any form they wished; unfortunately, this date almost coincided with the price of gold reaching an all-time high of $195 an ounce. European speculators had driven gold to this level in anticipation of an American gold rush that never materialized.

By the fall of 1976, the price of gold had fallen to $106, as inflation abated somewhat from its disastrous 1974 levels and a key development occurred: The United States Treasury and the International Monetary Fund succeeded in driving down the price of gold via a steady stream of auctions of only a small portion of their vast boards. Its price has since recovered to $135, and the vital question for anyone considering the purchase of gold is this: Do I want to take 135 of my paper dollars and switch them into an ounce of gold, on the theory that it will at the very least hold its purchasing power--or perhaps rise significantly--while inflation continues to reduce the value of paper money?

The answer to this question is, like anything surrounding gold, complicated. The classic "gold bug" view runs as follows: Governments, particularly democracies, are subject to constant pressure to provide their citizens with at least the appearance of a rising standard of living. The result of this pressure is inflation of the money supply, beyond the reasonable level allowed by increased productivity. The outcome of this process is a steady erosion of the value of paper money. There's more money but not necessarily more goods and services to buy with it. Ipso facto, prices rise. By placing your assets in gold, you can, however, ignore the inevitable decline in the purchasing power of the dollar, as the price of gold will rise to reflect its shrinking value. Ultimately, as rapid inflation becomes the runaway kind, everyone will be fleeing from paper money into the only true store of value--gold. Given the fact that annual production of gold mining is finite, with the amount having averaged about 43,000,000 ounces for the past decade, the growth in demand will force prices sharply upward.

But there's another point of view. The official central banks of the non-Communist nations hold about 1.2 billion ounces of gold as part of their monetary reserves. This is worth about 160 billion dollars at today's free-market price. The United States and the International Monetary Fund have already begun the process of disposing of their gold reserves, which alone equal nearly one third of these "official" gold holdings. In essence, this supply overhangs the market and can be expected to be periodically sold as the price of gold rises. Every trading day, approximately 160,000 ounces of gold actually changes hands world-wide; thus, the U.S. and the I.M.F. alone could supply current demand for the next ten years, not including the annual mine production, which also comes onto the market. And what if the other countries of the world, holding about 750,000,000 ounces, also decided to sell? This process of selling off the official gold reserves of the central banks would swamp the market with amounts far beyond what speculators and industrial users of gold could begin to purchase.

The long-term outlook for gold prices is in the hands of people with a sworn policy of "demonetizing" gold, of reducing ultimately to zero the role it plays as an official monetary reserve. Why have the United States and the I.M.F. taken this posture? Beyond the fact that the demands of international trade are so great that all the gold in the world would not be sufficient to enable currency to be once more freely redeemable in gold, there is a key political consideration: South Africa and the Soviet Union account for about 80 percent of the world production of gold. The United States is not about to place such vast economic power in the hands of those countries.

All of these conflicting views take us back to that basic question: Should I take some part of my net worth and buy gold with it? The answer is a clear, resounding maybe. The intellectual attractiveness of the argument about the inevitability of inflation is undeniable, but markets do not rise or fall on the basis of pure reason. The case that is being made for gold today at $135 an ounce was being made for it two years ago at $195. Supply and demand is, in fact, far more influential in the course of markets. The supply could come from those billions of ounces held by central banks. But it isn't certain that there will be an equal demand from speculators and hoarders. Yet gold does represent a chance to profit from rising inflation rates, declining confidence in governments, political upheaval and economic chaos. The past few years suggest that betting on the occurrence of these events--and at more frequent intervals--is not a bad move.

Thus, one is attracted by the idea of putting a small percentage of one's liquid assets into gold and praying that one will lose money on his investment. Because if the price of gold falls, it will be because the world is slowly working its way out of the problems of inflation and economic upheaval that have bedeviled it of late. But avoid attaching any mystical significance to gold. It is just another commodity and, like many others, can be expected to rise in price if inflation persists. Ultimately, though, it is money that you must spend, and you can't take your Krugerrands down to the supermarket--except, of course, in Johannesburg.

--John B. Tipton

Plat Team

Anyone who has ever wondered if that finny creature on his plate really was "swimming just this morning," as the menu claims, or if there is even a chance of finding any "imported Roquefort cheese" in the salad dressing that costs 75 cents extra should know about the "truth in menu" squad that is currently terrorizing Los Angeles restaurateurs. The menu "investigators," as they prefer to be called, are part of the consumer-protection division of the Los Angeles Department of Health Services and they're responsible for making sure that what is offered on the menu is what you get on your plate. Since poetic license is not uncommon on menus, it comes as a shock to an owner who is suddenly confronted with an I.D. and a summons or a fine because his chicken salad is actually made with turkey or his Idaho baked potato has never been north of Grass Valley. Sanka, maple syrup, whipped cream and Jell-O are also frequently victims of substitution, and, as Dale Reeves, who heads the L.A. program, notes, no one ever serves something better than what's on the menu. Things often go even further, though. One expensive dining room was discovered serving the same inexpensive fish under five different names. Once they collared a top-rated eatery for serving kosher pastrami that wasn't kosher. Los Angeles and adjacent Orange County were the first to have a vigorous program of menu enforcement, but other cities are following suit. "We're in an era in which the public is going to get what it's promised," says Reeves. Ever think of going into politics, Dale?

Genetic Shoot-Out

In the past few years, the debate over the safety of nuclear power plants has gone from scientific journals to public hearings and even to the ballot box. Now the potential hazard of genetic experiments that recombine or transplant the basic structure of organisms into new life forms is being examined in city-council halls and public forums all over the country. For the first time, elected officials have questioned the right of basic research to take place on campuses located in their jurisdictions. "People want to know what the hell they're doing in these laboratories," said Mayor Alfred Vellucci of Cambridge, Massachusetts, whose city council had twice voted short bans on recombinant DNA molecule research before allowing it to go ahead, under guidelines, a few months ago. What everyone fears is that when scientists modify genetic codes by breaking off sections of the DNA chain from a gene and grafting them onto unrelated chains, they may create disease bacteria for which there is no known cure. It was the realization of this possibility that prompted researchers in 1974 to voluntarily stop the most dangerous experiments and then, at the Asilomar Conference in California a year later, to set up guidelines to regulate safety conditions under which such work would be conducted. Both moves were unprecedented in the scientific world, and more detailed guidelines were soon set by the National Institutes of Health. While some labs, such as those at Stanford, adopted the guidelines with very little debate (too little, according to some researchers), others, such as Harvard and MIT, became embroiled in intense controversy as city fathers and others tried to have the guidelines beefed up or have the research banned entirely. It is a clash that has left scientists, unaccustomed to dealing with their legal and moral responsibilities to the general public, somewhat shaken. One biologist said, "It's like having a town meeting in which Galileo gets five minutes to say why the earth is round and then the Pope gets five to say why it isn't. Then everybody votes." Whenever very high-risk experiments are to be done, elaborate and costly precautions must be taken, such as installation of air locks at lab entrances and the decontamination of all workers when they leave. Currently, there are said to be six labs equipped to handle such work in the United States and some laymen aren't impressed even with precautions such as these, which "make one suspicious as to just how safe it is," as Mayor Vellucci put it. What really tends to sober the experimenters is the warning that they may be liable for damages if they are responsible for a catastrophe. "Prior restraint is appropriate where physical harm is at stake," one lawyer warned the scientists when they gathered at Asilomar. It all has echoes of those "mad scientist" flicks that pervade the telly Late Shows. But in this case, how it comes out may be a matter of life and death.

Out, Damned Smell

Till now, when people were confronted with a foul odor, there wasn't much they could do. They might have sprayed something in the air to make it smell like sylvan glades or bosky dells, or held their nose until the odor went away, or gone away themselves. But now, Monsanto's Flavor/Essence division has come up with a chemical that seems to leave your nose literally senseless. It's been claimed that Veilex is the first true "malodor counteractant" and that, unlike other products that merely mask offensive odors, a minute quantity of Veilex selectively prevents the receptors of smell in the nose from detecting odors that the brain perceives as unpleasant. What's more, Veilex works perfectly at any concentration down to one part per million, so a little goes a very long way. What Veilex does is apparent; just how it does it is somewhat more uncertain, since smell is the least understood of the five senses. For example, it has been known since the turn of the century that certain odor pairs can be mixed in a proportion that seems to make both of them disappear; but scientists still have no idea if the odors are being eliminated or merely masked. Most perplexing is how Veilex manages to block only unpleasant odors while letting others come through. None of this, of course, has stopped the Monsanto people from beginning to market their new wonder product to the consumer-products industry (though it did take them five years after Veilex was discovered to realize what they had on their hands). Since it takes such minute amounts to block odors effectively, it will be much cheaper for a company that must cover up an unpleasant scent in its product to use Veilex than to use other masking ingredients that have the same base cost but must be used in much greater quantities to be effective. But even with such a tremendous advantage in the highly competitive fragrance industry, problems may arise. Critics have already begun to wonder about the long-term effects of this kind of sensory padlock. Also, Veilex has been tested on the assumption that it is a cosmetic rather than a drug, and the safety standards for the former are much more lenient than for the latter. The ultimate deodorant would seem still to be a few steps away from the sweet smell of success.

"What really tends to sober the experimenters is the warning that they may be liable for damages if they are responsible for a catastrophe."