Gold is in a foot race sprint towards $1,000 a troy ounce and beyond. Platinum is already at $2,174 an ounce. Silver exceeds $20 an ounce. The price of oil has gone over $100 a barrel. Copper is now at a record $3.91 a pound; nickel is a $14.82 a pound and even lowly zinc is at $1.27 a pound.
The age of commodities is upon us.
Here?s the scary thing. A couple hundred dollars ago, gold reached its high of the 1980s, then the height of inflation and a series of economic pressures that were very apparent to the nation as a whole and to coin collectors in particular.
Just as a refresher, the consumer price index in 1980 was going at a clip of more than 10 percent, while the previous year, 1979, saw a 13.5 percent average.
The Hunt brothers had cornered the silver market, or tried to, before it topped out at $50 an ounce. Gold followed, largely on Soviet pressure, and withholding of sales, before it reached its zenith in the $850 range. The economic prospects looked dismal.
With silver at $50 an ounce, a silver dollar, even the most common date was $38.67 for the precious metal in it. Off they went to the melting cauldrons. It?s over now back again at $20, that leaves about $15.47 worth of silver in the dollar coin, again enough to threaten low-grade coins sometime sought by variety collectors.
I recall how I used the price of silver for my own collection, buying essentially at melt a set of early Washington quarters, 1930s and 1940s, all in circulated. It?s clear that with .18084 troy ounces of silver, common-date Washington quarters now have more than $3.61 worth of silver in them and, at least, circulated coins are threatened with extinction. (By contrast, with $50 silver each quarter had about $9.04 worth of metal in it ? and there was little likelihood that sum would ever be reached if valued solely as a collectible.
There?s a difference this time: the Chinese government and the American balance of payments. On Feb. 19, the World Gold Council released estimates that China absorbed 300 tons of gold jewelry and bullion in calendar year 2007. Imagine that: 24,000 troy ounces per ton (12 troy ounces to the pound) multiplied by 300 (7.2 million troy ounces).
There is also the value of the U.S. dollar, now at historic lows.
For hundreds of years, unlike other metals, gold has been an asset of last resort. That means that in times of desperation, it has made the difference, for some, between life and death. It has outpaced inflation, frequently outstripped other investment vehicles, yet at other times has been a stick in the mud going nowhere.
The CPI in the past month moved 0.4 percent (about 5 percent annually) ? about double the 2.68 percent in 2006, but less than the 13.5 percent in 1979 (when home mortgages on the conventional market topped out at 21 percent. (I remember being grateful at the time for a purchase money mortgage given to me at 14 percent).
The stability of gold is legendary. From 1837 to 1933, for example, with some narrow wartime exceptions, gold had a fixed and guaranteed international value of $20.67 an ounce. That broke down in FDR?s administration when the dollar was devalued by about 59 percent and gold?s price raised to $35 an ounce.
That guaranteed rate was forcibly retained until the late 1960s when gold was set free from a fixed dollar rate in a floating market, and later on Aug. 15, 1971, the dollar was again devalued and gold?s price raised to $38 an ounce. A subsequent devaluation to $42.22 an ounce for gold ? still the official rate ? followed in 1973.
Even today, with gold nearing $1,000 an ounce, official U.S. gold reserves are valued at $42.22, while the market price of gold is about 20 times higher. (That means that as of Jan. 31, 2008, the Federal Reserve and the Treasury have 261 million ounces of gold with a book value of $11 billion ? a realistic value of about $260 billion.
For all the talk of American economic collapse internationally, the U.S. gold reserve still far outstrips everyone else?s. The $260 billion outstrips official gold holdings of many other nations. The tonnage is calculated at the rate of one metric ton (1,000 kilograms) = 32,150.7 troy ounces.
Gold?s price has been less than stable since it was uncoupled from the dollar in 1968, but it has had a stability ? if upward mobility ? perhaps in part because when you add the top 20 holders of gold excluding the International Monetary Fund itself, the U.S. has about a third of the world?s official gold (261 million ounces or 8,133 tons. The IMF has 3,217 tons, or a little bit over 100 million ounces of the metal.
From 1980 to the present, the price of gold went through several different periods, but a trading range of $300-$450 an ounce is a dominant feature. It comes off a 1980 high of $850 an ounce, an average (for the year) of $613 an ounce and then the ups and downs associated with a commodity, not an asset of last resort. It?s gone up more than $200 an ounce since the beginning of the year.
With this as background, a reader inquired recently whether I thought it better to retain gold as bullion, Krugerrands, U.S. Eagles or U.S. numismatic gold coinage. The unanswered question is what performs better: numismatic coinage or gold bullion.
I undertook an analysis ? not scientific, but rather random ? using several different coins designed to mimic a numismatic coin with more bullion content than numismatic worth. That meant condition ran from about uncirculated to MS-63, but most were plain old MS-60. I also looked at VF double eagles of no special date or description (generic coinage).
The result: a clear numismatic kick or preference over pure bullion ? even American gold Eagles outperformed 100-ounce and 400-ounce bars.
The American gold coinage has integrity the world over. That is because:
? It?s a legal tender at its nominal face value;
? If someone copies it, they are liable for American counterfeiting penalties and Secret Service investigation;
? Civil protection of unintended copies with the Hobby Protection Act;
? Formal sales contracts on various commodity exchanges;
? Daily price postings not only on Web sites, but in daily press financial section;
? Well-recognized design and clearly spelled out fineness, weight, value, and
? Integrity assured by U.S. government.
There are other nations that have component parts of these bullet points, but no one except the U.S. gold Eagle matches up on all counts. (The same holds true for the silver and platinum version). There are, of course, variations as well as components that the Eagle shares with others.
Krugerrands ? owned primarily for bullion ? are a legal tender. But this is by virtue of legislative action ? the South African Mint & Coinage Act No. 78 of 1964, as amended by the South African Mint & Coinage Act of 1966, and the South African Mint & Coinage Further Amendment Act. No. 40 of 1966, §§11 through 12.
The legal-tender value of the Krugerrand is the price of an ounce of gold. That means it varies daily. But it is valued at less than the U.S. gold Eagle because of ongoing doubts about the vitality of South Africa.
For the same reason, the Canadian Maple Leaf is a legal tender by virtue of the Currency Exchange Act, Canadian Revised Statutes, Chapter C-39 §4, Schedule 1 (1970) (Amended by Order of the Privy Council No. 3048 (1979)). These coins have fixed (if low) value in Canadian dollars.
Since its launch in 1970, more Krugerrands have been issued ? some 46 million ounces ? than all other gold bullion coins combined. In fact, the World Gold Council estimates that more than 15 million ounces of Krugerrands are held in the U.S. ? the world?s largest gold bullion coin Market.
Some research discloses a measure of legal protection. In U.S. v. Bertram, 719 F.2d 735, C.A. Tex., 1983, a federal court found that a counterfeit Krugerrand with word ?copy? on them still is counterfeit. The same principals would prove true for other legal-tender coinage, including other bullion pieces. That?s full legal protection against illegal duplicates.
Prior to the 1960s, there were no ?bullion? coins, per se, but coins with a full measure of gold. Gold coins were traded and available on a widespread basis, even British sovereigns of the modern era (.2354 troy ounces) ? but if any were made after 1960, they could not be legally imported into the United States without a permit from the Office of Domestic Gold and Silver Operations.
Eventually, an arbitrary line in the sand was drawn with 1960 as a the demarcation point. Before that, it was rare and unusual ? even if it was a 1958 sovereign with 8.7 million pieces produced; afterwards, it was common, and not importable with a license ? even if it was a 1962 sovereign with 3 million pieces manufactured.
As a gold faced the real market for the first time following 1968, it was inevitable that economic forces that traditionally had driven the price upward ? inflation, war, and economic fears ? could also drive its price down.
And so it did in the early days of 1970. By Jan. 16, 1970, Under Secretary of the Treasury Paul Volcker (later chairman of the Federal Reserve) announced that the new gold agreement signed with South Africa provided ?no assured ?floor price? for gold speculators,? and with that, the metal dropped to its lowest price in London free trading in 16 years ? below the official floor at $34.90 an ounce. Who would have imagined that on March 3, 2008, it would top $981?
In a letter to Rep. Henry Reuss, D-Wis., then chair of an international economic subcommittee, Volcker called the agreement with South Africa ?consistent with a two-tiered system? of pricing gold.
A couple of years later, in an interview with me, Reuss would say that this marked the real beginning of the drive for legal private gold ownership in the United States? which did not take place until Dec. 31, 1974.
Now gold sprints towards $1,000 an ounce ? and beyond. Surely this makes collecting modern coins of gold content difficult, hard for the Mint to market $5 gold pieces (they should switch to quarter eagles). It also encourages like-kind exchanges of higher valued bullion coins for lesser-valued.
Certainly, it makes for an interesting entry into the new era of the age of commodities.
Just look at the chart. The trends point almost straight up.