As precious metals investors since 1996 (long only) and speculators since 2008 (long and short), we readily admit that when the right price appears we’re going to sell a large portion of our physical inventory. We have written numerous articles on gold and silver highlighting both the good and the bad associated with investing in precious metals. We feel that a balanced view of both the risks and rewards of precious metals investment and speculation is critical to the longer term goal of wealth accumulation.
Unfortunately, there is a contingent of precious metal marketers that would rather stretch the truth or even promote myths to inspire undue hope, fear, and reckless optimism. A common myth by these marketers is that if we have a gold “standard” instead of a U.S. dollar based financial system, our debt laden society would become stable. Unfortunately, promoters of this claim have not carefully examined a period when there was a gold “standard.”
Below is a chart of gold and silver in the period from 1846 to 1895, this to set the stage for the level of stability that was experienced by most Americans.
The chart above is drawn from an article titled “The Relative Stability of Gold and Silver” by Edward Sherwood Meade in the Annals of the American Academy of Political Social Science, 1899. In the period from 1851 to 1873, there was a bimetallic “standard,” where both gold and silver were used as a monetary base in some countries. At the same time, either gold or silver was used in other countries as a form of a monetary “standard.” After the period of 1873, the silver “standard” was abandoned due to “…legislative and industrial” reasons according to Meade.
Unfortunately, both gold and silver “standards” are constructs of legislative actions (fiat) and subject to industrial supply and demand constraints, just as the U.S. dollar is subject to fiscal and monetary policies (etc.). It should be noted that although gold and silver were the “standards” for a given monetary system, there was still a decline of nearly –33% in the value of gold and silver from 1851 to 1873. The subsequent dramatic rise of both gold and silver from 1873 and beyond only demonstrates just how little stability there actually was in having gold and silver as the anchor for the monetary system.
Adding insult to injury, it took 33 years for gold to achieve parity after the decline from 1851. This is eerily similar to the 31 years it has taken gold to achieve the inflation-adjusted equivalent of 1980 when gold peaked at $1,900 an ounce in 2011.
While gold and silver was vacillating wildly as a “standard” in the 1800’s, the stock market, represented by the chart below, was demonstrating its characteristic fluctuations.
The stock market increased nearly +300% and declined over -50% on two separate occasions in the period from 1860-1895. Having a gold and silver “standard” promoted greater volatility in the market since it would take a government edict (fiat) to mitigate massive gains or losses in the price of gold and silver. Additionally, cornering of the market was much easier then than it is today.
At the same time that the stock market was experiencing wide gyrations, the U.S. economy experienced widespread panics and depressions in the period from 1857 to 1895. Below are the National Bureau of Economic Research (NBER) dates for economic recessions from 1857 to 1895:
| Peak |
Trough |
Contraction (peak to trough in months) |
| June 1857(II) |
December 1858 (IV) |
18 |
| October 1860(III) |
June 1861 (III) |
8 |
| April 1865(I) |
December 1867 (I) |
32 |
| June 1869(II) |
December 1870 (IV) |
18 |
| October 1873(III) |
March 1879 (I) |
65 |
| March 1882(I) |
May 1885 (II) |
38 |
| March 1887(II) |
April 1888 (I) |
13 |
| July 1890(III) |
May 1891 (II) |
10 |
| January 1893(I) |
June 1894 (II) |
17 |
Amazingly, 47% of the time from 1857 to 1895 was spent in periods of recession with a large dose of panics and crashes mixed in. The most notable of the U.S. economic contractions started with the panic of 1873 which, spawned by years of railway speculation in the U.S. but sparked by the collapse of banking giant Jay Cooke & Co., led to a global economic depression that lasted well beyond 1878 in many other countries. The panic of 1873 was the longest lasting recession/depression based on NBER data.
Currently, the monopoly role (corner of the market) that government has on monetary and fiscal policy allows investors and speculators a better chance to align their interests within the context of the known. What we know is that the purchasing power of the dollar will never increase under the current regime. If governments are allowed to set artificial “standards” then investors and speculators would not know when the policy will be changed/ended.
Again, anyone who feels that the current system is out of whack should carefully consider the prospects of the “legislative and industrial” whims that a gold and silver “standard” could bring. We believe that whether dollar, gold, yen, silver, yuan, or pesos, the only constant is change itself.
Planning accordingly for the prospects of change is what makes for successful investment and speculation in the precious metals market. Those marketers who rely on fear and the propagation of myths only serve to ensure the maximum number of unsuccessful speculators.
Note: In terms of gold and silver, the word “standard” following each metal is really a pseudonym for price control, price fixing and propping the market for whatever the “standard” may be. This means that the market value for whatever the “standard” is will not be realized in the open market in the period that a “standard” is used.
There is nothing more oxymoronic than the word “standard” being applied to either gold, silver, or the U.S. dollar since the origins of the word “standard” is rooted in the meaning to “stand fast or firm.” This is something that could never occur in a world that is always seeking a price, unless mandated by government that price seeking is illegal.
