08 May 2010

War, gold and American Express

Surfing around I found this excerpt from the history of American Express interesting:

During the summer of 1914, approximately 150,000 American tourists were stranded when war engulfed Europe, many without access to funds. Banks had ceased to pay against foreign letters of credit or any other form of foreign paper. Panic-stricken travelers lined up inside and outside the offices of American Express in whatever city they happened to be visiting. American Express was able to cash all travelers cheques and money orders in full, enabling quick passage home for thousands. Many of those remaining were able to book passage home soon after a decision by American Express and a consortium of nine U.S. banks to ship $10 million in gold to Europe so that local banks could once again honor foreign drafts.

During 1938 and 1939, as the prospect of another world war loomed over Europe, there was still a sizable group of longtime American Express managers and employees who had worked for the company 25 years before, during World War I. Their past experiences – and their advance planning, in this instance – helped the company survive World War II. Even before the official declaration of war, American Express had mounted extensive preparations to protect its financial and real estate assets, including its principal offices in Berlin, London, Paris, Rome and Rotterdam. Throughout Europe, American Express offices continued operating until the last possible moment in countries about to be invaded – often long after American embassies and consulates had been ordered to evacuate.

The history is interesting not for the reminder that in war fiat is worth nothing, but that AMEX had an organisational memory of WW1 that enabled them to prepare for WW2. The two events were close enough that those who had experienced the first were still employed and had not retired.

I think that what is necessary for an organisation (which is really just a collection of individuals) to see the need for "advance planning" is not experience of a crisis, but experience of the period prior to a crisis. Only then can one see similarities between the period that preceded a crisis and one's current situation and thereby identify the potential for a future crisis.

I also think that what is important is direct experience. One has to have personally experienced the pre-crisis environment - it makes for a strong imprint on the mind. Indirect experience is not the same. Reading the history of a period that draws parallels to now does not have as powerful a call to action. Words on a page can also be rationalised away.

For example, do you think giving Paul Mylchreast's 4th May Thunder Road Report history of the US and Sterling crises during the Johnson and Nixon administrations in the 1960s and 70s (pages 24 to 35) to someone in their 30s raising a young family will result in them buying gold? It is too distant and academic.

I would also argue that the minimum age for direct experience of economic/financial events to really register would be no younger than say 20 years old. This means that the youngest person to have experienced the 1970s and punishing inflation and a real gold bull market is now 60 years old. Anyone younger than that would probably not really "get it", at a visceral, emotional level that only direct experience can give.

My only "economic awareness" memory of the 70s would be my father suggesting I invest the $200 worth of Christmas and birthday money I had squirreled away up to my then 10th birthday into State Rail Authority of New South Wales bonds at 15% (my father was a train driver and they were offered to staff first). Getting a $30 cheque each year for 5 years seemed like a good deal. I remember being disappointed that I didn't hold out longer, because subsequent bond series peaked at 18%, if my memory is correct.

That is the extent of my experience of inflation, as a 40 year old. It makes me reflect on where I would be now if I had not made that fateful decision in 1994 to take a job with the Perth Mint. It is likely that my economic literacy would be negligible, my awareness of the potential for inflation and the role of gold as a wealth preserver in an investment portfolio, zero.

I am interested in what is your story. Why are you reading this blog? Is your interest in gold because of direct experience of the last gold boom, because someone close to you passed on their experiences, or because you are simply an inquiring mind? Please leave a comment.


  1. I was given a prod last year by someone over 60 as gold passed $950. I was nine years late to the party, but I researched it full time for six months, growing increasingly shocked at what I discovered, like opening that door at the end of the corridor in a horror movie.

    What I discovered resulted in cashing out my entire USD stock portfolio and transferring it to gold and AUD mining stocks.

    Here are the 3 most valuable things I learned during my "education":

    1) Gold works in multi-decade confidence cycles, which can be followed with the Dow/Gold ratio. They are headed to parity.

    2) Watch real interest rates. When public date goes up and private debt goes down, gold will rise.

    3) There is a tipping point for every asset, when it moves from linear to parabolic. For sovereign default, it was 80% of GDP. For gold, it was $1,000 USD. It's not obvious yet because assets don't rise or fall in a straight line. Once the line is crossed though, the result is inevitable. At this point, there is nothing to do but sit back and enjoy the ride.

    It is an interesting story about American Express. Like you point out, the interesting thing about gold is that the gold cycle has been so long between drinks that an entire generation has missed the feeling of inflation and perceive gold as a relic of the past.

    Not for long.

  2. I first started to notice something was amiss in mid 2006.

    I was working (hard) at my own small business, when I began to notice that almost every time I went to the supermarket, the price of some item I had been buying regularly had gone up 5c, 10c or more. This was despite the AUD appreciating against the USD, supposedly the 'standard'.

    Hang on, I thought, I can't raise my hourly rate every week, if this continues I will soon be going backwards. At the time the newspapers, TV etc were full of 'good times'. This upbeat news was flying in the face of facts as they presented themselves to me; surely if things were so good then we should be getting more for less, not less for more?

    Anyway, sometime in 2007 I came across a graph of the gold price...

  3. I lived through chronic double-digit inflation in the 80s and hyperinflationary finale followed by the crushing deflation of couple of years, in former Yugoslavia, in the 90s.

    Your post resonates very much with me, in terms of personal experience that has to be lived through in order to be able to recognise the road to ruin.

    I am deeply worried with ominous parallels of what's happening now with us in the West (I live in Australia with my family now) as opposed to then, because I can see similar trends: debt crisis - money printing - inflation - social tensions - more printing - nationalism - war - more printing - hyperinflation - debt destruction - deflation.

    It may not necessarily play out in this order or with all the phases repeated. Yugoslavia had its own unique historical issues that combined to produce this particular sequence of events, but I can see those similarities so clear - it is frightening.

    I think when the crunch time comes, we will indeed go to war, because the society has to be distracted from the real cause of the problem and consolidated by state of emergency by its elite, in order to push through the hyperinflationary or deflationary means to clean the debt out.

    Otherwise it is too painful and population can revolt, as Greece events show now.

    So how to protect yourself? In what was then Yugoslavia, we used to convert local currency immediately to reputable foreign currency, mostly DM, as soon as possible.

    Today I increasingly think the similar answer would be gold, because that argument is easy to grasp - if all fiat fails, what is the ultimate destination? But I am not sure yet - hence reading blogs like yours.

    The reason why I'm holding back - I'm about 20% only in ZAUWBA - is that gold didn't work during Yugoslav turbulence. I knew no one who stacked gold, everybody was piling into DM or US dollars. In my opinion, it was because gold was a pain to deal with. There was no standardised gold coin or bar readily available and widely recognised; people weren't sure of the quality and whether it was fake or not; it had to be measured during the transaction.

    Recent rumours regarding tungsten bars and people worrying about silver bars not sounding the same when hit by the metal object on the YouTube are the variation on that theme today.

    Compare that to readily available black market in foreign currency.

    Large number of people had relatives living in Germany who helped during tough times by sending or bringing DMs with them when visiting. Everyone knew what DM looked like; you could be reasonably confident in your ability to spot a fake and - for ultra security - you could use ultraviolet testers to check if you wanted to.

    The companies and ordinary people had their own designated street dealers on the corners they would rush to when cleaning up the local cash from the bank as soon as they've got paid.

    The government, cynically, essentially had its own parabanking network of street dealers and used it to control money supply in order to extract as much hard currency from the population as possible, so it could finance the war.

    So I'm not sure if physical gold would be the ultimate haven and that's what I'm trying to figure out. There's not enough physical gold in the world for that.

    Perhaps you can discuss it more on your blog, your recent post about fractional nature of unlocated gold was interesting in that regard.

  4. Ironically it was Paul Mylchreast (mentioned in your article) who put me onto gold and onto websites such as JSMineset, and FinancialSense (I found your blog subsequently, Bron). I met Paul at a mining conference at which I was presenting in Singapore in mid-2007. If it wasn't for him I would be a very much poorer person today - in terms of both net worth and financial knowledge. BTW I did live through the 1970's and I remember the stagflation of the time and paying more than 20% interest on my housing mortgage.

  5. Thank you for your stories, very interesting.

    The Yugoslavia story and how people went for other fiat rather than gold is something that has been on my mind for a while.

    If all fiats hyperinflate will the general population use gold? As Yugoslavia said, physical gold is not suitable for small transactions. Maybe GoldMoney or similar will do the job these days, but then that is trackable and thus taxable by a hard cash strapped Government. Plus GoldMoney just does not have the "brand recognition" or awareness in the general population to be taken up when the need arises.

  6. Currently retired. The mindset in the inflationary 'Seventies was to spend it today because everything was more expensive next month. Once that psychology set in it continued on long after inflation began subsiding.

  7. I had worked in gold mines since 1990 and had progressively been exposed to various ideas about gold. I saw the bottom in the late 90's/2000's when I really started to get interested in what it was we were digging out of the ground. I just soaked up every available article about gold that I could on the internet and filtered out the good from the bad. Professor Fekete's articles were especially instructive. One thing that especially stuck with me from personal experience is that gold is incredibly difficult to find, and even more difficult to extract at a profit. This still gives me jitters about gold stocks and I prefer bullion, I figure it will come out on top in the end even if stocks were to out-perform in the interim.

    I was brought up to listen to the opinions, then to make up your own mind. I also was influenced by Huxley and Orwell, now more so by Ayn Rand.

    I have a leaning to learn as much as possible about a topic and figure that if one understands gold there are just as many opportunities to make money by speculating in it as there are from long term investing.

    I started seriously getting into gold in 2003 and have progressively increased my exposure until now. It was the best financial decision I have ever made and I still believe the best is yet to come so hopefully have a bright future ahead.

    Note to previous poster: If USD's were the mainly held go-to currency in the Hungarian expansion, then this time the only safe option is to hold gold (or silver) since this time around the USD itself is failing. But I expect most people wont figure it out until too late since the level of ignorance out there about gold is truly apalling.

  8. My ealiest memory's about money came from my grandparents ,both of which have been in both WW's.As soon as I got pocket money from my parents my Oma set up a "saving's account"with a local bank.I am not sure why she felt that was the best thing to do with pocket money,perhaps she was keen on me learning about compounding interest.Maybe she figured I could be a multi millionaire by the time I finished school.
    I never heard the word Gold mentioned in our family ever even though we lost a lot of land during the great depression and some property in East Prussia during WW2.Sometimes I think people dont want to learn.
    I first learned about Gold from a old Rhodesian friend of mine in about 2000 and I have not stopped reading numerous article 's daily.If there was a PhD in Gold I reckon I would have it.
    I read them all,good and bad and in between,and still do.
    I now have no plans as to what to with my Gold as I have become a mere custodian for those that come after me.I am however,accutly aware that one has to look out for the signs when Gold might have to be sold.Suffice to say that the time is not yet anywhere near yet.
    None of my friends ,family,acquaintances etc have any Gold,but I think my standing and my opinions on all things financial are considered more than they were in the last decade.
    I have stopped buying Gold 6 years ago as I ran out of fiat.I am 100 % in old and Gold shares,apart from the cash I get in form of wages.
    I am amused by the thought that I might
    have got some of Gordie's Gold.Who's the smarter one now ?The Prime Minister od the burger flipper ?
    I'd love to know what my grandmother would say if I told her that I have become a multi kilonaire.

  9. Bron, you were kind enough to chat with me when I visited the Mint, which was likewise my experience with everyone else on the staff of the Perth Mint. Europeans expressed utter shock that such an institution was possible, that you buy and sell bullion gold and silver coins and bars daily in the Gift Shop, and that unallocated positions can be redeemed in gold with only a few days notice, long enough to fabricate the coins. I can't say enough in praise of The Perth Mint or this blog.

  10. I am 64 and have been a farmer all my life. My father emigrated from Germany in 1925, shortly after the hyperinflation. He came from a long line of peasant farmers, we still stay in touch with them. I vividly remember him telling me that the only ones who made it through the hyperinflation with any assets intact were the small farmers who owned their land free and clear.

    Other than good farmland, I have always thought that gold would likewise survive anything coming.

  11. Hi Bron,

    Briefly, my background in economic issues started when I was set a task in high school to research the depression. It was mainly to do with the social costs and arrangements that occurred during that time. My project consisted of a structured questionnaire that I would ask of people who had lived through those times. To my great fortune, I knew several people, including my father, who was a young adult at the time. While at first reluctant, his recollections were simply stunning to me as a well provided for youth growing up in the sixties. It made an impression, and made me a cautious saver and self-insurer (much like my father) throughout my subsequent adult life. Naturally being a saver often left me feeling like the mug, exposed as I was to price inflation. Happily I was able to advance in my career at such rate as to render inflation less hostile to me, but of course my savings still suffered. I recall doing a review of my financial situation in regard to retirement planning in 2005, and receiving a jolt of realization as to how much of my life savings had been stolen through inflation. After some pondering and procrastinating, I finally started buying gold and silver in early 2006. I have also taken steps to manage my own super fund, and it too contains significant exposure to precious metals. Overall, I estimate my metal holdings would be around 30%, and I am very seriously thinking of increasing this. During my career I have experienced the 70's (sometimes out of work), the 80's (highish inflation and high interest rates)
    and of course the recession we had to have. I continue to read gold blogs, and yours is important to me. Current unfolding of events and those in prospect are extremely unsettling. While perfect insurance doesn't exist this side of the grave, I nevertheless would like to remain a good provider for both myself and my loved ones in turbulent times, and maybe help others on the way. I see precious metals as additional insurance in uncertain times.
    Part of me still can't believe that such dreadful monetary, political and social events are in prospect, but like you say unless one actually experiences these things it is hard to imagine that they can reappear even when pre-crisis events have similar patterns to them. I don't expect to make a killing on gold, but I would hope to be able to survive in my retirement and not be a burden to others should worse case scenarios arrive, particularly when I may not be able to work any more.
    Hmmph! I was going to brief, and look what happened...I'll stop now. Very interesting reflections from the other posters here too. Thankyou all.

  12. GenX renter with significant savings for a house ....significant enough we could almost buy something for cash.
    Greece etc got me worried about the volume of cash we have and no assets...so am starting to diversify