When Owning Gold Was a Crime

Here’s a great post by my friend Gary Alexander of Navellier Market Mail. Gary’s been writing on investing for nearly 40 years.

Imagine what would happen if the U.S. government determined that oil, gas and other energy investments were too important to allow “speculators” to push the price up and down in the open market. Imagine a heavily guarded national oil hoard in “Fort Cushing,” Oklahoma, with strict rationing and penalties of up to 10 years in prison for storing gas in your garage. Then, imagine the price of oil growing nearly 10-fold before you were free to buy it. Then you hoarded the stuff, only to see the price fall by 50% in 18 months.

That’s the story of gold. In the “land of the free and the home of the brave,” we allowed this outrageous abridgement of our investment freedom for 40+ years, beginning in April, 1933 and ending in late 1974.

In January 1934 & January 1974, the Forbidden Metal Soared

On January 30, 1934, on his 52nd birthday, President Franklin D. Roosevelt tossed around a few numbers in his head and decided that America’s huge new hoard of gold – then priced at $20.67 per ounce – would be suddenly revalued 69% higher at $35/ounce. The Gold Reserve Act gave him that power. Previously, under Executive Order 6012 (enacted on April 5, 1933), FDR outlawed “the Hoarding of gold coin, gold bullion and gold certificates.” Gold ownership became a felony, punishable by up to 10 years in prison and fines of up to $10,000. Americans were given only 25 days to surrender their gold (by May 1, 1933).

Jewelry and some collector coins were exempted. Americans were also free to own gold-mining shares like Homestake Mining and Dome Mines, which became the biggest winners on Wall Street in the 1930s. Homestake shares rose from $80 during the crash month of October, 1929 to $495 in 1935, after FDR’s gold grab, dollar devaluation and gold revaluation leveraged the profits of most of the U.S. gold miners.

Now, fast-forward 40 years to January of 1974, when gold ownership was still prohibited to Americans.

Gold began 1973 at $65 but reached $112 by year’s end. A week later, on Tuesday, January 8, 1974, gold hit a record $126.50 in London, caused in part by the Japanese government’s announcement that they had devalued the yen by 6.7% that day. The U.S. dollar also seemed to be in free-fall, after two devaluations.

On the same day (January 8, 1974), the U.S. Department of Labor reported that wholesale prices (later called Producer Prices) had risen 18.2% in 1973. Silver hit a record $3.40. In the next three days, the Dow fell 6.5%, from 880 to 823 as Wall Street began its worst year of the postwar era with a dramatic thud.

Late in the following week, on Thursday, January 17, 1974, the Commerce Department reported that the final quarter of 1973 saw the largest quarterly rise in price levels since 1951. Then, something dramatic happened. On Friday, January 18, over 700 investors flocked to the first modern gold-oriented investment conference in New Orleans under the guidance of James U. Blanchard III, the man who, more than any other, helped make gold legal for Americans to own. The seminar, sponsored by the National Committee to Legalize Gold, discussed alternative gold investments and plans to lobby Congress for gold ownership.

On Monday, January 21, 1974, as that first gold conference broke up, gold hit a new record high $138.50 and silver hit a record $3.97, as most Americans longed hopelessly for this investment they dare not own. But finally, after much lobbying, a bill passed Congress in August to make gold legal for Americans to own, as of December 30, 1974. Unfortunately, that was the day of gold’s peak price in the mid-1970s.

Gold’s High and Low Prices in the Mid-1970s

January 18, 1973; $63.90; The Dow peaked a week earlier at 1051.
December 30, 1974; $195.25; The first day of legal gold ownership since 1933
September 25, 1976; $103.50; A 47% price drop for the first “legal” gold buyers
Source: USAGOLD

So, law-abiding Americans were forced to sell their gold at $20.67. Then, they were free to buy it back at $195 (missing an 844% gain), just in time to endure a 47% loss. But these early gold buyers, if they did not give up on the yellow metal in 1976, enjoyed eight-fold gains in 3-1/2 years, to $850 in early 1980.

Today, gold has once again fallen by 40% from a peak of $1,923 to a low of $1,192. What’s next?

The Pundits Agree – Gold Will Likely Fall to $1,050 This Year

Last Thursday, Bank of America Merrill Lynch strategist Michael Widmer cut that firm’s gold forecast for 2014 by 11%, from their previous projection of nearly $1,300 per ounce down to $1,150 – well below gold’s recent 2013 lows. Widmer says that gold could bottom out at $1,000 before closing at $1,150. Merrill’s silver forecast is off even more sharply, down 21% from over $23 down to $18.38 an ounce.

The annual gold forecasts from other authorities sound equally dismal. Goldman Sachs predicted a 15% drop in gold for 2014. J.P. Morgan reduced its 2014 forecast by 10%, from $1,400 down to $1,263. Barclays’ analyst Suki Cooper sees a drop to $1,050 gold in 2014. HSBC and MKS Group also cut their 2014 targets for gold. Moody’s cut their projected 2014 price for gold from $1,200 down to $1,100. Louise Yamada of Technical Research expects gold to fall by almost 20% this year, to $1,000 an ounce. UBS reduced their 2014 target to $1,200, down from $1,325, and predicted a 2014 gold low of $1,050.

Some predictions sound more like obituaries. Quincy Krosby, a market strategist at Prudential Financial, said “Investors were heartbroken by gold…. The selloff was one of the deepest purges in an asset class that I’ve seen.” Also, Scott Nations, president and chief investment officer at NationsShares, says that gold’s true value in 2014 is close to $1,000. Nations told CNBC on December 23 that he “wouldn’t buy gold with my worst enemy’s money.” Why? Because “I think it should go below $1,000 in 2014.”

Some gold bugs, of course, see higher gold prices, but I can’t find one established Wall Street institution that sees more than a small rise to $1,300 by the end of 2014. They might be right, but their unanimity sounds a bit like group-think, or perhaps financial analysts don’t appreciate gold’s unique fundamentals.

The fundamentals supporting gold’s price include: (1) Continuing strong physical demand from China, the #1 gold producer and #1 gold consumer; (2) rising physical demand for gold bars and coins in the Middle East, Europe and America; (3) continuing quantitative easing under Janet Yellen’s leadership at the Federal Reserve, and (4) many emerging market central banks continuing to accumulate gold hoards.

On the supply side, we’ll see more gold mines closing, since they cannot make a profit on $1,200 gold. This limits the new supply. In addition, some mining CEOs are talking about returning to the old practice of selling their production forward, under the assumption that gold prices will continue to retreat further. This takes new supplies off the market early, potentially creating a warehouse supply shortage later on.

What If Gold Rises from the Ashes – Like it did in the Late 1970s?

Most pundits have called gold’s 2011 peak a “bubble,” similar to the 1980 spike to $850, but perhaps a more realistic comparison is to the first peak in 1974. After all, the only difference between gold’s fall from $195 to $105 in 1976 and the current decline from $1,950 to (presumably) $1,050 is a decimal point.

What if Wall Street is right and gold hits $1,050 during 2014? That would be very disappointing to most gold investors, and it would give Wall Street a chance to crow about their predictions, but it would fit right in with the long base-building period from 1975 to 1978, which preceded gold’s 1979-80 surge.

Gold has beaten every currency on earth during the 20th and 21st century. Gold is an alternative to paper currency, not stocks, and Navellier Gold offers a low-cost method for accumulating gold bullion. We have no idea where gold will finish 2014 or 2015, but we are hoping to see a relatively long, flat trading range, so that we can accumulate a meaningful position for gold’s next surge, which will surely come.

Posted by on January 21st, 2014 at 10:37 am


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