HELPING PHYSICIANS ATTAIN FINANCIAL SECURITY
By Robert M. Doroghazi, M.D., F.A.C.C.
The quotes to illustrate my points are taken from Conquest, Tribute and Trade: The Quest for Precious Metals and the Birth of Globalization by Howard J. Erlichman (Prometheus Books).
“The Ming Dynasty, having abandoned the impractical paper currency system during the 15th century, was thrilled to receive (via Manila) American silver”.
RMD comment: History has shown that all paper currencies end up worthless. There is no discipline, just print, print, print. Since the creation of the Federal Reserve in 1913, the US dollar has lost more than 98% of its value. I remain convinced we will eventually return to a metallic-backed currency, and the Federal Reserve will become history.
“When times were tight, the emperor (Charles V) had no qualms about confiscating private treasure shipments from the Americas”.
RMD comment: Could the US government confiscate your wealth? I am not talking about “indirect confiscation” via onerous taxes and inflation (both of which are now being used), but outright taking your money.
Remember that in 1933 Roosevelt “called in” the gold, and then immediately re-valued it from $20.66 per ounce (as it had been since the 1790s) to $35/ounce, an instant 68% loss, essentially confiscating the wealth of American citizens (see quotes from Thomas Donlan below).
“Sense on Cents” (11/29/10), quotes Bloomberg from 11/25. “Hungary is giving its citizens an ultimatum; move your private pension-fund assets to the state or lose your state pension”.
“Sense on Cents” (1/11/10), posted “Blueprint for Government takeovers of IRAs”
RMD comment: I suggest you read both of these posts for yourself. This has been one of my greatest concerns; that the government could become so hard-pressed for assets to confiscate your private retirement accounts. Could it really happen? Very unlikely—BUT (also, see below).
“Attempts were made to transfer some of the emperor’s stupendous debts in Castile (Spain) to the taxpayers of the Netherlands (At the time, Felipe II had sovereignty over Spain, Spanish America, the Netherlands (present day Belgium and Holland), Naples, Sicily and Milan).
RMD comment: Politicians try whatever slight of hand they can. States that are running deficits just look to the Feds for help. But the worst offenders are the US Congress. Money is taken from the (current) surplus in the Social Security Trust Fund and just spent as part of the general budget. This number is not included in the formal budget deficit. Thus the real deficit is significantly greater than it appears.
During this entire 16th Century in Europe, the silver to gold exchange ratio was about 10-12/1, i.e., it took 10-12 ounces of silver to buy 1 oz of gold. Silver was relatively more valuable in the East. In the Indian Ocean area the ratio was 9:1. In China, it was usually 4-6/1.
RMD comment: For some time now the average has been around 50, with a range of 90 to as low as 16 at the peak of the last bull market in the precious metals in 1980. It is currently about 47.
I’m not sure why this has occurred; but clearly, as time has gone on, the value of gold has increased dramatically in comparison to silver. As this bull market in the precious metals continues, silver should continue to out-perform gold. My general conclusion is that, although silver was the medium of daily commerce (you took a silver dime to the store to buy a loaf of bread, not a piece of gold), people have come to recognize gold as the true storehouse of wealth.
“The very same (new amalgamation) process was applied to years worth of smelted slag ores (trailings) that had been discarded….and (to) lower quality ores”.
RMD comment: If you wish to do some personal research, you might look into finding a company that is sitting on piles of the currently-worthless discards of previous mining operations. When prices go higher, these could have value.
(In 1996, we bought a condo at the Lake of the Ozarks. The area is quite hilly. They will knock off the top of one hill, dump it in the adjacent valley, and build on the now flat area. Carrying this to an extreme, I think the earth will eventually become contourless. Land from mountains will fill valleys, or be dumped in the ocean to make new land (as Dubai has done on a tiny scale).
As it relates to this point, I also believe that landfills, now our garbage; will at some time in the future be valuable as the resources are recycled).
“The Fuggers (at the time, the most powerful merchant bankers in Europe) had some issues. Some 2.7M of their 5M ducats in total assets were “book debts” (claims), that were less than certain”.
RMD comment: So they really didn’t have 5M ducats, did they? If I had my choice between $2.7M in IOUs, and $2M (or even less) in gold, I’d take the gold. It’s like when people say “this is worth so-and-so”. Something is only worth what you can sell it for.
This also brings up the issue of counter-party risk. You have an insurance policy and your house burns down. It’s worthless if the insurance company can’t pay. In the above example, the Fuggers were bondholders who ended up getting only cents on the dollar.
As you will see when I finish this topic in the next issue, in the end, the people who had the gold and silver, the hard assets; did fine. Gold has no counter-party risk; it stands alone. The people who were stuck with the paper got hosed.
RMD
Barron’s, 1/17/11. Thomas Donlan says “In 1935, the Supreme Court ratified the power of the government to abrogate gold clauses in contracts and confiscate privately-held gold without amending the Constitution. The right to own gold was not restored for 40 years and contracts requiring payment in gold are all but forgotten”.
RMD comment: So, it looks like the government can do just about what it wants—when the people let it. Some people are actually looking at the Constitution again.
I receive several emails per day from subscribers. I try to respond to all of them. (Likewise, I cannot answer questions specific to your personal portfolio, and I cannot make your investment decisions for you). Overall, I encourage your comments, because it provides me with ideas and issues I might not consider otherwise.
This is in response to my comments in Monday’s letter that we will not see the end of our current financial troubles until we address spending, including on social programs (Social Security and Medicare).
“The free market won’t provide adequate sustenance for the elderly and sick, just for a tiny fraction of the very wealthy…I’m concerned for the loss of the safety net…Left to market vagaries, some would retire with insufficient assets…
The thing we are missing today is the compassion factor. Hard-headed realism insistent upon personal responsibility is valid until we contemplate the fellows in society’s gutter. As a social corporation, we will save them and it is never cheap”.
Hank Waters
Publisher, Columbia Daily Tribune
RMD comment: Beautifully said. The truly great leaders, such as Washington, Lincoln, and George Marshall (my personal hero), know when to be firm (hard) and when to be compassionate. I believe the US is one of the most compassionate, charitable societies on earth. But as it relates to the current discussion, our government just can’t afford to be as financially compassionate as we are right now.
Yesterday (1/19) Jeffrey Gundlach was interviewed on CNBC. Gundlach was a finalist for Morningstar’s Bond Manager of the Decade (given to Bill Gross of PIMCO).
He had these concerns:
1) The flare-up in Europe will keep repeating itself until the underlying issues are adequately addressed.
2) There is trouble in the muni-bond market. If munis fall, high yield (junk) bonds will also fall.
3) The commodity price boom indicates a trend (higher inflation) that will hurt bonds.
RMD comment: In Monday’s letter I gave you a heads-up that there is big trouble in the muni-bond market. Likewise, everyone needs some fixed-income exposure, so what should you do? I suggest short-term CDs at your local bank; just make sure you are under the FDIC limit.
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