Pay No Attention To That Man Behind the Curtain

Frank Baum published his original novel for children, The Wonderful Wizard of Oz, in 1900. Adult readers heard a satirical note in some of its 16 sequels, and they couldn’t miss the politics in many of Baum’s other fantasy stories and plays (an octopus takes offence, for instance, at being likened to the Standard Oil Company’s strangling monopoly). Yet it wasn’t until the mid-1960s that Henry Littlefield, a New York high school teacher, writing in the American Quarterly, highlighted the Wonderful Wizard’s “blatant satire” on turn-of-the-century monetary politics.

Baum himself claimed that Oz was “written solely for children”. His flight of whimsy certainly isn’t Animal Farm or Pilgrim’s Progress in trying to change opinion or morality. But like Littlefield five decades ago, literary professors and economic historians have since found relationships and analogies with events and characters from when Baum was writing that seem far too consistent to be coincidental. Put simply, the story pokes fun at the presidential election campaigns of 1896 and 1900, and the United States’ political battle over joining Great Britain and the rest of Europe in adopting a gold standard, rather than including more plentiful silver in its monetary system.

The Yellow Brick Road, Dorothy’s magic slippers (silver in the book, not ruby), the green glasses with golden bands everyone must wear in Emerald City, even the name of the fake wizard’s kingdom itself (‘oz’ is an abbreviation of Troy ounce, then as now the standard weight for bullion prices) together create what Littlefield called “a gentle and friendly Midwestern critique” of the late 19th century Populist movement. It campaigned for a return to silver against the “sound money” ticket of Republican William McKinley. His “gold bug” supporters often wore gold-coloured metal lapel badges in the shape of insects. The Populists backed William Jennings Bryan, some wearing “silver bug” badges to show their allegiance. Bryan secured the Democrat party’s 1896 candidacy with a fiery speech attacking the deflation in prices and wages that had followed the US abandoning silver coinage two decades earlier:

“Having behind us the producing masses of this nation and the world, supported by the commercial interests, the laboring interests, and the toilers everywhere, we will answer [the] demand for a gold standard by saying to them: ‘You shall not press down upon the brow of labor this crown of thorns; you shall not crucify mankind upon a cross of gold. ’”Says the Cowardly Lion: “I learned that if I roared very loudly, every living thing was frightened and got out of my way” – a trick that opponents now accuse both Democrat hopeful Bernie Sanders and likely Republican candidate Donald Trump of using in this year’s US presidential election campaign. The gold standard has also made an appearance on the2016 hustings, but with the odd twist that tight money and higher interest rates now seem a populist promise, rather than an appeal to evil New York bankers (the Wicked Witch of the East keeps the little Munchkin people “in bondage...making them slave for her”, and her spells turn a hard-working woodcutter into the machine-like Tin Woodman).

There is something very nice about the gold standard,” Donald Trump said in March 2015, adding that “we used to have a very solid country because it was based on a gold standard”. Ted Cruz, Trump’s remaining competitor (at the time of writing) for the Republican nomination, has also said that the Federal Reserve “should get out of the business of trying to juice our economy, and simply be focused on sound money and monetary stability, ideally tied to gold”. Neither mentions returning to a gold standard anywhere on their campaign websites, but Cruz says that “a rules-based monetary system would restore stability to the dollar”, and his campaign has run a TV ad using footage of 1980-1988 US president Ronald Reagan speaking on gold- backed money, with the 2016 candidate vowing to “finish the Reagan Revolution”.

Cruz’s advert doesn’t mention however that Reagan’s pro-gold commercial of 1979– which blamed America’s then “crippling inflation” on the decision to “stop tying the value of the dollar to gold” taken by his (unnamed) fellow Republican Richard Nixon in 1971 – was never actually shown to voters. Reagan’s first manifesto didn’t mention the word ‘gold’, stressing instead how “the independence of the Federal Reserve System must be preserved”. Yes, the Gipper called in 1981 for the appointment of the Gold Commission already signed into law by his Democrat predecessor Jimmy Carter. But the final report published in 1982 found against returning to gold, and it was only in 1984 – after nearly four years of power and two deep recessions – that Reagan’s re-election platform said that “the gold standard may be a useful mechanism...to sustain price stability”, and only then because the record- high interest rates imposed by Fed chairman Paul Volcker were at that time “destabilizing actions [which] must stop”.

The bullish gold position amongst hedge funds and other money managers speculating in Comex futures and options has also turned sharply higher, growing at the fastest pace since the UK government and Bank of England flirted with turning the failure of Northern Rock into a full-blown banking run in late 2007. Retail demand for physical bar and coin products has leapt as well in New Year 2016, but from a stronger level, because as prices fell ever lower over the last five years, the more that private investors built their holdings. Last year’s fresh turmoil in the euro, plus the currency zone’s move to QE and ever-more negative interest rates, saw the Austrian Mint’s gold sales rise 45% from 2014. Between January and March this year, the US Mint sold 12% more gold Eagle coins than the last half-decade’s Q1 average, and 18% more silver Eagles.

Mint figures don’t say whether retail distributors have yet sold all this stock to consumers. Like the raw ETF data, they also don’t say how much demand is coming from new buyers rather than from existing gold bugs already wise to the fact that central banking is really a “confidence game” (to quote the title of one detailed history of Western policy-making in the 1970s and 1980s). But our data at BullionVault do confirm a sharp jump in the number of private Western investors peeping behind the curtain (almost nine in ten of our 60,000 users live in North America or Western Europe), with new account openings rising 60% between January and March compared with last year’s quarterly average to reach a level not seen since spring 2013. Back then, gold prices suffered their worst-ever fall, dropping 25% against the US dollar and drawing a wave of ‘bargain hunting’ from investors buying gold at what were then the lowest prices in almost three years. Gold in contrast ended March this year 17% higher versus the dollar from the end of December, its strongest quarterly rise since Q3 1986.

A straw in the wind perhaps, but this year’s fresh demand suggests that a new wave of private investors is seeking shelter in physical gold. On the other side, however, existing investors held off making new purchases at gold’s sudden multi-month highs (priced in sterling, gold in February touched levels not seen in two-and-a-half years). Indeed, the number of BullionVault users choosing to sell gold leapt by two-thirds in Q1 from 2015’s four-quarter average. As these previous buyers cut losses or took profits, that capped our sentiment measure – the Gold Investor Index – at the highs of last autumn, when new price falls drove more bargain-hunting again (see Chart 2). Each month, this index tracks the number of net gold buyers over net sellers as a proportion of all existing holders, rebased so that a reading of 50.0 would signal a perfect balance.

More traditional retailers dealing in small bars and coin (both more difficult and costly for investors to resell than vaulted bullion traded online) don’t as yet report a rise in customers selling back. But based on revealed preference amongst the largest single pool of private bullion investors online, the Gold Investor Index offers an early indication of broader behaviour. After the bonanza of bargain-hunting gold bug demand since 2013, the wider retail gold investing industry – like central bankers – might want to note the example of Japan.

The developed world’s first joint real-estate and stockmarket bubble to burst, Japan was first to slip into deflation, and turned to QE and zero interest rates before Western central bankers did. Its private households also turned to gold ahead of North American and European savers, building large holdings before world prices bottomed and the bull market began in 2001. Higher prices then invited those owners to sell, especially from 2005, when gold broke above levels last seen when Tokyo’s property and financial crash began in 1989. Japanese savers have been net sellers of gold ever since (see Chart 3), with data published by major provider Tanaka Precious Metals suggesting that its clients bought 525 tonnes of gold over the last 15 years but sold 664 tonnes, running down the investment holdings built during the country’s first “lost decade”.

Western households, in contrast, couldn’t reduce their investment holdings during the bull market of 2001-2011, because they hadn’t previously built any to sell, choosing instead to buy real estate, equities and bonds under the magic spell of central bank stability epitomised by ‘the Maestro’ himself, Alan Greenspan. Should this early 2016 rebound continue, Western households cannot repeat the rediscovery of gold they began a decade ago, and retail dealers expecting a repeat of the one-way flows of the last bull market could face a rude awakening. Because whether or not the retail gold investing business is over the rainbow yet, the fact is we’re not in Kansas anymore. At least some of the bargain-hunting stockpiles amassed on lower prices since the peak is very likely to come back to market, even as new investors and savers discover that there isn’t a wizard behind the curtain.