At times, it seems the entire investment world is split between two camps. On one side are those who believe that gold can do no wrong; on the other are those who believe that gold is no more important than any other commodity—in fact, less important—and that gold's increase in price is due purely to irrational expectations.
There is a third viewpoint however (and, I'm sure, a fourth and a fifth, etc.), that treats gold as a vehicle for personal profit. This viewpoint looks for the reason for gold's appreciation and tries to determine when that appreciation can be expected to end. I'll try to explain that viewpoint in this article.
I won't bother to re-explain the value of the gold standard in this article—as I've done so at length in my books. The conclusion of that explanation is that any currency not convertible at will into gold at a stated rate is going to have problems.
It's important to realize, however, that the abandonment of the gold standard has a greater effect upon the currency than it does upon the price of gold—especially in any short period. When the U.S. Government abandoned gold convertibility in 1933, it would have been an excellent time to buy some gold overseas and hold it through the devaluation that followed.
But once the devaluation had occurred, gold was a poor investment for 37 years—although I must admit I might not have realized that in 1934, had I been old enough or interested enough to think about it.
In the meantime, the deterioration of the currency (as a result of the abandonment of gold) created many investment opportunities and crises. Anyone who understood the significance of gold could have profited from that understanding.
Because the U.S. Government devalued the dollar more than necessary in 1934, the $35 price of gold was too high until 1949. That might seem to be a sweeping assertion, but it's easily demonstrated.
The U.S. Government agreed to buy or sell gold to anyone in the world (except U.S. citizens) at $35 per ounce. Until 1949, it bought far more gold than it sold; the market, in general, preferred 35 more dollars to one more ounce of gold. Beginning in 1949, the Government sold more gold at $35 than it bought. And that trend accelerated greatly during the 1960's, as the market's valuation of gold rose further and further away from $35.
The Government's agreement to buy or sell gold at $35 was an effective form of price control. The price couldn't go much above or below $35 as long as the Government was in the market. No one would sell for less than $35, nor buy for more than $35, as long as the Government willingly traded at that price.
The price control lasted for 34 years—from 1934 until 1968 when the Government stopped selling gold (the 1971 closing of the gold window was an after-the-fact declaration). From 1934 to 1949, the Government held the price up; from 1949 to 1968, it held the price down.
Had the Government not controlled the price, we can assume that gold would have risen in price fairly steadily from 1949 until recently. But the rise would have been reasonably gradual and not dramatic enough to represent an outstanding investment opportunity.
Price controls invariably result in dramatic swings of price after the controls end. And therein lies one of the great values of economic understanding. If you understand how government policies distort the marketplace, why rant and rave about them—since you probably won't change anything anyway? Instead, use your understanding to foresee the dramatic changes that will be caused—and bet on those changes.
PRICE CONTROL OPPORTUNITIES
Price control periods are usually short. When they end, the price rise may occur so suddenly that you don't have time to take advantage of it. But there are three principal assets that were price controlled for such long periods that they resemble the proverbial "once-in-a-lifetime" opportunities. They are gold, silver, and strong foreign currencies.
As I've mentioned, the effective price control on gold lasted from 1949 to 1968. Silver was held down in price from the middle 1930's until 1967. And currencies were price-controlled from 1944 to 1973.
These exceptionally long periods have created exceptional opportunities. First, such long periods suggest that the prices would have to rise by large amounts after the controls end. And second, the commodities became such bargains toward the end of the control periods that many people bought them for speculative purposes. These people have since resold much of their holdings to the market—and thereby have tended to delay the price rises, giving the rest of us time to become involved.
By now, a great deal of the potential post-control increase in prices has already occurred. Since 1968, gold has risen from $35 to $175 (as of February 13, 1975), an increase of 400 percent—and most of that has occurred since 1971. Since 1967, silver has risen from $1.29 to $4.25, an increase of 230 percent—and, again, mostly since the end of 1971. Since January 1973, the Swiss franc (in my opinion, the strongest foreign currency) has risen from 26¢ to 40¢, an increase of 55 percent.
WHY THE INCREASES
An understanding of the price control reasoning explains the errors in both of the investment camps mentioned at the beginning of this article.
First, the price increases haven't been irrational; they have been the inevitable effects of the price controls that preceded them. And second, the price increases won't continue forever. They will continue until the assets involved have regained their natural places in the market. Each of these assets is seeking to offset the price suppression of the past. When that has been accomplished, the dramatic increases will end.
When will it be accomplished?
It isn't easy to forecast timing. But the hardest part is forecasting when the price rise will begin after the controls have been lifted. The available supplies outside of the government's hands can delay the price rise unpredictably (in the case of silver, the delay was four years). But once the rise has begun, it can be expected to continue fairly steadily until its completion—subject to fluctuations along the way.
I expect the prices of all three commodities to stabilize within the next three years or so. If this time estimate is reasonably correct, it will be more important to determine how much price increase is still to happen.
If one can expect at least 50 percent appreciation over the next three years, it will probably represent a more profitable investment than the stock market, real estate or any other traditional investment.
My estimates of price potentials for the three investments are:
Gold: $250-400 per ounce, an increase of 43-125 percent from $175;
Silver: $10-20 per ounce, an increase of 175-370 percent from $4.25;
Swiss franc: $.60-1.50, an increase of 50-275 percent from $.40.
The side range of possibilities I've given might seem to be hedging too much, but I don't think so. The important figures are the low ones. If the minimum potential makes the investment worthwhile, the rest is all gravy.
Here's a brief summary of the reasons for these estimates.
If one thing is certain to me, it is that gold convertibility will return. The currencies of the world won't function satisfactorily without it; and it's obvious that they're already hurting badly for lack of gold convertibility. The convertibility will return—either before or after a total collapse of most currencies.
Gold's potential price can best be determined by estimating what the official price will have to be in order to permit convertibility of the U.S. dollar—without causing a run on the gold supply that liquidates it completely.
If the dollar were convertible today, the net foreign claims upon the U.S. Government gold supply would be approximately $100 billion. If the dollar were convertible into gold at $42.22 per ounce, only $11.65 billion of the claims could be covered and the gold would be all gone.
Since convertibility has been delayed so long, I think that all the claims will have to be coverable to prevent a run on the gold supply. Anything less would create enough uncertainty to induce every claimant to want to get his gold before it's too late.
To cover all the claims, the gold would have to be valued at $362 per ounce. It may take less than this, but I would consider $250 to be an absolute minimum.
If convertibility is delayed too long, the price will necessarily go higher in the free market—because gold will be needed to settle contracts for which the dollar is too unstable. For example, oil-selling governments might be less concerned about the prices they get if they thought the payment medium wouldn't depreciate as rapidly as the dollar is now depreciating.
If $362 isn't necessary, $250 is certainly a minimum. And while a 43 percent increase isn't an outstanding potential, it's probably the surest bet that exists today. The international monetary situation will remain terribly unstable at least until gold is $250—and maybe beyond that.
So, while gold has the least potential of the three, it's the surest thing for the future—and thus represents safety in an investment program. For a number of years, it should increase in price yearly by at least the rate of price inflation.
Of course, the reason that its current potential is the smallest is that it has already achieved most of its long-term potential.
Silver is probably the most speculative of the three. It has more than tripled already—but still has tremendous potential left. The world silver shortage, which was caused by the price controls, hasn't even been dented yet. It will take much, much higher silver prices to discourage enough silver users to bring supply and demand into harmony.
A long-term depression wouldn't hurt silver prices, because it would depress copper, lead and zinc production—the source of silver production. But in the short term, silver consumption can be hurt as much or more than production—thus holding back the price rise.
But one day, not too very far away, silver prices will explode upward again—as they did from $2 to $3 in 1973 and from $3 to $4 in 1974. Anyone who's waited patiently will be rewarded once again.
The Swiss franc is the greatest mystery. That's because its future depends upon the actions of the Swiss Government—while gold and silver are ultimately impervious to government action.
The Swiss Government suffers from the mistaken belief that it must protect its exporters by holding down the price of its currency. It does a disservice to all Swiss consumers and producers thereby, but I can't expect the Swiss government to realize that.
For several years, the Swiss Government inflated its currency in order to hold the Swiss franc price to 23¢ and then 26¢. Finally, in January 1973, it threw in the towel and allowed the franc to float. The price immediately rushed upward.
But in the fall of 1973, the Swiss Government lent Swiss francs to the Federal Reserve Bank of New York. With these, the Federal Reserve purchased dollars in the open market to depress the Swiss franc and prop up the dollar.
The ploy worked—temporarily. In 1974, the loans had to be repaid, in Swiss francs, and when the Federal Reserve purchased the necessary francs in the open market the Swiss franc price rose again. This is a demonstration of the temporary nature of government "solutions."
In the middle of 1974, the Swiss franc was under heavy buying pressure. More francs were lent to the Federal Reserve to buy dollars. This time, the intervention only slowed the rise; it didn't halt it or reverse it. And then, in late 1974, when the loans had to be repaid, the franc moved upward by 15 percent—from 34¢ to 39¢.
At the beginning of 1974, the Swiss franc threatened to go through the roof. More francs were lent to the Federal Reserve to buy more dollars. And this time the Swiss National Bank intervened directly—buying dollars in the open market with Swiss francs.
Just after the beginning of the year, the franc crossed 41¢, but the intervention pushed it back down. However, despite the tremendous selling pressure from the governments involved, the franc dropped less than two cents.
As always, the governments are fighting a losing battle. The price has to go up because, compared to dollars, there just aren't enough Swiss francs to go around. It isn't just speculators and long-term investors who are pushing the price up; it is the normal requirement for currency to use in transactions—and relative to other currencies, there's too much of the other currencies.
The only way the increase can be avoided is with a massive printing of Swiss francs by the Swiss government. But to stabilize the Swiss franc permanently at 40¢, the Swiss Government would have to increase the Swiss money supply by 275 percent! It won't happen.
However, there's no way to know how far the Swiss will go before the consequences of such inflation start causing visible new problems at home. Although the present absolute potential for the franc is $1.50, the Swiss may chip away at that.
So far, it looks very good for the franc. Since the middle of 1972, the Swiss money supply hasn't increased at all. But I don't know how desperate the Swiss Government might become when the franc starts moving again in earnest. My guess is that they will continue to intervene from time to time—but each time at higher price levels.
No matter what the outcome, the Swiss franc is an important investment tool because of its small short term downside risk. While gold and silver fluctuate widely in the short term, the Swiss franc can be expected to drop no more than 15 percent in any temporary downturn. This provides liquidity to an investment program—the opportunity to sell one item at a minimum loss when cash is needed unexpectedly.
No investment advice can be valuable if it doesn't consider individual personal differences. So I won't attempt to suggest a hard-and-fast investment program. You have to determine that for yourself.
However, as a place to begin, you can consider splitting investment funds that are aimed at long-term capital growth equally between gold, silver and Swiss francs. Gold represents a certainty of value—no matter what happens. Silver provides the opportunity for big profits—completely independent of whatever governments decide to do. And the Swiss franc offers liquidity, coupled with a chance for big profits.
Just remember, for the next few years, gold will be a helpful part of a larger investment program, but don't overestimate its investment value. Its phenomenal rise hasn't been a fluke or the result of irrational speculative activity. But, on the other hand, it can't be expected to last forever.
One suggestion that you might find useful is to begin reducing the percentage of your funds in gold after it exceeds $200 in price. From there on, its potential increase could be as small as 25 percent—which isn't enough to get excited about. However, it could also surprise me by sailing through $300 one day—and I wouldn't want to have sold all my gold and be watching from the sidelines.
Fortunately, gold, silver and Swiss francs haven't moved together. So now that gold is getting close to the point where its phasing out of the investment program should begin, there are silver and Swiss francs to take its place.
Harry Browne is the best-selling author of How You Can Profit from the Coming Devaluation (1970), How I Found Freedom in an Unfree World (1973), and You Can Profit from a Monetary Crisis (1974). Now, he has no plans for an additional monetary book, instead, he is working on a long-cherished book on opera and is offering his investment advice through Harry Browne's Special Reports—a newsletter selling for $175 for 10 issues.
This article originally appeared in print under the headline "What's Ahead for Gold, Silver and Swiss Francs".