WINDERMERE, LAKE DISTRICT – How much gold is too much?
This is probably the wrong question to be asking in the current climate. If anything, your average investor should be asking themselves, how much gold is too little?
I don’t believe the gold sector (bullion, mining, and exploration) is anywhere close to a level of “overinvested” today. Gold ownership amongst mainstream investors – while more common than it used to be thanks to exchange-traded funds (ETFs) – remains rare.
But believe it or not, it is actually possible to have “too much gold”.
And the Spanish found out the hard way.
Last week, we explored how the conquistadors’ rampage across the New World in the 1500s massively increased the gold supply in Europe. We contrasted this on Friday with the grim outlook for gold supply today, with miners needing to pull ever larger quantities of earth out of the ground to extract the same amount of gold.
In today’s note however, I’d like to dwell on what that enormous bounty of gold did to those that acquired it. For in a twist that would befit an adventure novel or video game (hell, it formed the plot of the first Pirates of the Caribbean movie), the vast hoards of looted Aztec and Incan treasure were tainted – cursed…
And I think we may be seeing a similar dynamic take place today: but in a different country, and with different “gold”.
Over the course of the 16th century, the conquistadors would increase the total stock of gold and silver in Europe by almost five times. But the entry point for this vast injection of plunder into the continent was very narrow: almost all the treasure entered the continent via Spain. While you might think of this as a great advantage for the Spaniards – and so it seemed at the time – the arrival of the conquistadors’ bloody loot would doom the country.
Peter Bernstein describes how this came to occur in his great book, The Power of Gold (emphasis mine):
Once the gold began arriving in quantity, the Spanish were far more proficient at spending than at producing. The massive imports of gold and silver stimulated the spending skills at the same time that they stifled Spain’s incentive to produce. Spain acted like a poor man who makes a great windfall at the gambling tables but comes to believe that the money is his destiny rather than a non-recurring event. This event was indeed non-recurring: copious as the shipments of gold to Spain may have been during the 1500s, they peaked in mid-century and dropped off sharply after 1610; silver shipments peaked around 1600 and fell into a steep decline after about 1630.
During the 16th century, five-sixths of outgoing cargoes from Spain, primarily to the colonies, consisted of goods grown or manufactured in other countries. Late in the century, the Cortes, or Parliament, declared, ‘The more of [gold] that comes in, the less the kingdom has…. Though our kingdoms should be the richest in the world … they are the poorest, for they are only a bridge for [the gold and silver] to go to the kingdoms of our enemies.’ Another Spanish observer, Pedro de Valencia, wrote in 1608, ‘So much silver and money . . . always has been fatal poison to republics and cities. They believe money will keep them and it is not true: plowed fields, pastures, and fisheries are what give sustenance.‘ Instead of transforming the gold and silver into new productive wealth, the Spaniards paid the precious metals out to other countries and spent so much that debts to foreigners soared. As early as the 1550s, there was a popular saying that ‘Spain is the foreigners’ Indies,’ because so much good Spanish money was being paid over to foreigners for ‘puerilities’ — baubles like bangles, cheap glassware and playing cards.
Like an economic painkiller, the enormous inflow of foreign gold caused the Spanish economy to atrophy. Why bother competing with neighbouring countries to produce something in exchange for gold, when a river of gold is flooding into your country, and your country alone?
You could draw a comparison with Spain’s great windfall in the 1500s to the discovery of oil in Middle Eastern nations in the 20th century. You could point to how the “sudden wealth” altered, corrupted, and atrophied these nations blessed with black gold.
As Ryszard Kapuściński wrote in Shah of Shahs on the temptation oil breeds in men:
Oil creates the illusion of a completely changed life, life without work, life for free. Oil is a resource that anaesthetises thought, blurs vision, corrupts.
No doubt the Spanish were similarly afflicted. However, I think there is a better comparison. For oil is not a currency – and gold was back in the 1500s.
Spain had been given seemingly unlimited access to the money everyone used and trusted. Everyone accepted gold and silver – it was the global reserve currency of the time. And Spain just kept receiving boatload after boatload of the stuff, for relatively little cost. It was almost like they’d been given a printing press… but for “hard money”.
Today the US enjoys a similar blessing – which is also a curse. While the US dollar is not gold any longer, it is the world’s reserve currency. And this privileged position leads to similar boatloads of treasure arriving at America’s shores, seemingly for “free”.
Foreign governments invest their foreign exchange reserves in US Treasury bonds – trillions of dollars their countries have earned from trading with the US, are sent back to the US for the federal government to spend (Japan and China own a trillion apiece). Foreign investors not only buy US Treasury bonds, but American stocks and real estate too (foreigners own more than $9 trillion in US shares).
And yet despite all of this wealth flowing in from abroad, the US is cursed by it – just like the Spanish. The dominance of the dollar which foreigners must work to acquire but the US can simply print appears an enormous advantage – but over time, it has led to societal decay.
Just like the Spanish, the US’s incentive to produce has similarly been stifled – the factories and mills that made it an economic superpower have gone abroad, while its citizens blow their money on the “puerilities” of today. The US spends so much that its debts have soared and continue to accelerate. Washington owes $28 trillion today, with $8 trillion of that being added in the last four years alone, while wealth inequality only gets worse and social unrest smoulders and flares.
Pedro de Valencia’s words from 1608 are just as prescient today as they were in 1608 – “They believe money will keep them, but it is not true”.
For the Spanish, it was too much gold. For the Americans, it is a case of too many greenbacks…
More to come,
Editor, Capital & Conflict
PS At long last, our 2021 Gold Summit begins today. My first interview is with Nigel Farage – don’t miss it.
Category: Investing in Gold