Gold’s constant purchasing power gives it special status worldwide

Just about a year ago an event of great significance in the world of gold took place: the United States Mint, for the first time in a generation, struck a legal tender gold coin — the new U.S. Eagle, containing one ounce of fine gold.

If you think back just a few years you will realize how big an about- face that was. From 1934 until Jan 1, 1975, the ordinary U.S. citizen was forbidden to hold, to invest, privately, in gold except for certain numismatic coins. Today the U.S. government is again issuing a gold coin and Americans may invest at will in the metal.

But the Eagle is not alone. Look around the world: gold bullion coins, sold at close to the spot price for gold, are becoming quite the fashion. Our friends across the border in Canada have their gold Maple Leaf, the British have long minted the Sovereign and are adding a new coin — the Britannia — this fall, the Australians have launched their Nugget this year and the Belgians sold out the first issue of a coin called the ecu (after the European currency unit). Even China is doing well with its Panda gold coins, which have proved so popular in the U.S. that they often now command a premium. In short, the habit of investing in gold coin is alive and well.

So today, in trying to give you a global view of gold, I’d like to share with you some thoughts on how gold still remains a significant investment medium in countless countries on every continent. For me, as a gold miner, that is naturally good news. The gold mining industry, not just here in the U.S., but worldwide, is achieving a rapid increase in gold production (in the U.S. alone output is up 4-fold since 1980).

So gold miners must concern themselves with who will buy this new production — and, more important, at what price? And there is no doubt in my mind that the investor holds the key. So what is his attitude? Why does he value gold? Price stability

The key fact we should keep in mind is that gold’s historic reputation is founded upon the very stability of its price. As Prof Roy Jastram observed in a book aptly called The Golden Constant, “gold’s purchasing power in the middle of the 20th century was very nearly the same as in the midst of the 17th century … gold maintains its purchasing power over long periods of time.”

Gold was not just the benchmark against which other prices could be judged, but it enabled millions of people to preserve some of their assets when their country was beset by political or economic disaster. The French, for instance, whose nation was invaded in two world wars in this century, have an enduring reputation for keeping gold coins or small bars under their mattresses, in their cellars or buried in the garden; probably 5% of all the gold ever mined has been squirrelled away by the French — an asset worth over $70 billion at today’s prices ($450 per oz).

And in Europe recently I heard about a Greek family that, at the moment of the German invasion in 1940, turned all their assets into gold sovereigns. They took out the door frames throughout their house and carefully hid the sovereigns behind them; once or twice a year throughout five years of occupation they removed one door frame and took out a few coins to buy food or other vital necessities. When peace came, the local paper currency was worthless, but they took out all the remaining sovereigns and started their business again.

Such experiences die hard. And the trust in gold persists today among many peoples. You will recall, too, the Vietnamese who escaped at the last moment from Saigon, ofter carrying with them only gold bars with which they have started a new life here in North America or in Europe.

And over the last decade much of the prosperity that the people of Taiwan have reaped through their successful selling to us of consumer goods has been ploughed into physical gold holdings, because of the uncertainty about Taiwan’s political future vis-a-vis mainland China.

People like their little stock of gold in case they have to run away. And that is not the only motive. Recently when I was at the Financial Times gold conference in Venice, a speaker from the Far East mentioned that just the previous week there had been a rush for gold through the Singapore gold market. Why? Because of fears of a devaluation in neighboring Indonesia, traders there were switching monetarily from the local rupiah currency into gold. Wide world of gold

For those of us here in the U.S. accustomed to a sophisticated investment industry offering all manner of opportunities — to say nothing of leverage — to get into stocks, bonds, futures or options, it is often hard to realize that there is a much wider world of gold out there, where possession of the physical metal is still a prime form of investment.

Here we look to Comex, where the turnover in the gold trading pit alone in a single year may be equal to a third of all gold ever mined. No doubt a mood, a trend, on Comex can dictate swift movements up or down in the gold price. But very, very few people take delivery on Comex. And ultimately, as a gold miner, what I like to see is someone actually buying the gold from our mines to fabricate into jewelry or industrial products or as some tangible form of investment.

Without doubt jewelry is a major cornerstone in the gold business. Something like 60% of all the gold that has come on the market in the last 20 years has gone into baubles, bangles and beads. But the real key to long-term direction of the gold price is investment attitudes. It is serious investment money that is going to determine the development of the gold price for the rest of this century. Three examples

I’d like to give you three sharply contrasting examples of gold investment — from Switzerland, from India and from Japan.

First, Switzerland. Swiss money managers have long taken a pragmatic view of gold as an integral part of any broadly-based investment portfolio. The classic view among portfolio managers in Geneva’s private banks, for instance, is that 5% to 10% of a portfolio should be in gold, not so much as a profit generator, but as insurance.

The traditional view, in fact, is that gold is held to preserve assets, not as a moneymaker — the other 90% to 95% of the portfolio can do that. But given today’s volatile gold price (in contrast to the historic experience, when the price of gold in pound sterling did not change for 200 years) they have become more flexible. In the high inflation of the late 1970s and early 1980s many Swiss money managers urged their clients to increase their exposure to gold to 15% or 20%. One Geneva bank even got 45% of the prortfolio in gold for a short period.

But as inflation waned, as interest rates shot up in the early 1980s, and then the dollar strengthened until 1985, and later the stock and bond markets took off, so gold came back to the hardcore holding of perhaps 4% to 5%. In the last year or so, however, the mood has changed. By the summer of 1986 alert portfolio managers, realizing that Japan was buying a lot of gold, that the dollar was tumbling and that it might be a good time to start “insuring” some stock market profits, slowly started increasing their exposure to gold again, initially to 7% and then to 10%.

Those early birds rode the price up nicely from around $350 an ounce to $450 and beyond. And so far in 1987 we have seen the most positive investment approach to gold since 1980; continued concern about the dollar, about tension in the Gulf, trouble in South Africa, of inflation returning or the stock market collapsing, have created an anxiety cocktail that has provided a steady undertow of investment buying this year. Gold has come back as the “bedrock” to rest upon in uncertain times.

The significance of this more positive Swiss attitude to gold may be judged from the amount of money they have under management. The 24 Swiss banks alone are estimated to direct assets worth around $100 billion; if they put 10% of that into gold, it would purchase nearly 60% of this year’s output from all mines in the non-Communist world. Asset preservation

The Swiss approach to gold is dictated by a professional concern to preserve assets. In India, by contrast, investment in gold has much more to do with deeply inbred social customs — yet they have much to do with preserving the wealth of a family. It is often hard for us in America to realize how important a role gold still plays in the social fabric, not just of India, but of many Third World societies from Morocco, all along the north African coast, into Turkey and the Middle East and on beyond into Malaysia or Thailand or Indonesia.

But India provides us with the best example of a nation where gold is still a social symbol. The farmer who has a good harvest goes to his village goldsmith and buys 22-carat gold ornaments; they are the basic form of saving for him or his family.

If the monsoon is late next year and his crop is ruined, those gold ornaments are his insurance policy. If his wife is sick, they can buy medicine. If his daughter gets married they are her dowry. Throughout the villages of rural India trading in gold ornaments is still the only way that a farmer can get instant liquidity, The goldsmith gives him rupees in his pocket this morning. Otherwise he might have to walk 20 miles to the nearest savings bank, and then waste hours with bureaucracy.

Thus India remains one of the great markets for gold. Last year over three million ounces of gold (equal to all U.S. production) went to India. It is all, I should add, smuggled. India has forbidden gold imports for 40 years, but gold finds its way there in abundance. The price there is a contstant incentive; it is usually around $80 to $100 an ounce higher than in New York or London.

Moreover, the local Indian price, in rupees, shows you why gold retains its attraction as the staple form of investment. Over the last 25 years the Bombay gold price has advanced steadily (without the wild swings we have seen here) by a multiple of 30. If you bought an ounce in Bombay in 1962 it cost you about 2,500 rupees; today that is worth over 80,000 rupees; a rather better track record, incidentally, than we have seen. A new habit

In India gold hoarding is an ancient custom; in Japan it is brand new. In today’s gold market Japan has emerged as a towering force during the last few years. One great question for gold traders is how strong is this new Japanese habit? How long will it last? The important point about the Japanese is that they are just in the earliest stages of building up a private investment stock in their country; by contrast the French, the Indians or the overseas Chinese (that is, those living and working outside mainland China in Hong Kong or Southeast Asia) already have their gold holdings. The Japanese are beginners. But they seem to be going about it with their usual diligence.

In Japan gold investment is not an integral part of social customs. The key factor is that the Japanese have not only a highly prosperous nation with a high standard of living, but they have a very high savings rate (17% of disposable income in recent years). Private investors alone (as distinct from institutional) had over $3 trillion at their disposal by the end of 1986, but scarcely any of that was in gold. So far most Japanese investment has been in the stock market, real estate (or buying golf club memberships, which are traded as negotiable certificates on a secondary market). But gold is starting to attract their attention.

Last year, to commemorate the 60th anniversary of their Emperor, Hirohito, the Japanese government issued 10 million gold coins; and although they charged a premium of over 100% on the gold price, most of the coins were snapped up. This event alone put gold in the hands of millions of Japanese families for the first time. A first step on the gold investment ladder.

Today the Japanese people are becoming aware of their wealth and are eager for investment diversification to spread risks. Personal financial management is suddenly the topic of discussion among office workers, housewives, even students. The Japanese even have a word for it — zaiteku — which really means financial technology. Zaiteku is becoming a household word. The Japanese, so it seems, intend to apply to personal money management the same skills they have shown in creating their wizardry in electronics and technolog y. Great implications

This initiative has great implications for gold. Not only has the Hirohito coin put gold in the hands of many Japanese for the first time, but as they practise their zaiteku, their financial technology, they realize interest on bank deposits in Tokyo is low — less than 4% on 1-year deposits — and is liable to tax. Gold, on the other hand, can be bought (and sold) anonymously. Consequently, during the last few years, Japanese investors have slowly been buying more gold. Last year, for instance, they acquired almost six million ounces (virtually the combined production of the United States and Canada) in gold bars. quite apart from the Hirohito coin, and jewelry and industrial use.

And in May this year, when the Tokyo stock market dipped, over $300 million was switched into physical gold to protect stock market profits in just a matter of days.

Looking ahead, bullion dealers in Tokyo reckon that over the next few years the Japanese will continue building up their basic private gold holdings to bring them up to par with the more traditional stocks of the French or the Indians or the overseas Chinese. That underlying Japanese demand is one of the most bullish long-term factors in today’s gold market. And what interests me particularly is that this is physical gold holding; it is not trading paper gold on an exchange. Spreading the risk

The Japanese investment is motivated by the desire to spread risks, and is aimed more at preserving assets rather than making money. Precisely the classic reason for gold holding. Gold’s best credential, as I stressed at the beginning, is the maintenance of purchasing power over long periods. Many people have their favorite examples to illustrate this.

In closing, I’d like to share with you one that I heard in Europe this past summer. A London gold analyst, Julian Baring, charts his “gourmet’s guide” to the gold price by the number of people who can dine at London’s Savoy Hotel for a gold sovereign. He starts in 1914 when one sovereign was enough to pay for three dinners at the Savoy. This summer, dinner at the Savoy cost L22 per person (up over 70 times) but … you’ve guessed it … one sovereign at the market price still bought precisely three hot dinners.

That is what gold has going for it. If you buy one U.S. Eagle (or a British sovereign) today, you can feel confident that it will buy you just as many meals in, say, the year 2000, as today. Can you say the same of a one-dollar bill?

Gordon Parker is chairman, president and chief executive officer of Newmont Mining Corp.