Is $4,000 Gold the First Crack in the Fiat Era?

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1:08To understand the economy, you have to understand human nature. This podcast is powered by Acast.

1:21David McWilliams: How you doing there? It is podcast time. I am looking out over the Hollywood Hills, just under the Hollywood sign, that iconic image of California, of LA in particular, of the movie industry, which we suggested last week. The reason this place is so fascinating, it is a city that lives on its imagination. It is one large script and it tells America the story of America. And it's quite a fascinating, fascinating, ephemeral, lightweight economy that you can build entirely created on what is going on between the ears of creative types, scriptwriters, movie moguls, etc, etc, etc. The only other problem, John, is there is a song that says it never rains in Southern California, and that is wrong.

2:14David McWilliams: Girl, I want to warn you, it pours, man, it pours. Okay, so we are now getting warnings on our phones, warnings on our phones of mudslides in Malibu. Oh, wow. Because, of course, one of the dilemmas with LA is it doesn't have a very good drainage system. Why? Because it sometimes doesn't really rain. But when it does rain, and we're in the middle of a Pacific storm here, it absolutely pours, and of course, the place floods. And to add to that, Mac, as well, is that the recent fires in LA and the whole LA area have burnt up the undergrowth, which kind of helps to soak up and slow down the water drainage.

3:00But now it's just going to flood off with loads of mud with it. So yeah, that's a concern.

3:06David McWilliams: It was just my luck, but there is always a silver lining, John. Always a silver lining. There is with you, Mac, always. I was walking down Santa Monica Boulevard. I just like the sound of that, okay? and for some reason I'm walking down and it starts to rain it starts to lash and of course I have no umbrella because I'm a paddy on me holliers in effect right and you're on your holliers in California so it shouldn't be raining so you've all the inappropriate clothing and I look across the road and there is a little bar called the Formosa and in I go to the Formosa and I stepped into completely inadvertently a piece of Hollywood legend.

3:50Right. It is an amazing bar.

3:53David McWilliams: Listeners from LA, from California will substantiate this. You know, you walk into a bar, you think, wow, it's dark, it's red, it's oriental, it's hip. I didn't realize that it was one of these iconic sort of bars that Marlon Monroe used to drink in. Oh, really? All the film stars used to drink in, all the rock and rollers. It was just amazing. So it's always a silver lining. I had a glass or two of the local Pino, and off I went on my tour of Santa Monica Boulevard. So yes, it is raining, but never fear. It always turns up something. But anyway, it was really good. So I turned up Trump's last night after having been caught out in the pissing rain.

4:33David McWilliams: But this week, John, we talked about the Chinese bordellos in the 19th century. We are going to talk about the price of gold. The impact of the price of gold, The price of gold has gone through the roof. It is now at around$4 ,000 an ounce. This is the highest level in many, many years. It is peaking and troughing. What I mean is peaking and troughing. It's actually bouncing around at a very, very high level. And I want to talk to you about, not so much about the price of gold, but I want to talk to you about the history of gold, the economic history of gold in this part of the world. because before the Californian gold rush, so the San Francisco 49ers, the team, are called the 49ers because 49 was the year of the great Californian gold rush.

5:29Yes.

5:29David McWilliams: Before that, California was Mexican, number one. It was very sparsely populated, number two. The large indigenous population, number three. And it was regarded as so far away from the rest of the United States as to be only really a place for pioneers and cowboys and all that sort of stuff. Yeah. After the gold rush. And to Eastwood. Exactly, all that sort of stuff. John Wayne more. I'm more of a John Wayne. John Wayne, yes. I'm more of a John Wayne man, you know. Anyway, but basically after the gold rush, the whole geography of America changes. Yeah. And the potential of the Western coast and the Pacific coast of America emerges like a huge, huge dynamo.

6:14David McWilliams: for the United States. It changes the entire sense of the United States' relationship with the Pacific. The United States' Pacific Navy becomes a central part of the American armory in this part of the world. But it's all about gold, John. And what I want to do is I want to extend that, this discussion, not just to gold, but how we got to the gold standard. Because without the gold fines, you don't get the gold standard. Why? Because there simply wasn't enough gold in the world. So the three great gold finds prior to the gold rush of America, California, Russia, the Klondike, all of those ones are in the late 19th century.

6:56David McWilliams: Prior to that, there was only three big gold finds in the world. There was Croesus in Lydia. Remember the Lydians? The Lydians up near Turkey? Exactly. In the river Pactolus, they found gold. That's the first one. Then Pizarro finds gold in the New World in Latin America. Okay, so his was the other big find. Of course, the third big find was gold in what we call now Timbuktu. Timbuktu sounds like a very exotic place. In fact, I met a man once in a bar, and he was in Bangkok. And I was in Bangkok, and I asked him what he was doing here. And he said, when he was a child, he found the name Bangkok incredibly interesting.

7:38David McWilliams: So he wanted to go to Bangkok. And I said, well, where are you going next? And he said, Timbuktu. There's another place that he found fascinating. Well, actually, I was supposed to go to Timbuktu because about 50 miles from Timbuktu into the desert, they hold that festival, Festival du Desert. It's in Mali. Yeah. What is it? Well, it's a big music festival of African music, but also Robert Plant played there. The Hot House Flowers played there. And Damon album played there as well. I'm not sure if the festival is still going, but it was one of those festivals that I always wanted to go to, in the middle of Mali in the desert, right beside Timbuktu.

8:16You should go.

8:16David McWilliams: You should go, John. Take yourself off. Seize the day, my friend. Seize the day. Bye. Anyway, so, they were the three big discoveries, but this becomes obliterated by the discovery of gold here in California, in Russia, in Siberia, The big one then is in Australia. And then the final one is in South Africa. Taken together, this dramatically changes the amount of gold in the world. I'm going to try and give you a sense, John, right? By 1859, with California, Australia, and Siberia all going strong, i.e. these new mining areas, Total world output of gold alone was 275 tons a year, which was more than 10 times the average annual output during the entire 18th century, right?

9:09David McWilliams: Wow. So what you were talking about is a massive, massive positive shock to gold supplies all over the world. Now, what happened here in California was particularly spectacular Because the first change was that the gold that was found by the Spaniards in South America was mined by indigenous people who were in effect slaves of the Spaniards. Yeah. So it never created the mad rush energy and enthusiasm that the gold mining here in California created. Why? Because the gold mining in California was all individual prospectors. So people go out and try their luck. The same in Australia. Contrast that with Russia, where the gold in Siberia was again extracted by slave labor, who were serfs, who extracted the gold for the Russian aristocracy.

10:08Yeah.

10:08David McWilliams: So here you have... And did they get the guys in Russia that were in the gulags in Siberia as miners as well? Was that kind of slave labor? Stalin did that later on. Stalin rarefied the production process of the Russian gold. But the first deposit of gold was found in California on the 8th of December of 1849. And just gradually, what they wanted to do, of course, is they wanted to keep this a secret. Yeah. Because one periodical described it as a new mistress, right? One newspaper. Knowing that people would go completely crazy for this, right? But the big change, John, came, of course, in the revolution telecoms, right?

10:47Yeah.

10:48David McWilliams: The establishment of the Western Union Company. So the Western Union, which is still here today, right, was wiring the entire United States for telegrams. Of course, in the age of telegrams, like in the social media age, you can keep nothing secret for long, John. And by 1853, over 100 ,000 people had swarmed into California, including 25 ,000 Frenchmen and 20 ,000 Chinese. Those are referenced earlier on to a Chinese bordello. Yes. 20 ,000 Chinese, right? This is the ultimate FOMO, isn't it? Yeah, completely mad, right? And of course, the annual gold production approached 80 metric tons, which is a phenomenal amount of production.

11:32David McWilliams: it peaked in early 1853. So the gold rush was only four years. Yeah. But that four years completely and utterly changed California. And subsequently America. It changes everything. Legend is it all came for a fellow called Johann Sutter. It was in his farm that they found it. Now, Johann Sutter was born in Western Switzerland, John, in 1803. He leaves Switzerland, goes to America. He's mooching about. He's a farmer. He's not a gold prospector. He's a farmer. he sets up outside San Francisco in a place called Yerba Buena, which was the name of San Francisco before the gold rush, right? Oh, okay.

12:10David McWilliams: He sets up a farm. And in this farm, he decides to create a settler colony. And this settler colony called New Helvetia, so New Switzerland. And his idea was that he would just simply have a little well-run farm, quite religious, You know, all these sort of very, very unusual characters. Yeah, a lot of these Europeans left Europe for a reason. The reason that they wanted to join cults, they wanted to go explore. But a huge amount of them acquired land. He would have bought this off of Mexicans who owned this part of the world at the time. And they created their own little villages, right? So basically what he was doing, right?

12:52The New Helvetia in 1846,

12:55David McWilliams: there were 60 buildings in New Helvetia. So it was big. It included a bakery. a barracks, a tannery, a blanket factory, plus 12 ,000 head of cattle, and over 10 ,000 sheep, 2 ,000 horses and mules, and fields producing 40 ,000 bushels of wheat. Jesus, that's some setup, isn't it? Yeah, substantial form. And Sutter himself wanted to become the wealthiest man on the Pacific coast. And he said in his, this is the interesting thing he said in his diaries, right? My best days were just before the discovery of gold. So what happened was he wanted to build a new mill on this land. And he employed a fellow called James Marshall.

13:34David McWilliams: James Marshall was an engineer. And James Marshall was digging around the foundations of the new mill. And on 24th of January, 1848, Marshall appeared in Stutter's office, asked to see him alone, insisted they close the doors, and produced out of a cotton rag in his trousers, one and a half ounces of gold dust. and he said there's gold under this particular... There's gold in them there hills. There's gold in them there hills. Now Sutter took a very dim view of all this, right? And he wrote, during the night, the thought burst upon my mind that a curse might rest upon this discovery. From the very beginning, I knew what the outcome would be and it was a very melancholic ride on which I had started the next morning because he understood that the place would be overrun.

14:24Yeah.

14:24David McWilliams: By the 4th of May, by the 4th of May, everything had changed. People had figured out that not only was there gold, but there was gold easily found. The San Francisco Chronicle had the headline, gold, gold, gold, in the American River, which was the river behind Sutter's place. And Sutter says, all my plans and projects came to naught. One after another, all my people disappeared in the direction of the gold field. Only the sick and the crippled remained behind. The damage which I suffered in 1848 was inestimable. Because basically what happened, his property and his workers said, screw this farming car malarkey.

15:05David McWilliams: Let's go upriver and pound handle for gold. So basically, John, what actually happened, right? Even the schools closed down in San Francisco. Right. Because everybody abandoned. And this is, this is again, remember we keep talking about this Dutch disease and how FOMO moments change everything. So suddenly the entire economy of this part of the world changed profoundly. But not only that, the type of people who turned up here were kind of prospectors. They were sort of wild blokes, you know? So you got a huge change in demography. You have thousands of Chinese coming over. You have thousands of speculators.

15:39David McWilliams: As I said, 25 ,000 French people turning up in California. So this is where you get that mad excitement of this crazy place. It's what you feel here still, you know, that people come here. Like, I've just realized that most of the Uber drivers are Armenian here. Now, a very strange thing to go into a car. So I was practicing my Yerevan geography there twice yesterday. Yeah. And I said to them, is this the thing? And he said, yeah. He said, well, a lot of Armenian tractor drivers here. I said, when did you come over? And they said, look, we're constantly facing wars with Azerbaijan. We're constantly facing wars.

16:09David McWilliams: The Russians won't help us anymore. We're on our own. And most of us are just saying, you know what? If we can get out, let's get out. But aren't the Kardashians Armenian? The Kardashians are Armenian. They've started an Armenian rush to California. Yes, yes. That's one way of looking at the Kardashian phenomenon, is an Armenian rush. But it is quite interesting. Again, it's just around here, loads and loads of Armenians. So huge change in gold, John. That changes profoundly the United States. And at the same time, just coincidence, as we talked about in Australia, there is the Australian gold rush, right?

16:43David McWilliams: A guy called Richard Hughes had been over here, an Aussie. He went back to Australia using the same technology that they used here. Our friend discovers gold in Australia. Within six months, John, of 1851, 50 ,000 people were mining for gold in Australia. And they were so rich. Think about this as a detail, John. Yeah. They were so rich that ice from Thoreau Walden Pond in Massachusetts, loaded with sawdust, was shipped 15 ,000 miles to Melbourne, unloaded onto carts, dragged by horses 700 miles to the gold fields of New South Wales so that the miners who had won out could enjoy cold drinks. Get out of here.

17:29Really? The ice? Isn't that extraordinary ice from Massachusetts? How much of it must have melted on the way? I don't know. And got contaminated and stuff. So they just wanted for their cocktails. They don't have cold drinks. It's very warm in Australia. You saw my sunburn when I came back. It's very warm over there. Okay. Cosmos.

17:50David McWilliams: I want more eyes in my Cosmo. And of course, as the newcomers poured into Australia, they transformed what had been a kind of a minor league penal colony of 45 ,000 men into what would turn up to be a flourishing, incredibly well diversified nation, as we know. Again, change the whole thing. A quarter of British men. Think about this. A quarter of British men in the 1850s applied for tickets to go to Australia. A quarter of all men in Britain. Wow. To try and find gold, which is an extraordinary amount of people. Do you know what strikes me is that nothing drives the human mind, like the whole idea of getting something for free or getting something for a bargain.

18:37You're right, John. It's like that's why little and Aldi are so popular.

18:40David McWilliams: Easy money, right? What drives people isn't money. It's easy money. Yeah, yeah. And there's nothing easier in your head, although it's very, very difficult to do. But in your head, you create that idea of finding gold and striking it rich. This is one of the age-old dreams, imaginations of humans. And in the 19th century, it came true. You also had a massive gold find in the Klondike, up in the Yukon Territory in Canada, in and around the same time. And then the mother and father of all gold strikes was, of course, in South Africa because they found gold in enormous quantities in the diamond mines of South Africa, but they found it very, very difficult to get out.

19:25David McWilliams: So while they had the technology here in America, it was incredibly difficult to get the gold out of the mines in South Africa. So it was so deep. As we were finding gold, engineers, chemists, and biologists were really working incredibly hard to try and figure out ways of extracting the gold. And in the case of South Africa, a process called cyanidation, using cyanide, was developed by a fellow called John Stuart MacArthur, a chemist from Glasgow. And this process allowed the South Africans to separate the gold from the rock. And as a result of this process, the South Africans became immensely, immensely rich.

20:16David McWilliams: And polluters. So again, what you have is two very, very different production processes. You have the production process in Russia, which was slave labor, serfs, who were actually technically still slaves. Yeah. You have the production process in South Africa, where we're black indentured slaves, in effect, working for nothing for white owners. This is why the city of Johannesburg grows up rapidly, because into Johannesburg floods tens of thousands of peoples, Irish, Brits, Germans, Jews, all sorts of people from all over the world, right? But in Australia and in America, the prospectors were pioneer individuals.

21:04David McWilliams: And the long-term legacy of these types of people has absolutely changed the business DNA of both Australia and the West Coast of the United States because these are the places, as I said about LA, that they live off their imagination. And there still is that legacy that we can get rich quick here. Yeah, gold fever. There is a gold fever here. And the same when I was down in Australia. And it comes from the very different ways in which gold was extracted. So, Mike, this is about the mid-19th century. So this is also the time of the Irish famine. So there was loads of Irish coming over on boats and joining in on this gold rush.

21:49But with that amount of new gold in the world, what did that do to the kind of global economy?

21:56David McWilliams: Well, see, this is a fascinating, fascinating subject, John, because all this new gold should have had a very, very inflationary impact on the world. Because the price of gold would have fallen dramatically, number one. And the price of everything else versus gold, by definition, would have risen dramatically. This is what happened in the 17th century when the Portuguese discovered gold in large quantities in Brazil. that the gold came into particularly Portugal and Spain and generated lots of internal inflation, right? Right. Something really interesting happened in the late 19th century, which was the assumption was that we were going to have something very, very similar, but we didn't.

22:41David McWilliams: Two things happened. The first was there was enough gold to have the gold standard become the established institutional architecture of finance for another 50 years. That's the first thing. The second thing that happened was in tandem with this extraordinary find of gold came an extraordinary flourishing innovation. So it's often mentioned that the 19th century is the century of biology. So you have Darwin, you have Pasteur, you have an extraordinary amount of medical improvements and biological improvements in that century. But you also have at the end of the 19th century, amazing technological change in electricity, which changes the world profoundly, which rapidly reduces the cost of energy.

23:34David McWilliams: That's the first thing. In effect, up until then, prior to steam, John, basically all you had was muscle, animal and human muscle, and a little bit of wind drove the economy. Yeah. After the discovery of electricity and the fine-tuning of the discovery of electricity and the industrialization of electricity in the United States in particular, what you see is this absolute kick to productivity. And that actual kick to productivity expands the global demand for almost everything, right? So the late 19th century is a fantastically innovative period in chemistry. You know, since the beginning of the chemical industries, in engineering, in biology, in innovations, in medicine, and of course, the big one, in power, in electricity power.

24:28David McWilliams: And all this investment was from gold. And all this investment was facilitated by the gold standard, because what the gold standard allowed was all this trade between various different countries, because all the exchanges were fixed to gold. So what there was, there was a very, very little friction in international trade. So it's the first period of globalization. Right. First period of globalization. And what you get then is the first period of what they call financialization, John. So banks, particularly in London and New York, begin to start investing in what they call emerging markets. And emerging markets were the Australias of this world, the Argentinas of this world, the South Africans of this world.

25:12David McWilliams: What were they building? They were building railways in the main and massive infrastructural projects, all of which had a stream of income going from the likes of Argentina back to England constantly. So this, of course, does one other thing, John. As the income is going back to the UK, what you get is you get the emergence of a financially literate middle class and the emergence of stock markets. So in the late 19th century, stock markets emerge all over the world. and where stock markets, it's quite interesting, they all emerged around the same time. They were all put in buildings that looked like classical Roman.

25:48David McWilliams: Yes, with the columns and stuff. Yeah, yeah, yeah, yeah. They all look the same. But of course, why was that? Because stock markets were allowing people to participate in these big infrastructural projects. The best one we've mentioned before, the people listening to the podcast will know, is the Suez Canal. So the Suez Canal was as much a feat of financial engineering as it was of real engineering. How to get something like this financed, how to issue it. And this is, of course, what you're talking about. In the era of the gold standard, there was a huge amount of financial innovation going on because flows of money from around the world were emboldening people to actually take these risks.

26:31David McWilliams: So because, again, I always think, you know, the Industrial Revolution, it's all very well talking about it. But it had to be financed. You know, people, somebody had to take the risks. And of course, once people start taking the risks, returns go through the roof as risk increases. And what you get is the beginning of what you would call the merchant bourgeois financial class, the likes of which Karl Marx couldn't stand, even though Karl Marx actually wrote for an American financial newspaper under his own name. Not going to suit him. Yeah, yeah. And again, the discovery of gold kicks all this stuff off.

27:06David McWilliams: And you can't understand the history of the late 19th century, you know, boom, without understanding the gold standard. Yeah, absolutely. So let's bring it up to today. In the last, what, 10, 15 years, particularly since COVID and the GFA in 2008, there seems to be a kind of a new gold rush with lots of central banks in particular buying up gold. I want to ask you after the break, why is that and what's the impact of that? Okay, cool. Let's do that.

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29:44So Mark, you gave us the rundown of the history of gold, particularly in America, but also the four main gold rushes around the world in the 19th century in particular. But to bring it up to today, in the last few years in particular, gold prices, you know, skyrocketed because loads of people are buying it. And it seems to be central banks are the main people who are buying it, apart from my mate Joe as well. But there's always gold bugs, John. Yeah, but go on. Yeah, yeah, yeah. Well, they're doomsday preppers. But what I want to ask you is, like, why is that happening now? And what does that say about the kind of the state of the global economy?

30:26David McWilliams: Okay, so what it is, it's very interesting. So basically, in a nutshell, the price of gold has gone from$1 ,000 an ounce to about$4 ,000, right? Yeah. So it's huge, you know, over the last few years. Three things going on. One is that every time there is a fear that the economy and our politics is going to be upset, like a war or the breakdown of sets of institutions or any of that sort of stuff, John, people go to gold as something to hoard that will keep its value so the increase in the price of gold against the dollar is bad news for the dollar right it's somebody's taking the view that you know what the dollar will not maintain its value and what might that be well it might be a the huge indebtedness of the american economy the massive massive debts that the biden administration and Now, the Trump administration are quite happy to sit on.

31:21David McWilliams: And again, they all have to be paid back in dollars. And a lot of people are saying, well, hold on a second. The dollar can't maintain its value. That's the first thing. Secondly, there is that geopolitical risk. There's a war in Ukraine that's broken out. What's going to happen with China? There's a lot of that geopolitical risk out there. In the past, people would have gone to the dollar as the safe haven. A lot of people are saying no, because the dollar is compromised. So we're going to go to gold. The central banks themselves went through a period of selling their gold reserves in the 1990s.

31:52David McWilliams: I think the Bank of England in particular sold all of its gold reserves. And they now realize that, hold on a second, we do need something to back up the currencies, particularly if there is a perception that we are going into the end of fiat money, right? Yeah. So that, again, is a precautionary buy. There's also people hold gold for ornamental reasons, as they've always done. And then finally, I think there's the sort of the crypto Bitcoin background noise that is saying we are going through a period of monetary change. And that monetary change is going to reduce the value, not of the dollar, but of the euro and all those other fiat currencies.

32:32David McWilliams: And in a sense, the digital world, it's quite funny, the more digital the world becomes, the more people are actually going back to a relic from the old age from Croesus and from Midas called gold which is kind of ironic but that's the way it is but it's a fascinating story John the story of gold is a fascinating story if you really want to get into this I am rereading a wonderful book called The Power of Gold The History of an Obsession by Peter L. Bernstein so if there's leaders out there who are insomniac and like reading about economics late at night But it's a fantastic, a fantastic. Let me ask you one last question as you're a bit like the Shirley Bassey of podcasting and Goldfinger and the whole lot.

33:15But let me ask you one last question. And it's kind of a silly question, I know, but I am curious when the Turkish Central Bank or the Kazakh Central Bank or whatever, when they buy gold, do they take delivery of the physical gold? Yeah. Yeah, like does the UPS guy turn up with his van and leave it at the door? Like what actually happens there?

33:40David McWilliams: There's a bar of gold. No, I'd say most of it is kept in probably the vaults of something like, if you're a country that's friendly with the United States, of something like Fort Knox and you just have an account there. But I mean, like certain companies like Turkey would ship it around. They'd want to keep it from themselves. Well, Germany wants their gold back, don't they? Yeah, so I mean, so there is, again, this is the sort of, we're in this kind of new Cold War idea where countries have to defend themselves and people can't really assume that the institutions are going to remain intact. So what you're seeing is you're seeing an atrophying of the sort of post-1990 settlement, of the globalization settlement.

34:18David McWilliams: This is all part of the same story, John. When we had immigration, now we have re-migration. We had open trade. Now we've got tariffs. We had open current accounts. Now we have in certain countries bringing in exchange controls. And this is all part of the whole thing. It's the idea that we're going from one big area, I've told you before, one big super cycle to another one. And all bets are off and gold is part of that bet. Incredible. Talk to you Monday.

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