On the night our documentary I.O.U.S.A. made its nationwide premiere in August 2008, the film was followed up by a live panel discussion, broadcast via satellite. Our friend David Walker, the former US comptroller general and “star” of the film, took part…along with several other luminaries.
At one point, the question was asked: Might America’s trading partners one day sell off their US Treasury holdings?
Impossible, said Warren Buffett. In fact, he insisted, they couldn’t…because they’d need to convert it into some other currency, which would be little better than the dollar. No one else chimed in to challenge the assertion.
“Buffett’s answer assumes that there is no alternative,” author, friend and local Baltimore resident Bill Baker writes in his 2009 book Endless Money: The Moral Hazards of Socialism, “because for generations, all the world’s currencies have been backed only by the promise that governments would accept them in payment of taxes.
“But that ignores a currency that has been used effectively by man for thousands of years: gold. China and other countries might exchange their US dollars for it now.”
Indeed, China is quietly building its gold reserves. They totaled 600 metric tons in 2004. Then in April 2009 came an announcement they’d grown to 1,054 metric tons. And the buzz from Beijing is that the central bankers want to grow that stash another tenfold.
Meanwhile, China has trimmed its US Treasury holdings for three months in a row. The January total was $1.15 trillion – down 1.75% from October.
These are the first steps toward what Baker sees as the “remonetization” of gold – coming soon to a country near you.
History is a pendulum.
“Once gold and silver had been written into the Constitution,” Baker says, “no one might have thought that it would be replaced by paper within 60 years.” But the pendulum swung, the Union issuing its infamous greenbacks during the Civil War.
Then the pendulum swung back, the greenbacks’ critics were “able to successfully push for an agenda of gold resumption. But before the London Economic Conference of 1933, the world would be shocked by Roosevelt’s rejection of the gold standard.” The pendulum swung again.
Now, “a series of crises such as was the case in Rome might ultimately bring the pendulum back toward gold,” Baker writes.
In other words, we’re approaching the end of the Great Dollar Standard we wrote about in The Demise of the Dollar. The only world anyone below the age of 40 has ever known – in which all the world’s currencies float freely against each other – is nearly over.
And Baker is investing accordingly.
In late 2010, he began accumulating shares of a tiny gold miner called Orezone. “Our cost basis is 78 cents, and now it’s $3.61,” Baker tells us on a wintry afternoon in his office on the outskirts of Baltimore. “I’ve sold off two-thirds of the shares that I own, and it’s still one of our largest positions. I can’t keep it down!”
It’s a good problem to have. And Baker has it because he’s willing to go further afield than your typical money manager…as far afield as Burkina Faso.
We’ll pause here to place it on a map, so you can get your bearings. (If you were a geography geek growing up, you might remember it as Upper Volta.)
“I read these other quarterlies from these hedge fund managers,” Baker tells us, surrounded by family pictures, CDs of composers like Brahms and rafts of company research. “They’ll get really absorbed in the macroeconomic picture, but they don’t really know what they’re doing, so they just buy GLD [the gold ETF].
“Or they’ll hire two all-star Canadian analysts. Then I look at what they own, and they own Gabriel Resources because John Paulson owns it. It’s safe. Or they bought some big South African company because it’s cheap based on reserves in the ground when they ran it through their stock screener.
“They don’t have a coherent philosophy about really kicking the tires and really finding these companies that people don’t know about.”
Baker does. His firm, Gaineswood Investment Management, has taken sizeable positions in tiny gold miners working well off the beaten paths of the Americas, Australia and South Africa.
Burkina Faso is smack in the middle of a geological formation called the Birimian Trend…the richest source of growth for gold miners in recent years.
Even better is how many miners in West Africa have consolidated their holdings. “In Canada, you might have a district filled up with 12 companies. One company might have each block, or half a block. But in West Africa, these guys own all of it. They’ve got a lot of time, a lot of land, and now they’ve raised a lot more money, so they can keep going after it…and we’ll keep getting these upside surprises.
“That’s our philosophy, to find opportunity where, for example, this one outfit has found 1.2 million ounces of gold. But with all the new discoveries they’re making, they’ll probably come out and say we have 2, 2.5, and next year they’ll say, well, we have 3, 3.5, 4… and it isn’t over yet, because of this whole giant region that’s been unexplored.”
Before we go any further, we’d better make something clear: Bill Baker isn’t your typical gold bug. Nor is he your typical stock market bear.
“The timing or eventuality of financial calamity is unable to be forecast,” Baker writes in Endless Money. “At best, it might be like a hurricane warning: The tempest may strike here, it may hit there, it may be downgraded to a tropical storm or it may go elsewhere entirely.”
But that doesn’t mean investors should fail to prepare for financial calamities…or the demise of paper currencies. Financial calamities are becoming increasingly likely in this overly indebted world of ours…and the death of paper currencies is becoming increasingly certain. The best time to prepare is ahead of time.
For Markets and Money Australia