Gold an Asset of Last Resort in Time of War

from NUMISMATIC NEWS magazine February 25, 2003
Written by David L. Ganz

Gold’s price has gone to six-year heights, closing in on $400 an ounce, as America is on the verge of war over Iraq. The asset of last resort with its traditional hedge against inflation. and against destruction, has kicked in, even before the battle has begun – and the coin market has followed upward.

For more than 2,000 years, gold’s price has risen and fallen based on world events and economics. Contemporary American history shows that the price is not especially stable, but rather prone to movement based on political as well as economic circumstances – and that coin prices tend to follow.

One reason for the follow-the-leader factor is that the coins contain a weight of precious metal in addition to the numismatic value. The intrinsic value for $20 gold pieces in uncirculated condition is substantial, because each coin contains nearly a full ounce of gold (the actual weight is 0.9675 troy ounces).

With gold at $370 an ounce, a $20 gold piece contains $357.97 worth of gold, regardless of condition, date, or mintmark. A relatively common 1907 Liberty head coin from Philadelphia Mint with a mintage of 1.4 million pieces has a selling price of about $710 in MS-63 and around $500 in MS-60 condition. (The 2003 US. Coin Digest lists the coin at $440 in MS-60, but that was when prices were lower).

The difference between MS-60 and MS-63 in condition is not that substantial (though the MS-63 is a prettier coin); but in terms of portability of gold in case of disaster, the lower-grade is the better buy. Here’s why.

If you are buying gold for the event of cataclysm, or disaster, portability is the key. Instead of a brick of gold weighing a kilo or more, your gold $20 gold piece weighs just under an ounce.
There are better buys in the market place, however, if the only aim is gold coin that is also a legal tender as opposed to American Eagles, Canadian Maple Leaf pieces or the other bullion coins. (Bullion coins in that regard offer the best of all worlds, with just a two or three percent margin separating coin values from the raw metal content).

Gold’s history in war, at least until the latter part of the 20th century, was a good solid record. It failed when the Russian government coup that tried to topple Gorbachov failed – and the price of gold dropped $ 100 an ounce. It failed the second time during the first Iraq conflict of a dozen years ago. As chemical weaponry rained down on Israel, and world war threatened, the price of gold dropped $50 an ounce.

Beyond that, gold’s history is generally one of stability if you look at it from 1789 until 1933. There was talk of a 16:1 gold to silver price ratio at the time of the creation of a U.S. Mint in 1792, but the machinations of Alexander Hamilton were miscalculations – and the wrong price for the gold caused a major out flow of American gold coin.

One of the major reasons today that early U.S. gold coin is so scarce is that very outflow; it went abroad and was recoined into less expensive (less metal) foreign coinage. (That is also why the gold and silver weights were changed so many times between then and 1837).

The Coinage Act of 1837 set the value of gold at $20.67 an ounce, and for nearly a century it was maintained at that level – not until 1934 when the dollar was devalued was the price changed to $35 an ounce. During the Nixon years gold was revalued officially to $38 and then to $42.22 – still its official price.

America’s fortune and its world leadership, its economic engine and its $11 billion plus gold reserve (valued at the official price, of course) have helped shape the 20th and early 21st century golden age and golden rules. (To get an idea of the real value of America’s gold reserve today, multiply it by 9 and you get an approximation of its current value – $ 100 billion).

As a precious metal, gold has been – always – in scarce supply, even during the days of the Gold Rush. The Gold Institute popularized a few years ago an analysis that showed that if all the gold mined since the beginning of civilization was melted in a crucible, and poured into a mold the shape and size of the Washington monument, only about a third of the mold would be filled.

Gold’s use as a metal – it does not rust and is highly malleable – as well as industrial and jewelry uses (the latter since ancient times) seals its position as a source of wealth and value. In troubled times, its portability is a godsend because it allows substantial wealth to be moved without attracting attention.

Just 45 pounds (troy pounds) of gold convey $200.000 worth of assets. Imagine trying, to do that with currency – which in a war of the kind that is being contemplated could well be worthless, or nearly so. That’s the value of gold.

For those looking at opportunity in a crisis like that which we are facing, there’s some measure of hope in circulated gold coins of lower mintage coins. For example, an 1844 $2.50 gold piece in about uncirculated is a $5,000 coin; as a VF-20 it is in the $468 range. The mintage for this rarity: 6,784 coins only
Gold coins for inflation, for recession and for war. As America moves down that perilous path, it is some comfort that a hobby can be what one write termed “Financial Survival.”