(4 of 5)
To protect his wealth, Knapp bought $10,000 in gold at $152 per oz., $10,000 in silver, and half as much in Swiss francs. Just over three years later, the gold is worth more than $16,000, and the other investments have also gained handsomely. Now he plans to increase his investments. At Deak-Perera, the nation's largest retailer of gold coins, Chairman Nicholas Deak reports that some of his recent customers have been high school kids. Says he: "It's a little scary. They just walk in and say they have a little money and they want to buy a Krugerrand."
Yet investment in gold may not be so clever. One often overlooked reason for gold's rise is that its value had been held down artificially at $35 per oz. for nearly 34 years, until 1968. Much of the climb since then has been merely catching up.
True enough, the 30 stocks in the Dow Jones industrial average have not performed nearly so well as gold in the 1970s. They have lost close to 8% in value. But that hardly means that gold, which pays no dividends, would have been a better play. It was illegal for Americans to own gold until 1975, and by that time foreign speculators, anticipating an immediate rush into gold, had bid it up to nearly $200 per oz. At that level, investors remained wary, and within a year the metal slumped to about half its value. Meanwhile, the Dow Jones average, which then stood at a bearish 616, began a rise. Even at last week's fairly modest level of 827, the Dow stocks have done better than gold since the beginning of 1975. The stocks have climbed 34%, while gold has gone up only 27%.
Some forms of gold investment may turn out to be sucker's bets. Anyone with just one Krugerrand can boast about his "gold holdings," but the coins typically sell for 6% to 10% above the going rates paid by dealers for bullion. Worse, some banks and jewelry shops that sell them will not buy them back except at a similar-size discount, and a number of retailers will not repurchase them at all.
Hoping to prevent the Pretoria government from profiting by the U.S.'s gold fever, Congress last year passed a law requiring the Treasury to begin selling its own one-ounce and half-ounce gold pieces next spring. The coins, with profiles of Louis Armstrong and Mark Twain, will not be legal tender in the U.S., and will presumably be no easier to swap for real money than the Krugerrand.
The Administration is clearly right in wanting to bury gold as a monetary reserve. It would be dangerous to make the official wealth of the world's nations dependent upon the erratic supplies of a metal that comes largely from South Africa and the Soviet Union, whose governments can pump up or cut off sales at will. But gold will continue to glitter until a stable and acceptable monetary substitute can be found. In theory, there is nothing wrong with continuing to use the dollar as the world's primary currency for international trading and holdings of national reserves. But the U.S. has printed so much money to cover federal budget deficits, and has run such big balance of payments deficits, that as many as $700 billion in greenbacks are swirling like confetti through the money markets of Europe and the Far East.