Gold Bullion Dorey

A bible for the gold market? – part I

Will Bancroft takes a look at another financial book that is often an inspiration to those that buy gold bullion. In this review he takes a look at what has been a ‘must read’ book within the gold bullion investment market for many years now, and one that is still touted as one of the great tomes on gold, money and man’s ‘ability’ to manage it.

In our Blog section we often feature the best financial books for our readers, but today’s review is a bit of a special one. There are many great books out there for gold and silver investors to read and understand monetary history and the precious metals markets. However, there is one book that might stand above them all:  ‘Gold Wars’ by the late Ferdinand Lips. If you buy gold, are thinking of buying gold, this is an essential read.

Gold Wars has inspired the likes of Ben Davies, CEO of Hinde Capital, is highly regarded by gold market heavyweights, is regularly mentioned by expert commentators on the financial and monetary system, and was published by The Foundation for the advancement of Monetary Education (FAME) in New York.

Uncovering Gold Wars

Although the full title, Gold Wars: The Battle Against Sound Money as Seen From a Swiss Perspective, sounds technical and might come across as dry, this book is mostly very easy to access. The reader is in fact taken on a compelling journey of the history of money and gold, with revelatory diversions that touch on liberty, freedom and human progress.

Readers with a moderate knowledge of money are likely to find this book revelatory and illuminating.

Ferdinand Lips drew wide ranging praise for his publication from a range of academics, historians, miners and geologists, and professional investors. What is even more impressive is the standing and depth of the individuals Herr Lips has come across or read and understood in his dealings as a Swiss banker and advocate of sound money. His breadth of knowledge is remarkable and he was clearly very well acquainted with the likes of the late gold market analyst, Julian Baring, monetary expert, Professor Peter Bernholz, investor and author, James Dines, Ex-Federal Reserve banker, John Exter, and many other notable individuals who appear in the literary journey.

Introducing gold and money

Herr Lips begins with an introduction that is useful to contextualise the subject matter for the reader (both new and familiar with the subject matter), some condensed history of gold and a definition of money itself. This helps the reader understand why gold and silver began to be used by humans as a medium of exchange, and how numerous great civilisations operated on metallic monetary systems. References are paid to ancient Babylon, China, Egypt, Greece the Incas and Lydia.

What is of particular interest is how the decline of so many of these civilisations coincided with their fiddling with the monetary foundations, and how the flourishing of human development always coincided with the use of sound money, whether it was the Roman Aureus, Arab Dinar, or Florentine Florin.

The reader is then introduced to gold’s role within modern history with chapters covering the 1930s and abandonment of gold, the apparent ‘Gold War’ of 1960 to 1971, the not so golden 1980s, through to the 1990s and contemporary financial era. It is worth noting that the book is slightly out of date, being published in 2001 (Herr Lips died in 2005), but its relevance is little diminished.

You may not pick up the book with an initial interest in philosophy, but anyone with a belief in liberty and small government will enjoy Herr Lips’ explanation of sound money’s link with liberty and freedom.

Herr Lips also puts the abandonment of gold in the 1930s into perspective and charts the rise of Keynesianism, noting that “the reasons why the war against gold has intensified with every passing year, one has to go back to the crucial and historic events of the 1930s”.

Whilst not as much focus is given to why the flawed gold exchange standards of the Western world failed, compared to Jim Rickards in ‘Currency Wars’, the reader is well educated as to how the developed world lost its golden anchor during this period and what this really means for the later periods of history yet to be assessed. Upstanding individuals who tried to prevent the abandonment of gold are quoted and given airtime, such as Senator Carter Glass (1858 – 1946).

Instead of wading through chapter and verse we asked ourselves what are the takeaways from this book we found most educational, and that we had not found elsewhere?

The media don’t get gold

Another subject that was fleshed out further for us was the mainstream media’s general lack of understanding of gold and money, and their at times patent dislike of gold. It has generally appeared to us that when expert gold market commentators are interviewed by the talking heads of the financial media about gold, the interview can only offer so much given the interviewers potential lack of knowledge.

To hear Herr Lips, as experienced and expert gold market commentator as you might have found, opine that “for decades the media of the establishment have done everything in their power to either avoid the subject of gold or denigrate it”, is bold, and we find it instructive. We are informed that German Swiss media outlets have stopped their coverage of the gold price, whilst the major German language Swiss daily newspaper, the Neue Zürcher Zeitung is not much better.

The people commentating on gold today have no idea what money is and are better not mentioned. 

Weakness in the gold price: 1980 – 2000

Gold Price Depression

Perhaps the most illuminating aspect of Gold Wars to us was the book’s coverage of a range of actors and factors which arguably contributed to systematic weakness in the gold price in the last two decades of the previous millennium. Whilst the market was due some period of recovery and consolidation after the blow off of 1979-1980, this vicious 20 year bear market that followed was not entirely natural according to Herr Lips. This is where his analysis gets a bit more technical to those unfamiliar to the financial markets and related instruments and jargon.

The first to act and apparently begin a dynamic, which for obvious and less easily understood reasons contributed to a weak gold price, were the central banks. Their apparent mismanagement of their gold reserves is cited by the author who suggests “in the absence of central bank sales and lending, the gold price would not be so suppressed” and that “no normal business person would act in such a way as to depress the price of his most valuable asset”. This criticism of central banks focuses on the fact their gold sales and loans were managed in a way that was as public as possible and often not aimed at achieving the best price.

Central banks would typically announce their transactions ahead of time letting other market participants know of their impending sales, then announce them again at the time of sale, and finally announce them again after the event to ensure all market participants were aware of their actions. This is all unhelpful for achieving the best possible price for their nation’s monetary assets. Herr Lips argues that this was deeply irresponsible and short-termist, and that the public dumping of gold by the market’s largest gold holders caused deep and long lasting psychological damage to the market.

Nonetheless, we should not be entirely surprised to hear of this given central bankers’ aversion to gold, and the previous attempts at gold price suppression by the London Gold Pool. Essentially the market’s most powerful participants were acting in concert to prevent appreciation of the gold price. For a period of time they were successful.

Enter the Bullion Banks

To learn how the bullion banks were also involved in a weak gold price, and how the gold mines got bound up in a speculative feedback loop, read part II.

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About the Author

Will BancroftWill Bancroft is Co-Founder of The Real Asset Company, a market place for individuals to invest in gold, silver and precious metals. Will also contributes commentary and analysis to the Research Desk. His interest in financial markets and investment led to a keen interest in monetary economics, gold and silver. Will is passionate about gold’s role in a portfolio and his views appear on sites and media such as Kitco, Market Oracle, Seeking Alpha, Stockopedia, The Telegraph and Yahoo Finance. Follow Will on Google+, and get his commentary via our RSS feed.View all posts by Will Bancroft