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A 24-Karat Tale - Peter L. Bernstein discusses the impact of gold - Interview

CFO: Magazine for Senior Financial Executives, March, 2001 by Peter Bernstein

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A hedge is a bet that your primary bet won't work. Consequently, you take only a small position with a hedge, because it's a bet on what you think won't happen. You surely don't want to have all your money in gold today, because the worst may never happen. It's a very costly asset to own. But a small amount of gold--given the leverage of the kind of thing that I'm talking about--can be a fantastic hedge. It doesn't cost much to have 2 percent, 3 percent, 5 percent of your assets in gold. I can't think of any hedge against disaster that can explode in value like gold.

What kind of disaster would drive people back to gold?

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The only event I can think of that would lead people to flee back to gold would be a dollar crisis. I call that the mother of all crises because we have seen that we can get through euro crises, and Thai baht crises, and Mexican peso crises. The dollar is serving the purpose of the gold standard in the 19th century. If the standard gives way, it could be very frightening.

I don't know what the trigger to a dollar crisis would be. I do know that all the necessary conditions for a dollar crisis are here, because we have exploding liabilities to other countries. [Economist] Henry Kaufman said recently that we're lucky that the rest of the world is slowing down with us, because if we slowed down and Europe and Japan were getting stronger, a dollar crisis could happen--because then maybe Europe or Japan would be the place to go. Imbalances do develop.

We think that the Internet stock market was a momentum-driven stock market. That's kid's stuff compared to the kind of momentum that develops in foreign exchange markets. Foreign exchange traders don't do purchasing power parity calculations; they don't look for value. They herd, and they chase one another. Once the sense is out that the dollar is no longer the strong currency, it can change very fast. Gold will not come back into prominence as a hedge until that happens. It takes something really big--like 1978, 1979, 1980, when it went from a few hundred dollars in price to $850.

But until that happens, gold will remain just a metal, albeit a precious one.

Let me tell one poignant story that is worth keeping in mind. Britain made the terrible error of going back on the gold standard after World War I. It wasn't such a bad idea to go back on gold, but not at the old parity, when $4.86 [the prewar value of the pound sterling] didn't buy anywhere near what it used to buy, because of World War I inflation. The mastermind of that was a man named Montagu Norman, who was the governor of the Bank of England for 20 years. He was the Alan Greenspan of his day--a world figurehead, an icon of the world economy and financial system. It was he who persuaded the Chancellor of the Exchequer--in 1925, it was none other than Winston Churchill--to go back at the old parity. Norman was absolutely convinced that no matter what happened, that no matter how many people got unemployed, going back on the gold standard was the only thing that would save the British Empire.

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A 24-Karat Tale - Peter L. Bernstein discusses the impact of gold - Interview

CFO: Magazine for Senior Financial Executives, March, 2001 by Peter Bernstein

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