Gold & The Wizard of Oz

Terrifically amusing take on Gold, via RaJa’s Jeff Saut:

"We thought a lot about gold over the holiday as we watched “The Wizard of Oz.”

Now, most people know The Wizard of Oz as one of the most popular films ever made.  What is little known, however, is that the book it was based on was an economic and political commentary surrounding the  debate over “sound money” that occurred in the late 1800s. Verily, L. Frank Baum’s book was penned in 1900, following unrest in the agriculture arena (read: farmers) due to the debate between gold, silver, and the  dollar standard.  The book, therefore, is supposedly an allegory of these historical events, making the  information easier to understand.  In said book, Dorothy represents traditional American values. The  Scarecrow portrays the American farmer, while the Tin Man represents the workers and the Cowardly Lion depicts William Jennings Bryan. Recall that at the time, Mr. Bryan was the official standard bearer for the  “silver movement,” as well as the unsuccessful Democratic presidential candidate of 1896 (he was also a  main character in the Federal Reserve Act of 1913). Interestingly, in the original story Dorothy’s slippers  were made of silver, not ruby, implying that silver was the Populists’ solution to the nation’s economic woes.

Meanwhile, the Yellow Brick Road was the gold standard and Toto (Dorothy’s faithful dog) represented the Prohibitionists, who were an important part of the silverite coalition. The Wicked Witch of the West  symbolizes President William McKinley and the Wizard is Mark Hanna, who was the chairman of the Republican Party and made promises that he could not keep.  Obviously “Oz” is an abbreviation for “ounce.”

As we watched the movie we thought how appropriate an apologue for our current environment given the recent action of gold, silver, the dollar, the T’Bonds.  This time, however, the “man behind the curtain” is Alan Greenspan, to which we are paying little attention.  What we are paying attention to is the charts, since in this business price is reality.  Consequently, when we look at the “gold standard” of our era, namely the dollar, the picture is still not a pretty one, even after its recent rally.  As a sidebar, it should be noted that before 1873 the U.S. dollar was defined as consisting of either 22.5 grains of gold or 371 grains of silver.  This set the legal price of silver in terms of gold at roughly 16:1 and put the country on a gold/silver bimetallic  standard. Since both metals had other uses than just coinage, whenever the ratio got out of whack, rational people would buy the cheaper metal and take it to the mint to coin.  That provided a natural stabilizing arbitrage. With the 1873 Coinage Act, however, the silver dollar was omitted, effectively shifting the country  from a bimetallic to a gold standard.  Other countries soon followed this shift and as tons of silver were unloaded, the market silver price of gold rose from 16:1 to 40:1. 

The result was that the dollar was now linked to a metal that was getting scarcer and scarcer."

Who knew?

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Source:
Investment Strategy
by Jeffrey Saut
December 27, 2005
http://www.raymondjames.com/inv_strat.htm

Following the Yellow Brick Road: How the United States Adopted the Gold Standard
FRANCOIS R. VELDE
Federal Reserve Bank of Chicago
Economic Perspectives, 4th Quarter, 2002
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=377760