|
THE
INVISIBLE CRASH
WHAT IT IS, WHY IT HAPPENED, HOW TO PROTECT YOURSELF
A Book Review
by David Shvartsman
October 18, 2004
 The
Invisible Crash
by James Dines
367 pages.
New York
Random House
1975. 1st Edition.
“There
is nothing inherently wrong in effect with fiat money, provided we get
perfect authority and god-like intelligence for kings”.
– Aristotle
Using
this quotation in an early chapter of his 1975 book, The Invisible
Crash, author James Dines of the highly regarded “Dines Letter”
puts the inflation of the 1960s and ‘70s into historical perspective.
Pressing the case for investment in gold shares, Mr. Dines argued
against the unsound monetary structure of that time and warned readers
to prepare for the wealth eroding effects of an inflationary depression.
Expanding
on his newsletter writings of the 1961-1974 period, Dines used his book
to draw attention to the losses investors would suffer in an
“Invisible Crash”. At the time of writing, leading U.S. stock market
indices had cratered from their early 70s highs and left stockholders
with widespread losses. While a bear market in paper assets was clearly
underway, the popular averages told only half of the story. In addition
to the losses seen on price charts in nominal terms, many investors were
experiencing greater losses than widely supposed. In real terms, the
weakening dollar combined with the market’s percentage losses to
create a deeper hit. In an environment in which private ownership of
physical gold was still outlawed (lasting until December 31, 1974),
investment in gold shares was recommended as a means to protect ones
wealth.
Historical Stores of Value
In
a chapter entitled, “The History of Gold,” Dines describes the
important roles that gold and silver have had as historical stores of
value and as forms of currency. Retracing the folly of economic man, he
notes that paper currencies over time have consistently fallen back to
their intrinsic level of value – worthlessness. An examination is made
of the economic developments that led to the 1929 market crash, in an
attempt to look back at what went wrong. Principle among the causes
mentioned for the ensuing bust
was the effort made by the U.S. in the 1920s to support the overvalued
British pound. It seems the point is that due to deficits and a devalued
pound, energy and resources were spent creating unnatural levels of
support for a foreign currency. I must admit that this part of the
history was a bit difficult to fully grasp, despite the fact that it had
been written for the layman! A web search on the subject and a quick
refresher cleared things up a bit. To quote cartoonist Ted Rall, “I
blame the public schools!”
The Art of Prognostication
Hype
and cocksure jawboning seem to be fixtures in the modern era of
financial media coverage. The investing public is bombarded with
opinions and ideas on how to “get an edge” in the markets on a daily
basis. With competition between financial newspapers, magazines, cable
news and finance related Internet sites comes a constant demand for
“expert opinions” and scoops on the developing “hot” trends.
Many astute observers of the precious metals and commodity markets have
remarked in recent years on the cold shoulder being given to coverage of
gold and the commodity bull markets. Until the recent mass acceptance of
the “China story” as a catalyst for rising commodity prices, many
media stories and comments on the precious metals were made with an
unfavorable overriding tone. At the start of the 21st
century, the idea of gold as a “barbarous relic” persists.
James
Dines was no stranger to doubting Thomases of his day. In fact, he slyly
devoted a chapter of The Invisible Crash to those leading
influentials that downplayed the need for gold as wealth protection. In
“Who Gets the Booby Prize?” Dines recalls the scripted economic
lines and “anti-gold propaganda” of the 1960s and ‘70s. Statements
made in print debunking the importance of inflation as a national issue
or the potential for higher gold prices are printed and attributed to
their source. He notes that some on record are there because they
actually got it right – those were the guys to listen to next time
around.
Hold The Gold
The
latter part of the book is dominated by the “Odyssey” chapter; a
collection of writings and observations on gold and inflation taken from
Dines Letters of 1961 through 1974.The period begins with early
recommendations for gold stock investments, a position supported by a
view of a coming “gold crisis”. Dines went on to predict a flight
from paper money and assets into gold and a significantly higher gold
price to be brought about by the marketplace.
In
a passage from January 1968, Dines voiced his objections to a system of
world trade conducted with fiat currency. He insisted that each
nation’s currency be “translatable into a common denominator” of
some valuable commodity so that international trade might sustain
itself. Mr. Dines also hoped for a renewed monetary discipline to reign
in the masters of the printing press and their aims to fund social
programs and “worthy causes” through increased money creation. In
his view, their promises not to abuse this power could only be
meaningful when paper was linked to gold.
What
to do about gold in the face of doubt and a reworking of the monetary
system? Dines advised his readers to hold fast in 1968, and to ignore
the temporary declines brought on by “panicky” selling. He
reiterated this position again in 1974 against the backdrop of an
ongoing “inflationary depression”. At that point in time, he noted
that the oversold condition in precious metals created a fine
opportunity for those who had not yet participated to buy gold shares.
In the next breath was a call for the coming gold and silver rally to
turn into “one of the most spectacular in history”. He was proved
right.
The Crash in Retrospect
For
those who advocate the use of inflation-adjusted charts, a look at the
performance of the Dow Jones Industrial Average over the 1966-1982
periods would seem to validate the notion of the “Invisible Crash”.
While some investors may have done quite well buying and holding
selected value stocks near the bottom of the mid 70s decline, many
investors were pummeled by loss of capital, a decline in purchasing
power of cash, and lost opportunities. For those able to locate the
early part of trends and ride them out, the move into precious metals
shares could have been a big win. Another important theme stressed in
Dines’ writings is the effort given to preserving capital and holding
through rough times, so that future values can be taken advantage of in
rare times of opportunity.
The
Invisible Crash
is a book of historical significance for its archived remarks on gold
and U.S. monetary policy, as well as for its time capsule look at the
Gold and Silver bull markets of the 1960s & 1970s. It is a valuable
insight for the resource investor. Recommended.
© 2004 David Shvartsman
Editorial Archive
CONTACT
INFORMATION
David
Shvartsman
Finance
Trends Matter
Chicago, IL USA
Email
| FinanceTrends
Blogspot
The
opinions of FSU contributors do not necessarily reflect those of
Financial Sense.
|
