Investment Biker

by Jim Rogers

  Of course, not all of us believe that the goals the obsessive among us take on are good things. Was it sane of Captain Ahab to chase Moby Dick? Was it necessary for Roger Bannister to break the four-minute mile? Was it essential for Edmund Hillary to be the first man to climb Everest? These were goals to which each man was willing to dedicate himself. Ahab drove his men with him to his goal, where all but one died. Even though he may be remembered with affection after he’s won the war, during battle the colonel is hated for pushing his men into the enemy’s jaws.

  Well, corny as it may sound, I was totally absorbed and dedicated when I worked on Wall Street, and I was like that about this trip. I’d thrown myself into it, going to excess, the way I’ve done everything my whole life. I’d made up my mind to do it, and to do it in good time, not to take a decade. Nothing was going to stop me or slow me down.

  However, there wasn’t a lady friend I cared for more than Tabitha, and to have her along as a companion had come to be as important as the trip itself. Coming to this realization was a surprise to me in and of itself, as I’d never felt that way before about a traveling companion.

  If she would continue, I would strive to accommodate her more, although I wasn’t going to give up the trip because she was uncomfortable. If she couldn’t handle it, I understood that. I would put her and the new bike on the plane back to New York and continue without her.

  It wouldn’t be as much fun—I would be terribly sad—but I’d get it done.

  The black market again found me in the person of a burly mobster named Alex who wanted to sell me Russian-army belt buckles, hats, and trinkets for hard currency.

  Alex was jovial and wary, open and guarded, the epitome of everything I’d always heard about the Russian soul. It turned out he had been in jail, a place that sounded even more dreadful than prisons back home. All the prisoners slept together in big barracks. They ate little but gruel and worked on the roads twelve hours a day, except when they worked on the railroad. His crime, he said, was that he kept telling the workers that capitalism was better and that Communism wasn’t the way the world should be, which sounded to me like poppycock he used to flatter Western customers. On close questioning he said he had gone to jail for forging his work papers and his time card. I decided he had put down that he was at work while he was out hustling dollars on the black market.

  He said he could get me anything, just name it—girls, booze, every sort of contraband—as long as I paid him in hard currency. Ever the intrepid traveler and always eager for an adventure, I bought a few dollars’ worth of trinkets and got him to introduce me to the bootlegger, who made vodka, naturally.

  As it happened, we bumped into Alex in the park the next day when he happened to have his girls-for-hire with him, a couple of plump, stolid eighteen-year-olds who despite their youth didn’t look particularly attractive. Notwithstanding the fears of Western religions about Communism unleashing free love and rampant sex, the world’s oldest profession seemed to have handily survived seventy years of scientific materialism.

  His eyes gleaming, Alex drifted off with me to discuss my purchasing more Russian medals. His great goal, he now confided, was to buy a car in Japan for fifty thousand yen, or less than three hundred dollars. A used car. “In Japan they throw such cars away,” he said. The Russians would let him bring it in duty-free, and he could turn his three-hundred-dollar car into maybe sixty thousand rubles, or thirty-five hundred dollars—a way to get rich.

  He needed hard currency to start this process. Rubles were no good, as the Japanese didn’t want them. In the real world the only money that counts is real money.

  Alex declared that after he’d done it once he would do it again.

  Tabitha stumbled on a woman’s clinic and got to know the doctor there, Natasha Zollotorev, who talked about the more intimate details of Soviet life.

  With none of the restraints imposed by religion, few movies, and the state TV yet more boring than that in the States, sex was a major pastime in the USSR. Dr. Zollotorev said abortion and IUDs were the country’s only two means of birth control. Frequently the clinic didn’t have IUDs, and even when it did the quality was poor. Abortion, which she detested, was the principal means of birth control. The average Russian woman had ten to fifteen abortions in her lifetime. As a result, 30 percent of the women wound up having emergency hysterectomies.

  It was clear that if AIDS arrived in the Soviet Union, there was a strong chance of its devastating the population.

  Back to sleeping in the same room, we were waiting for the tires from Japan and for Tabitha’s outbound plane.

  One day on the street we saw a huge, unruly mob outside a store, the sort that gathered wherever anything was for sale.

  It was a jewelry store, and we went in. The mob was more ferocious, desperate, and frantic than usual. A shipment of gold jewelry had come in, and because gold was such an honest store of value, these Siberians were desperate to cash out of rubles and buy gold.

  Intrigued by the importance of gold to the Soviet Union, we went to see the head of the local state gold-mining organization, Igor Sosnin. He was the bureaucrat in charge of all the Pacific far-eastern gold mines. I remembered how significant gold and oil were to the Soviet Union. In the States the head of a mere mining operation wouldn’t be that important, but in the Soviet Union it was a different story. Igor was a big guy, the equivalent of the head of IBM or GM in the United States.

  I especially wanted to speak to Igor about gold and other commodities because of what I understood had been happening to their raw materials and what would be happening in the future. The Soviet Union in the twentieth century is a fascinating study in national survival.

  Back in the twenties, the Communist Party lived on the euphoria of surviving the First World War and the revolution, but by the thirties the country’s economy had fallen apart. Millions starved, and Stalin hung on to power by executing tens of thousands of his enemies. Others he sent to the network of concentration camps called the Gulag, which grew in population from thirty thousand in 1928 to eight million in 1938. The country was on the verge of collapse.

  Hitler, however, saved Stalin by giving him a menace against which to rally his people, staving off his overthrow and the country’s economic ruin. We helped him, too, with our Lend-Lease Act Program in the Second World War. In the fifties and early sixties, the new colonies in Central Europe—Poland, East Germany, Bulgaria, etc.—began to produce new wealth. During the late sixties and seventies the country was helped by the worldwide commodities boom, as well as by the expansion into the Virgin Lands of the Central Asian Republics. Although the Soviets had no services and manufactured goods that the rest of the world wanted, vast increases in the production of copper, wheat, cotton, palladium, and aluminum gave them a new lease on life. For decades Russia was the world’s largest producer of oil and its second-largest producer of gold. Naturally it put its best people in these important industrial and mining positions.

  By the eighties, however, the Russians’ luck had run out. No longer were they in the right place at the right time. Western central banks, including that of the United States, reined in inflation, bringing to a halt the commodities boom. This cut the economic ground out from under the Soviet Union, which had failed to develop a single industrial or consumer product that the rest of the world wanted. Not only was the commodities boom over, but Soviet managers were operating their lands and mines in precisely the fashion for which their political leaders condemned the West! They had stripped off the easy pickings without a consideration for what the next decade would need.

  One of my theories was that the Russians would become more and more desperate to hold their ranch together, that is, to service their foreign loans and bring in Western necessities, whether computers or wheat. They would dump gold to earn hard Western currency, which would keep the price of gold low. After all, they didn’t have much else to dump.

  I asked Igor right out if they were dumping gold.

&nb
sp; He wouldn’t answer me directly, but we did have a long, general discussion.

  “We’re starting co-ops now,” he said. “They’re very efficient producers.”

  He even introduced us to some co-op owners at a big lunch out in the country, the best meal we had in this part of the world. Their chief, Georgy Abramov, put on the dog: soup, fish, good vegetables and salads, vodka, wine, and tea.

  We learned that the co-op had been established for only a year, but that it was a rousing success. I gathered co-op was a Russian euphemism for a private enterprise devoted to profit. I asked what their territory was. Georgy pointed out on a map what looked to be thousands of square miles.

  The term co-op dressed up the reality, made it politically more correct to engage in private enterprise, which in the old Soviet Union was on a par socially with belonging to the Mafia back in the States. A few guys in a partnership had obtained the franchise to mine gold, raised the money to finance the machinery, and hired a thousand workers to do the work. Of course they were forced to sell their newly mined gold to the state—the Russians weren’t going to let them ship it to Japan without getting their slice—but if the co-op brought the gold in below the state price, it made a profit the partners could divvy up.

  Georgy explained how they worked it. They paid their workers more, so they expected them to work harder. They didn’t have the encumbrances and bureaucracy of the state’s mining operations. They flew the workers for a month at a time into the middle of nowhere, and the workers were glad to go for the extra money.

  I asked Igor why he hadn’t joined with the co-op.

  “Well,” he said, “basically I’m a bureaucrat and I like my position. I’m very powerful, I’ve worked my way to the top. This is enough. I make enough money for me.”

  Gold has been one of the great mystical elements of finance for hundreds if not thousands of years.

  Back in the seventies its price went through the roof. Investors were sure all paper money was going to lose its value. However, if they had done their homework and tracked the price of gold back through the centuries, they would have seen long periods when its price went down and stayed there, or didn’t move up with other prices. Later on, gold would catch up, but then so would wheat, so would lumber.

  For centuries gold’s true believers have said that gold alone is a good store of value. On the other hand, over the centuries a lot of things have been a good store of value, including wheat, lumber, and iron ore.

  Back in the 1930s, Franklin Roosevelt, in response to economic and currency crises, set the price of gold at thirty-five dollars an ounce, plucking that number out of the air. It had been twenty-one dollars an ounce.

  Now, any government could convert the American dollars it held into gold at thirty-five dollars an ounce. Naturally, everybody who owned gold was happy to fall into line. They received a 67 percent premium in value. Everybody was delighted to hold dollars.

  World War II came, which set external disciplines on all countries. In the thirties, of course, the external discipline had been worldwide economic collapse, which meant people didn’t move gold around or exchange their currencies for it. There was little demand because economic trade had come to an end.

  For thirty-seven years the price of gold was thirty-five dollars an ounce, which over time came to be a low price. Thus, the production of gold declined for many years, until 1970. This was yet another situation like the one here in Siberia, where the government underpriced an asset, thereby reducing its supply. Maintaining gold at thirty-five dollars an ounce had been similar to setting the price of gasoline in Russia at a nickel or a dime a gallon and keeping it there.

  During this thirty-seven-year period, few had looked for gold, few gold mines opened, and all mining operations had run down their reserves. The marginal mines had closed. Most gold that had come on to the world market came from South Africa and Russia, where it was cheap to pull it out of the ground.

  By the 1970s the price of gold had to go up. It was so cheap that its manufacturing uses had expanded, and demand was increasing partly because its price was so low. Gold was being used in teeth and electronics. Every time a new application came up, manufacturers said, “Let’s use gold. That’s the cheapest stuff around.”

  So the price had to go up. Not only did the supply keep going down, but the U.S. had currency crises because we were no longer running a sound economy. A lot of people, especially the French, came to us and said, “We want the gold you promised you would swap for dollars.” There was a terrific run on Fort Knox.

  Pressures for gold prices to rise grew in the fifties and sixties because the American government had begun to run an unsound economy: trade deficits, printing money, the whole works. The government then tried controls to prop up the value of the dollar artificially. In 1962, our government put on the interest-equalization tax to control Americans’ investments abroad.

  Instead of dealing with the problem of a badly valued currency, the government had applied a Band-Aid yet again. So the pressures only intensified, and in 1971 Nixon was forced to say, “Okay, guys, I’m not going to do it anymore. I’m changing the rules.”

  Of course, another reason we hadn’t had a problem in the thirties, the forties, and the fifties was that the government had made it illegal for Americans to own gold, which made absolutely no sense. The French could own gold, the English could own gold, and the Japanese could own gold, but Americans couldn’t. And why? “It’s for your own good,” the government said, although no one could explain why. We were being protected from ourselves, and yet other nations were taking advantage of us.

  That’s another thing about governments: They think little of changing the rules of the game. You and I would go straight to jail for a lot of things the government does. For instance, making an agreement with investors and then changing the rules. This would be called fraud.

  Remember the savings and loan crisis? The S&Ls went to the government and said, “Look, we’ve got real problems here. Our earnings are collapsing. We are going to have serious capital problems. We can’t raise money.”

  The government said, “Okay, we’ll change the accounting rules just for you. You don’t have to say what’s really happening.” Now, if you and I did that to a public company we ran, we’d flat go to jail for fraud.

  But our government said it was okay for the S&L industry to change the rules so it could report its accounts fraudulently. As we know, the S&L mess blew up, and we’re all paying the price. Did the government blame this on itself? Of course not. The government said, “This was caused by a few greedy guys who were doing fraudulent things.”

  Well, the government was part of it. It had said, “Change your accounting rules to report your books fraudulently, and we’ll make it legal.” Another Band-Aid that only delayed a crisis. The government didn’t just say, “You’re allowed to do it”; it directed the S&Ls to change their rules.

  Prolonging the day of reckoning only makes things worse when the pressure finally breaks through. We’re finding this out in Yugoslavia now, and we’ll find this in the Soviet Union in the future. The coming crisis of the U.S. dollar will be all the worse because we aren’t biting the bullet now.

  So Nixon slammed the window down on the Europeans, the “horrible” Europeans, saying, “You can’t come in here and take our gold, even though it’s our own fault for ruining our currency.”

  Demand for gold kept going up. Governments tried to hold it at thirty-five dollars, but they couldn’t hang on because everybody came in and cashed in his dollars for gold.

  In all my years in investing, there’s one rule I’ve prized beyond every other: Always bet against central banks and with the real world. In the seventies, the central banks were defending the United States’ artificially low price of gold. Central banks and governments always try to maintain artificial levels, high or low, whether of a currency, a metal, wool, whatever. Usually these prices are absurd, and the market knows they’re absurd. When a central
bank is defending something—whether it’s gold at thirty-five dollars or the lira at eight hundred to the dollar—the smart investor always goes the other way. It may take a while, but I promise you you’ll come out ahead. It’s a golden rule of investing. In its collective wisdom the market always knows that if some people are clinging to an artificially low price of thirty-five dollars, you should keep buying gold at that price.

  When after thirty-five years the price of gold was finally released, it went up more than it should have because it had been kept low for so long. Such violent movement happens whenever a price has been kept high or low.

  This is how markets work. Something, a stock, land, or some other store of value, will bump along at a stable price. Eventually something changes the supply-demand balance. The price starts going up because people realize, “Hey, they’ve got a new product,” or “The railroad is coming through Smithtown.” The price goes up for legitimate and sound reasons.

  There comes a time, though, when people buy land in Smithtown only because its price is going up. At that point, my mother calls me and says, “I want to buy some acres,” or “I want to buy this stock.”

  “Why, Mother?”

  “Well, Jim, it’s tripled over the past year,” she says in a tone that reminds me of the one Tabitha reserves for calling me a dodo-head.

  “That’s not the way you’re supposed to do it,” I say. “You don’t buy it because it’s tripled. You buy it before it triples.”

  But this is what happens. People see the price going up and know that here is the gravy train that’s going to make them rich. The newspaper will have stories about Joe and Sally, how they’re now rich because they bought all this land or a few shares of stock in the coal mine. The price now goes up because the price is going up.