$300,000 of Gold, in the Palm of My Hand

Two weeks ago I visited the New York Federal Reserve, for a meeting with a high-ranking official in an elegant conference room overlooking Wall Street. It's an appropriate view now, considering that in today's post-crisis world the Fed has assumed oversight responsibility for all the financial markets, not just banks.

Before the meeting above Wall Street, though, I went below Wall Street. I went five stories down into the solid bedrock underneath the New York Fed, 30 feet below the level of the New York subway system and 50 feet below sea level.

There the New York Fed has a vault containing about $300 billion in gold bars.

It's the largest single gold hoard in the world. It holds more than Fort Knox. Almost all of it is held in custody for foreign governments -- very little of it is owned by the U.S. government, and none of it by individuals.

You enter the vault through a slot revealed when a 90-ton steel cylinder is rotated. When you are inside, and the cylinder rotates back, you are in a water-tight, air-tight room half the size of a football field stacked to the rafters with gold bricks weighing 27.4 pounds each.

Gold is so dense that these heavy bars are surprisingly small, but don't make the mistake of picking one up with only one hand. Vault workers wear ultra-light, ultra-strong magnesium shoe-covers to protect their feet from the inevitable drops that have left the cement floors pockmarked with deep dents.

It's all very old-school. The vault was built in 1921 and looks it. It still uses technology from that bygone era. Nothing digital. Nothing web-enabled. An enormous scale used to weigh gold bars looks like an enlarged version of an old-fashioned balance beam you'd expect to see in an apothecary shop -- yet it weighs precious metal tons at a time within the accuracy of the weight of a grain of rice.

But then again gold is pretty old-school, too. When you're holding one of those bars in both your hands you have the sense that you're in the presence of economic value that is fundamental and lasting. It's more than knowing that the bar is worth about $300,000. Sure, it would be a thrill to hold a briefcase stuffed with $300,000 in hundred-dollar bills. But this gleaming bar is something more. It's real.

On my way out of the vault, on my way to my meeting upstairs, my host asked if I'd like a souvenir. Sure, I said, holding out both my hands expecting one of those gold bars (not really). Instead, a small sealed plastic bag was dropped into my hands, containing about an ounce of paper shredded like confetti, paper that had once been United States currency.

Yes, I thought. Exactly! What could be a better souvenir of the world's largest stockpile of true value than a little bag of something of no value whatsoever?

Would it have made any difference if the currency hadn't been shredded? Absolutely. That way I could have spent it -- which is to say, I could have turned it into something real. But until I did so, shredded or unshredded, it was just paper. In its unshredded form, its value comes only from the command of a government that declares that, under penalty of law, we all agree that it is valuable.

Yet it is not valuable, fundamentally. It's just paper, and there's no limit to how much the government can print, and then force us to regard as valuable. Gold is intrinsically valuable. It's scarce. It's hard to find. No government has to threaten you with a jail sentence if you don't think it's valuable. Because it just is.

So I went upstairs to my meeting with a high-ranking Fed official, and we talked about interest rates, the economy, the Fed's balance sheet. All I could think about was that bar of gold. And that bag of shredded paper. I knew that any decision the Fed makes can affect only the paper. That's the Fed's world. Paper. There's nothing the Fed can do to affect gold.

Which is why gold is so valuable, and why paper is worthless. Gold is forever. Paper is just whatever the Fed decides to do from one moment to the next.

Now here's a paradox, or at least a seeming paradox. The longer the Fed keeps interest rates at zero, the more worthless paper money becomes. That creates the impression that gold is more valuable -- in fact, this week it hit all-time highs at almost $1,100 per ounce as the Fed announced the indefinite continuation of its zero-rate policy. But that's not gold becoming more valuable. That's the paper money in which the price of gold is denominated becoming less valuable.

In other words, gold is the constant. Its value doesn't change. Its dollar price changes, but not its value. So when investors come to me and ask me how they can hedge against the falling value of the dollar, I always tell them to buy gold.

You can't escape the falling dollar by buying other currencies like the euro or the yen. They're just paper, too. Lately they've looked strong versus the dollar. But in the end, they're just paper.

And you can't escape with stocks. Fine, stocks are up something like 60% since the March bottom. But that's only if you price stocks in dollars. Try pricing stocks in gold -- in other words, how many ounces of gold will one unit of the S&P 500 or the Dow Jones Industrial Average buy? If you think about it that way, with gold now at all-time highs, then stocks are really only up about 34%.

OK, 34% is great. But think of the risk you took to get it. And remember that in terms of real purchasing power -- the ability to buy an ounce of gold, to acquire real value -- stocks only went up about half as much as it seems on the surface. The other half is just the value of the dollar collapsing.

It's going to get worse. The Fed is going to keep rates at zero just about forever. The government isn't going to stop spending. As I wrote here a couple of weeks ago, Treasury Secretary Tim Geithner is going to try to make the dollar even cheaper by getting exporting nations like China to raise the value of their currencies.

So it's like I've been saying here for a couple years now. Buy gold. It's that simple.