Posted on February 3, 2022
by Don Shaughnessy
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Do you remember 16 September 2011? Likely not. Most things more than 10 years ago are in the fog.
On 16 September 2011, an ounce of gold sold for US$ 1,812. At noon on 1 February 2022, it sold for $1,807.92.
The question -“Why would you choose to own gold?”
The answer is simple. Gold is not an investment. It is either a speculative trade where you believe you can anticipate how other people will respond to news and decide they need a safe haven. Alternatively, it is an inflation hedge, or a defence against government tyranny and incompetence.
Why would any of that work?
The answer lies in why gold has value. Primarily because it is extremely durable, even nitric acid won’t harm it, and very compact. A cubic ounce of gold weighs nearly 316 grams and is worth about $18,000. Scarcity is a key point.
If desirability increases, the supply remains the same or nearly so, the price must rise. That is unlike other things where more demand tends to cause more supply. That does not happen with gold. There is not so much to find and mine and it is costly to do so even when you find it. The current world production is about 3,300 tonnes. It has not changed much over the past several decades.
How much is the inventory in the world
There is obviously no way to know exactly, but one estimate is around 200,000 tonnes. That is in a few specific categories.
- Government reserves about 34,200 tonnes
- Personal investment holdings about 44,400 tonnes
- Jewelry about 93,200 tonnes
- All other about 29,500 tonnes
Much of the inventory is ancient. If you would like a model for recycling, gold should be your choice. Does anyone send it to a landfill? Some of the gold in your jewelry may have been mined two thousand years ago.
Where we can think from there.
Gold has been and is a dependable store of value. Some at least of it will remain that way. But will all of it remain that way?
We know nearly all of it has been recycled, but modern electronics uses minute amounts of gold. It cannot be economically recycled and so may be lost. The current estimate is that it amounts to about 12% of a years production so about 400 tonnes. A tiny but still meaningful loss. At $58 million a tonne about $23 Billion a year. This use is more likely to increase than shrink.
What about jewelry? In much of the world jewelry is for security. in other parts for fashion. If the fashion becomes less fashionable some of that gold will be melted and add to the supply for other uses. In poorer countries, if capitalism should come to be an advantage, some of the jewelry will be sold and the capital freed will be used to seed new enterprises. That will tend to increase the inventory of personal investment holdings and the added melted supply will tend tend to keep the price down.
If economic chaos should ensue the demand will rise and with it, the price. Not impossible. The harder question is if it does happen, will the government outlaw ownership of gold? I suppose it is not certain, but it would be the way to bet.
The bits to take away
Gold has been a store of value for millennia and it will likely continue to be so. Recall the Lindy Effect.
Gold in the form of jewelry is a preferred asset in many countries. India being dominant. If economic opportunities increase there, how long will the jewelry holding last?
Should you own gold or other precious metals? Maybe some. As long as you don’t expect to make capital appreciation in normal times. The trick will be to diagnose when times are not “normal,” and there is not much certainty in that assessment. Be objective and cautious.
Be cautious of government actions against your interest.
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I build strategy and fact-based estate and income plans. The plans identify alternate ways and alternate timing to achieve both spending and estate distribution goals. In the past I have been a planner with a large insurance, employee benefits, and investment agency, a partner in a large international public accounting firm, CEO of a software start-up, a partner in an energy management system importer, and briefly in the restaurant business. I have appeared on more than 100 television shows on financial planning, have presented to organizations as varied as the Canadian Bar Association, The Ontario Institute of Chartered Accountants, The Ontario Ministry of Agriculture and Food, Banks – from CIBC to the Business Development Bank.
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