Dummies Guide to Disliking Gold

(All values in USD)

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Many have been bullish on gold in recent years and they have been well-rewarded. The belief of gold and not the USD as the real reserve, along with these excellent returns, might push many more to invest in gold.

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I, therefore, present your guide to rationally disliking gold! J ?The two bullet summary of my argument is that (1) Gold or Mineral Resources are Not a Measure of Human Creativity Leading to the Size of Economy, and (2) Gold is Not a Great Return Generator in a Trans-generational Way.

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Let’s have a macro view of total gold availability vis-a-vis the global money supply.

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About 244,000 metric tons of gold has been discovered to date (187,000 metric tons historically produced plus current underground reserves of 57,000 metric tons).

– Source: https://www.usgs.gov/

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The troy ounce is used in the weighing and pricing of precious metals such as gold, platinum, palladium and silver. One troy ounce is 31.1034768 grams, or 0.0311034768 kilograms.

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Let’s convert 187,000 MT into troy ounces – the number is 6,012,189,608.33, say 6 billion troy ounces.

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At the current value of $2,500 per ounce, the current value of all the gold (not including reserves in the mines because it’s not yet available as currency) in the world is $15 trillion. Just think of gold as a stock for a moment and let this sink: gold has been traded since the ancient times, at least for 3,500 years. It took 35 centuries to reach the market cap of $15 trillion i.e. just 5 times NVDA!

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Anyway, back to gold. The total value of available gold immediately strikes one as pretty small in comparison with the global GDP exceeding $100 trillion in 2022. Source: https://www.statista.com/

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It’s too small to claim representation of the global broad money supply, which reached $129 trillion in December 2023. – Source: https://www.voronoiapp.com/, IMF, World Bank

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I quote Investopedia to remind myself of what money supply means. Broad money is a category for measuring the amount of money circulating in an economy. It is defined as the most inclusive method of calculating a given country's money supply, and includes narrow money along with other assets that can be easily converted into cash to buy goods and services.

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For the purpose of argument, let’s exclude gold i.e. from broad money supply and we get the non-gold money supply of $114 trillion, which is deemed as paper currency.

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If gold were to truly back the value of all the world’s currency in circulation, theoretically its price should be (114/15) i.e. 7.6 times or $19,000 per ounce. If you view this from an opposite angle, the money supply needs to contract by 86% to be fully supported by the current value of gold!!

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Sounds crazy. Reasons:

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1.?????? Gold as Measure of Value. As humanity we do not create tradeable value that is now represented by currency only by digging up gold with equal speed. While gold has industrial and scientific value and as Indians we know that our women and partly men drive a significant portion of the value of gold on emotional and cultural grounds; to argue that the value of human endeavour must be denominated by the limited availability of one mineral just sounds restrictive and surreal.

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2.?????? Gold v. Competing Assets. If the earth's underground resources are a great proxy of valuing our currency, then why just stop with gold? Diamonds and opal may be more valuable than gold depending on their features. Rhodium costs $4,725 per ounce as of today! Consider real estate. You may argue that these assets are not standard, not liquid, not easily or at all transportable etc. Fair. But now our economic lives are lived on Cloud. This situation nearly destroys the pre-industrial age desirability of gold as currency. Bonds, equity, REITs and other instruments do exist that create standardisation and liquidity in all the non-gold physical assets available as currency proxies and most of these assets have real value as rent earners, industrial consumables or gold-like decoratives.

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3.?????? Economy of Creativity v. Economy of Tangible Assets: Finally, the modern human inherently believes that the value of economy is a reflection of our civilisational i.e. scientific, technological and commercial progress. If it were not so, we would have to accept that our collective economic value before and after SpaceX’s invention of reusable space rockets should be the same because during this time, very little new gold has come into circulation! We can use several such before and after illustrations, for example, transition from physical to cloud commerce, or going back in time transition to mass transportation by ground, water and air vehicles. Let’s close this by using a couple of fun illustrations. Ask yourself this - if you had a choice, what would you want to leave as your heritage – a few kilos of gold or IP rights of an equal value to a technological development? As a working person, would you love to inherit a few kilos of gold or a well-run restaurant in Harris Park of the same value?

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To conclude, I argue that we need to free ourselves of the old notion of gold as the true indicator of the value of money. That age is over.

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Having said that, we all know that a part of our money supply, personal income and wealth is unreal because our central bankers have been printing too much currency for too long that exceeds the humanity’s civilisational value creation I have been referring to. Too much unsupported money has been distributed by our populist political leaders to remain in power or to win the next election. We are indeed not as rich as our net worth statement might show. Price rises are eating into our income.

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Yet relating this challenge to a select mineral i.e. gold as our saviour is not fathomable to me for the reasons stated above.

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As regards gold’s desirability as an investment, in the short run, gold returns do beat equity returns from time to time, but the longer term verdict is clear. Gold vs. S&P 500 — 40 years record shows this: Gold: $339 to $2,414 (+611.7%); S&P 500: 151 to 5590 (+3,613%). – Source: https://www.nasdaq.com/ That’s the directional change we better come to terms with.

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Gold investors could take note of crypto’s rise, too. The Bitcoin index has returned 13,616% in the last 10 years as of July 2024, with the 5 year performance of 560%. Source: https://curvo.eu/ In less than 15 years, the global crypto market cap has risen to $2.17 trillion (Source: https://www.forbes.com/) v. gold at $15 trillion after several millennia!

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If you are trading gold now, enjoy the short ride and have an exit strategy. As a temperamentally long term investor, I don’t trade. I am a gold permabear, because my view is long term, say 5-7 years on a rolling basis over my life and in view of the generational transit. Talking of the next generation, the Indian in me might like to pass on a 5 ounce gold statuette of Lakshmi, the goddess of wealth to my daughter.?

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Arguments against welcome!

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-????????? Chetan Shah

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PS: Academic discussion only, not financial advice