Worth its weight in gold?
At today’s prices, a person weighing 12 stone would be worth over $3.3 million if made of gold, equivalent to around six ‘Good Delivery’ bars weighing 400 troy-ounces, such as those you might see in the vaults of the Bank of England. Its lustre, due to a lack of oxidation, makes it pleasing to look at and to handle. Yet, it is simply a lump of metal that generates no income and will only be worth what someone else wants to pay for
it at any point in time. Given the lack of cash flow, common valuation models are not useful. Warren Buffett (1) – the legendary investor and CEO of Berkshire Hathaway – is not a big fan:
‘This type of investment requires an expanding pool of buyers, who, in turn, are enticed because they believe that the buying pool will expand still further. Owners are not inspired by what the asset itself can produce – it will remain lifeless forever – but rather by the belief that others will desire it more avidly in the future...Gold, however, has two significant shortcomings, being neither of much use nor procreative. True, gold has some industrial and decorative utility, but the demand for these purposes is both limited and incapable of soaking up new production. Meanwhile, if you own one ounce of gold for eternity, you will still only own one ounce at its end.’
Many investors seem enamoured with gold and its fabled properties. In this note, we will take a brief look at whether the claims that ‘gold bugs’ make, stand up to scrutiny. Amongst these are that it provides downside protection against periods of financial market trauma, helps to maintain purchasing power at times of inflation and hyperinflation, and provides an Armageddon safe haven.
A quick look at gold
Gold has attracted people’s attention across the millennia and was probably first mined around 3,600 B.C.
The first gold coins were minted in about 550 B.C., under King Croesus of Lydia. When Christopher Columbus sailed to America, it is estimated that less than 13,000 tons had been extracted in total. Today, the stock of above-ground gold is around 175,000 metric tons (2), which, if melted down into one block, would form a cube around 68 feet along each side (that is 10 feet shorter than a tennis court). It has been estimated that only around 50,000 metric tons remains below ground (3), such that, given gold production of around 2,500 tons a year, there is an estimated 20 years of below-ground gold left.
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(1) Fortune (2012). Why stocks beat gold and bonds, Fortune, February 9.
(2) World Gold Council (2017), About Gold.
(3) United States Geological Survey (2011), Gold: Mineral Commodity Summaries.