What If…

2012 December 12
by SJ Leeds

In the past, I’ve discussed the arguments in favor of and against gold.  Here’s a link to my blog about Howard Marks’ thoughts and here’s a link to my blog about Buffett’s gold thoughts.


Today, I want to mention an interesting paper that I read recently, The Golden Dilemma by Claude B. Erb and Campbell R. Harvey (Duke University).  Here’s the link to the paper.  Today’s blog is not a summary of the paper.  But, here are the ten thoughts I found most interesting:


1. Gold has been a relatively poor inflation hedge over the short term.  See exhibit and notice that there have been long periods of time when gold has outperformed inflation and long periods of time when it has underperformed inflation.

2. Real Price of Gold copy


2.  There have been approximately 171,000 metric tons of gold mined since the beginning of time.  It’s estimated that there are approximately 51,000 metric tons that can still be mined in the future.  So, approximately 77% of all gold has been mined.


3. We produced approximately 2,500 metric tons per year.  If these numbers are all correct, we’ll be done mining in 20 years (after capturing the remaining 51,000 tons).


4. If you look at all the gold that has ever been mined, it’s estimated that 50% is in jewelry and 12% has been used in manufacturing / technology.  The remainder (approximately 38%) is split evenly between investors and central banks.


5. As the price of gold has risen, the demand for jewelry has dropped and the demand from manufacturing / technology has held steady.  But, the demand from investors has increased.  It’s called momentum investing!  In fancy speak, it’s called “positive elasticity of demand” – in other words, demand increases as the price increases.


6. What if China decided to turn their currency reserves into gold?  They would need 66,000 metric tons of gold!  (They currently hold 1,000 metric tons of gold.)


7. What if the BRIC central banks wanted to hold the same amount of gold (per dollar of GDP) as the U.S.?  This would create demand for approximately four thousand metric tons.


8. What if the BRIC nations wanted to hold the same amount of gold as the U.S. on a “per citizen” basis?  They would need another 75,000 tons!  (The last two points combine to say that the U.S. has much higher per capita GDP.)


9. The value of all stocks (globally) is $48 trillion, all bonds add up to $41 trillion and all gold is worth $9 trillion.


10. If all investors could only hold these three assets (stocks, bonds and gold), and (what if) they decided to weight their portfolios with 2% in gold (similar to the current weighting of all the gold held by investors), this would create demand for another 30,000 tons of gold (close to 20% of all gold that has ever been mined).  Of course, this is simply doubling the amount that is currently held by investors (not including central banks).


The point of this paper (and this blog) is not to say that any of this will happen.  Rather, the point is to think about what would happen to prices if we ever saw any of this increase in demand.

Have a great week.



Have a great week!

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