Inflation of Gold


N

norak

I know an investment banker who converted all his net worth into gold
at the beginning of 2007 just before everything tanked.

Gold is a popular investment today. It is even possible to invest in
gold via your retirement fund.

Many claim that gold is a protection against inflation. If you hold
paper currency there is the risk that the central bank can print more
paper currency, which decreases the value of each unit of the paper
currency.

However, couldn't the same thing happen with gold? Gold is mined
around the world by gold miners. Over the last two centuries there has
been a steady increase in the amount of gold produced.

See http://www.eoearth.org/media/draft/6/60/Global_History_of_Gold_Production.jpg

As the amount of gold in the economy increases, this must surely
decrease the purchasing power of gold over time. How then can holding
gold protect you from inflation?

Because there is so much uncertainty about how much gold there is
still beneath the earth and because there is so much uncertainty about
where gold is stored, then the actual quantity of gold in the economy
is very uncertain. Because of this uncertainty, the purchasing power
of gold must fluctuate greatly, which destroys one of the most
important functions of a currency, which is providing a stable store
of value.
 
Ad

Advertisements

C

Chip

norak said:
I know an investment banker who converted all his net worth into gold
at the beginning of 2007 just before everything tanked.
Do you think he was a soothsayer, an intelligent observer of financial
trends, or had inside information on the excess greed of his country
club buddies?

Chip
 
J

JoeTaxpayer

norak said:
I know an investment banker who converted all his net worth into gold
at the beginning of 2007 just before everything tanked.

Gold is a popular investment today. It is even possible to invest in
gold via your retirement fund.

Many claim that gold is a protection against inflation. If you hold
paper currency there is the risk that the central bank can print more
paper currency, which decreases the value of each unit of the paper
currency.

However, couldn't the same thing happen with gold? Gold is mined
around the world by gold miners. Over the last two centuries there has
been a steady increase in the amount of gold produced.
Well, at $600 or so, he missed more than half of the recent run up. See
http://www.gold-eagle.com/charts/33yeargold.gif
When viewed in hindsight, his risk of losing all his gains and then some
is there. Ask him to tell you when he sells. You know anyone who sold at
$850 back in 1980? I sure don't.

When you view the long term (I mean the 100+ year charts), gold provides
some protection against hyperinflation, but little else. It provides no
return beyond just keeping up with inflation, and long term lags even
1yr t-bills (The so-called 'risk-free rate')

That said, long term, gold is not likely to crash based on new supply.
With annual production at 50 million oz/yr and the total gold mined
since creation estimated at 5 billion oz (yes I picked one number here,
the range goes from 5-10, but the point is no different) you can see
that the impact on supply is less than 1%/yr. In fact, the 'supply' is
impacted more by the fact that at some price people decide to sell their
jewelry or other gold collectibles.

Lastly, as the price drops, the mines supply drops as well as there are
yields in ounces per X tones of mined material that have a cost to
extract. The expensive cost mines shut down as the price drops to below
the profit level.

Joe
 
I

Igor Chudov

Many people about "gold as inflation protection", but they usually
forget an important detail. Which is that if you overpay for any
asset, you can lose a lot of money permanently, with or without
inflation.

And the price of gold is something that never crosses their mind as an
important detail to consider.

My main problem with gold is that I have no way of knowing if gold is
too expensive, or too cheap, or is in the middle. The production of
gold is so small compared to the gold available on the market, that
cost of production is not very material to its price.

Gold also has very limited industrial use.

i
 
R

Ron Peterson

As the amount of gold in the economy increases, this must surely
decrease the purchasing power of gold over time. How then can holding
gold protect you from inflation?
According to Wikipedia:
"The total value of all gold ever mined would be $3.39 trillion at
October 2008 prices."

So there is less than a troy ounce of gold for every person in the
world. If all that gold was in US hands, it would amount to $10,000
worth per person.

It would be silly for everybody to convert all their wealth to gold,
but in my case I have 4% of my wealth as ETF gold stocks and have sold
$90 Feb call options against them for $2.10 which will give me a
return of 20% if they aren't exercised (I would do better if they were
exercised, but I am not sure that I would want to continue owning gold
at that price). Note: 1 GLD ETF share represents about 0.1 troy oz of
gold.
 
J

JoeTaxpayer

Ron said:
According to Wikipedia:
"The total value of all gold ever mined would be $3.39 trillion at
October 2008 prices."
It would be silly for everybody to convert all their wealth to gold,
Silly? It would be impossible, unless of course gold ran up to be as
valuable as all other assets combined, which is, well, impossible.
 
Ad

Advertisements

S

Steven L.

JoeTaxpayer said:
Well, at $600 or so, he missed more than half of the recent run up. See
http://www.gold-eagle.com/charts/33yeargold.gif
When viewed in hindsight, his risk of losing all his gains and then some
is there. Ask him to tell you when he sells. You know anyone who sold at
$850 back in 1980? I sure don't.

When you view the long term (I mean the 100+ year charts), gold provides
some protection against hyperinflation, but little else. It provides no
return beyond just keeping up with inflation, and long term lags even
1yr t-bills (The so-called 'risk-free rate')

That said, long term, gold is not likely to crash based on new supply.
With annual production at 50 million oz/yr and the total gold mined
since creation estimated at 5 billion oz (yes I picked one number here,
the range goes from 5-10, but the point is no different) you can see
that the impact on supply is less than 1%/yr. In fact, the 'supply' is
impacted more by the fact that at some price people decide to sell their
jewelry or other gold collectibles.
It's also impacted by the fact that gold does have industrial uses,
which takes some out of circulation. Gold-plating for electrical cable
connectors; gold fillings and gold crowns in teeth; etc. When a person
with gold in his teeth dies, he and his gold may be buried indefinitely.


--
Steven L.
Email: (e-mail address removed)
Remove the NOSPAM before replying to me.


======================================= MODERATOR'S COMMENT:
Please trim the post to which you respond. "Trim" means that except for a line or two of the previous post to add context, the previous post is deleted. Thank you.
 
J

JoeTaxpayer

Steven said:
It's also impacted by the fact that gold does have industrial uses,
which takes some out of circulation. Gold-plating for electrical cable
connectors; gold fillings and gold crowns in teeth; etc. When a person
with gold in his teeth dies, he and his gold may be buried indefinitely.
This is the demand from a few years back

71% Jewelry (mostly US, China, India)
7% Central banks & industry
6% Hoarding
7% ETFs
3% Coins
5% Hedging reductions

This adds up to 99% or so. So less than 1% of the demand each year goes
to "other". Hardly enough to impact the supply/demand. No offense.
 
X

Xho Jingleheimerschmidt

JoeTaxpayer said:
...
This is the demand from a few years back
...
7% Central banks & industry

This adds up to 99% or so. So less than 1% of the demand each year goes
to "other". Hardly enough to impact the supply/demand. No offense.
I think that "Central banks & industry" would include industrial (and
maybe medical) uses like he listed. But what a bizarre lumping together!

Xho
 
Ad

Advertisements

T

Tad Borek

JoeTaxpayer said:
I blew it.
http://www.research.gold.org/supply_demand/
shows industrial & dental totaling 9% or so of total demand. Not huge,
but not a factor to dismiss, either.

JT, speaking of "my bad" - if you'd pasted in my complete post from 2007
it would have retained the source and date for those figures you quoted
above. Here's the rest of it:
When someone raises the question of investing in gold (client or
colleague) my response is: "without hitting google, describe the market
for gold -- major categories of supply and demand...GO!...." I have yet
to hear an answer that is anything close to correct. I don't have these
updated but they don't vary all that much - this is from 2005, in tons
of gold, as quoted in Barron's 1/06:
DEMAND
71% 2950 Jewelry (mostly US, China, India)
7% 300 Central banks & industry
6% 250 Hoarding
7% 300 ETFs
3% 130 Coins
5% 200 Hedging reductions
4130 Total Demand

SUPPLY
2500 Production
850 Scrap
500 Official sales

3850

(-280) Surplus (deficit)
So if you're considering gold as a valid "asset class" within a
portfolio, consider the market for it. Many of the rationales for
investing in gold break down when you look at it this way. Industrial
uses are a very small component of demand. It's all about jewelry and
similar "non-essential" demand components (contrast this to say oil
or copper which are essential commodities). Marginal demand from
speculators appears to drive short-term pricing to a large extent --
check out the price spike around the creation of the gold ETFs for
example. Marginal supply from central banks and exiting speculators
can easily supplement existing production to drive down price.
Meaning its "intrinsic value" is, in my view, a complete wildcard.

-Tad
 

Ask a Question

Want to reply to this thread or ask your own question?

You'll need to choose a username for the site, which only take a couple of moments. After that, you can post your question and our members will help you out.

Ask a Question

Similar Threads

Gold is always Gold 17
Inflation 10
Gold 1
Gold 2
Inflation 71
Inflation? 7
Inflation 31
Gold and Silver? 9

Top