“It gets dug out of the ground in Africa, or someplace. Then we melt it down, dig another hole, bury it again and pay people to stand around guarding it. It has no utility. Anyone watching from Mars would be scratching their head.” - Warren Buffett
After muting CNBC for years, I turned it on by accident yesterday and learned something very interesting. The gold ETF (GLD) is the 6th largest holder of gold in the world - the whole world, even ahead of China. When investors buy GLD they have to go out and buy gold to drive up the prices. This raises a little question - who will be buying this gold from GLD when investors will decide to sell it?
Gold is one of those weird assets where nobody knows what it is really worth. You cannot run discounted cash flow analysis to value it - it has no cash flows. It is an asset where perception and reality are deeply intertwined.
Investors buying the gold ETF (GLD) are influencing the price of gold which is fair for the most part as otherwise they’d be buying the real thing. Though of course the ease of buying GLD creates a slightly higher artificial demand, but still it is fair game. A violent sell-off in GLD will drive the prices of gold down dramatically unless a real buyer steps in (like another government sick of owning the US debt for instance) and the gold price could get cut in half overnight.
Suddenly, perception of not being a store of value will create a reality of gold not being a store of value. The gold game will be over.