Unlike stocks or bonds, gold has no earnings, no profits, and no dividends to use as a basis for estimating value. In fact, gold has negative cash flow due to such things as transportation, storage, insurance, and interest expense or opportunity cost. So how much is it worth?
Gold has historically been seen as a store of value – real money. It has been a primary means of payment in some periods of history. And it has been the official standard behind paper currencies at other times in history. Today, it is viewed by many as quasi-currency in the face of governments and central banks debasing their paper currencies. Some even believe it is a survival necessity should the world descend into chaos where paper money is unacceptable as a means of payment. That might possibly be true (with some important caveats), but how much is it worth?
Let’s take a shot at that on the theory that its worth is a function of its “real money” alternative to paper currency. Then let’s talk about a few practical problems realizing its “real money” use.
First a few background facts:
It’s All Still Here: Total gold mined in human history is about 165,000 tons (or about 5.3 billion Troy ounces) – and it is all still here. Proven in-ground gold reserves held by gold mining companies is about 50,000 tons (about 1.6 billion Troy ounces). Annual gold production from mines is about 2,400 tons.
How Is It Used/Held? Holdings/use of gold worldwide is:
- Jewelry 52%
- Central Banks 18%
- Investment (in bars) 16%
- Industry 12%
- Other 2%
Gold Bar Holdings: Gold bar investment funds hold 1,750 tons (of which GLD holds 1,300 tons) almost 1% of all the gold in the world --- more than Switzerland; and more than the combined holdings of United Kingdom, Saudi Arabia, Venezuela, and Taiwan; or more than India and Japan or Russia and Japan combined.
The only countries/institutions with more gold holdings in their central banks than GLD are: China (2,435 tons), the International Monetary Fund (2,847 tons), the United States (8,134 tons) and the Euro Zone countries (10,793 tons).
Investors hold almost as much as governments, and women own three times as much as governments in jewelry.
Per Capita Gold: If there are 5.3 billion Troy ounces of gold above ground, and if there are 6.9 billion people, then there are 0.77 ounces of gold per capita globally, which at the current price of gold means there is enough “money” for about $1,050 per capita globally.
The “real money” estimate
Since 1947, the ratio of US GDP to US currency in circulation has ranged from under 9 to over 26 (rising steadily from the low in 1947 to the high in about 1981, and then steadily down to the current approximate 16.5). The average is 20.
We don’t have data for that ratio for other countries, but let’s assume that globally it is about the same (9 to 26, average 20, currently 16.5).
So, at nice round multiples of 10, 15, 20 and 25, this is how much currency may be in the world at this time: $7.0, $4.7, $3.5 or $2.8 Trillion at USD purchasing power parity.
If there are 5.3 billion Troy ounces above ground, then if all currency were replaced by all above ground gold (including jewelry) and if the 1.6 billion Troy ounces of “proven” reserves below ground are not part of the calculation, the value of gold to replace all of the currency in the world might range from about $500 per ounce to $2,700 per ounce.
This calculation exercise may or may not make good sense. We’ll each have to decide that for ourselves, but if it holds any water at all, predictions of $5,000 or more per ounce for gold seem over the top and not reasonable. The current price of about $1,360 may be on the dear side, if the world GDP to currency ratio is similar to that of the US.
Real World Problems With Gold in a Survival Situation
Some people view gold as a key to survival in an “end of the world” scenario. We have our doubts about that.
First, we don’t see the end of the world, but there are those who do. To them, we suggest a camp in deep wilderness, far and hidden from other people, near fresh water sources, a year of survival foods, lots of seeds, guns, bullets, and plenty of gardening, hunting and self-defense skills.
As for gold as the ticket to survival, forget about gold futures contracts or gold indexed ETNs (such as UBG) in the event of any kind of systematic collapse of world order. The institutions that provide for clearing and settlement, would fail or fail to perform. The bond issuers would default. Your “gold” would be no more than pieces of paper documenting your interest in something that no longer exists.
With physical gold funds such as GLD, IAU, and SGOL, good luck trying to sell the shares; and there is no right to exchange shares for physical gold. Even if you could exchange shares for gold, how would you get to the vault? How would you transport the gold? How would you avoid being robbed of the gold along the way? And, there is reasonable chance that the gold would have been looted from the vaults by management or street rioters before you got to the vault.
Physical gold bars would be a problem too. Consider that governments almost always consider themselves to have a higher priority and right to survive than their individual citizens, and have the police power to assure that they do in terms of taxation (which includes outright confiscation of property). Ever hear of eminent domain? Ever read the facts surrounding the 1933 confiscation of gold by the US government in all forms from all citizens in forced exchange for paper money? It could / would happen again.
Then there are secret bank vaults in Switzerland or some other haven. Well, as of late Switzerland plays ball with US authorities and secrecy is not so secret anymore. And don’t forget that undeclared secret overseas assets are illegal and subject to imprisonment in the US if discovered.
Then there is also the risk that the bank where you have your secret accounts may cease to exist -- that its management may steal the gold, that the government of that country may nationalize the bank and confiscate assets held there, or that rioting citizens might invade and loot the bank.
If the world were upside down and in collapse, you might find it difficult to get to that country to retrieve your gold, and be unable to stay there to spend it, and unable to return to the US to spend it, or not allowed to keep it upon arrival. It’s very hard to move heavy gold bars, and you certainly wouldn’t want to ship them by any means other than holding them in your immediate personal possession.
Also, don’t overlook that in 2010 Jewish Holocaust survivors are still trying to force Swiss banks to release assets hidden there during World War II. The Swiss banks allege inadequate proofs of ownership. How much proof would you expect to have of your ownership in a world gone mad with crumbling institutions?
Survival in a collapsing world is more complicated than buying gold. Gold is a reasonable asset for diversification in a world within normal bounds, but not necessarily helpful in many end-of-the-word economic scenarios for which it is so loved.
Consider owning gold as a diversification asset in times of functioning markets, but don't view it as a survivalist solution, and don't view it as something where the price has no limits.
Holdings Disclosure: As of January 17, 2011 we hold positions in some but not all managed accounts for the following securities mentioned in this article: GLD.
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