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Inflation of Gold

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

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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.

Reply to
norak
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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

Reply to
Chip

Well, at $600 or so, he missed more than half of the recent run up. See

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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

Reply to
JoeTaxpayer

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
Reply to
Igor Chudov

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.

-- Ron

Reply to
Ron Peterson

Silly? It would be impossible, unless of course gold ran up to be as valuable as all other assets combined, which is, well, impossible.

Reply to
JoeTaxpayer

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.

Reply to
Steven L.

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.

Reply to
JoeTaxpayer

I think that "Central banks & industry" would include industrial (and maybe medical) uses like he listed. But what a bizarre lumping together!

Xho

Reply to
Xho Jingleheimerschmidt

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industrial & dental totaling 9% or so of total demand. Not huge, but not a factor to dismiss, either.Joe

Reply to
JoeTaxpayer

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:

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:

-Tad

Reply to
Tad Borek

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