Gold

October 11, 2016

Gold

Gold is a precious metal. It is precious because it is valuable. The value of gold is that it is a form of money which has been used for 1000s of years. Although it has been called a “barbarous relic”, central banks still hold tonnes of the stuff and to my knowledge they are not giving it away for free. That endorsement says the contrary. The fact is that gold is a store of value and it does this job well.

SWOT analysis

Strengths

Holds value, and it will never go down to zero
Readily accepted in the majority of countries of the world
Easily transported
Gold can acquire some functionalities of bitcoin. This is being tested by some companies like bitgold and DGX.io
As a safe haven in times of geopolitical and financial market instability.
As a commodity, based on gold’s supply and demand fundamentals.
As a portfolio diversifier.
It’s rare — Gold represents roughly five parts per billion of the earth’s crust. Consequently, gold is both difficult and expensive to dig out of the ground.
It’s virtually indestructible — Gold won’t ever diminish in quality or decay structurally.
It’s limited in quantity — All the gold in the world could fit in the confines of a football field, and
would only rise five feet off the ground.
It’s malleable — Gold can easily be shaped in various shapes and sizes, thus increasing its value in the consumer marketplace.
It’s hard to find — Gold is mined incrementally – its output rarely exceeds 2% annually.
Physical gold gives you physical possession. The added advantage of physical ownership over digital ownership is that digital ownership can be distributed with cyber attacks. Cyber attacks can be either criminal or state-sponsored attacks.
Close to zero and negative interest rates favour gold.

Weaknesses

No Yield.
It can be stolen or lost.
If you have gold in electronic form, it can be attacked by individual hackers (state-sponsored or criminal).
Pollution and deforestation are created when gold is mined.
You need oil to mine gold. Oil has a limited supply for two reasons. EROEI and absolute quantities.
Physical large denomination coins are difficult to trade with. How will you get change?
Physical Gold is expensive to insure, unlike cash in the bank.
When interest rates go up, gold tends to go down.

Opportunities

It has provided significant store of value
There it is a possibility that it can be remonetized. Meaning that a government will issue a state currency which is backed fully or partially by gold
Jim Rickards, a renowned gold expert, has claimed that gold will one day go to $10,000. However, be warned if gold is at $10,000 a loaf of bread will probably cost $50!
Yet to be discovered industrial process could use gold as one of their inputs.
When you own physical gold, you own an asset which does not need any third party to be valued or transacted. People intrinsically recognise the value of gold.
Only 1.5% of the investment community owns gold if the trend changes to the upside the demand and price of gold will increase significantly.
Gold is quoted in multiple currency pairs not only in USD. The price of gold in Yuan differs from that in Sterling or US Dollars. For example in 2016 gold priced in sterling rose by 40% as of the end of October.
Gold could be monetized, a country (or group of) could create a full or partial gold backed currency. Potential they would do this to restore confidence in their currency, or to protect the savings of their citizens. This would increase the value and demand for gold.

Threats

Confiscation
They say “do not fight the FED”, and the FED does not like gold prices going up. (FED: Federal Reserve)
Bitcoin has some features as gold like limited availability in addition to that it has many features which gold does not.
India is the largest consumer of Gold if their economy slows gold demand will slow.
Central banks are large holders of Gold if they decide to sell significant parts of their reserves they can flood the market with supply
Some say the price of gold is manipulated.
Gold is surrounded by a whole plethora of “entrepreneurs”, pumping it for their own reasons, not for the good fundamentals of gold. This gives gold a bad reputation and probably does more harm than good.
Fake gold bullion exists
Buying physical bullion and taking delivery breaks the chain of custody. If you have to sell that gold you need to have it re-valued and checked.
In parallel of gold at $10,000, there will be bread at $50.
If gold’s price increases significantly, Government could impose a windfall tax.