|
Would you – or China – rather own gold 8
years from now, or US Treasury bonds...?
ON THE LETTERS' page of The Economist last week, Nils Sandberg
from Cambridge University's Judge Business School presented a common argument
against gold's current value.
According
to him, gold is in bubble territory because it has few industrial uses.
Disproving Mr Sandberg's thesis is childishly simple.
· Take
one $20 bill out of your wallet;
· Consider
the industrial applications of the paper it is printed on;
· Now
burn it.
Well,
why didn't you? After all, its value – according to Mr Sandberg's
thesis – rests on the paper's usefulness in industrial processes.
Nevertheless
it's still interesting to understand why gold (like $20 bills) is valued
above its manufacturing relevance. Unsurprisingly the answer lies in marginal
utility.
Gold
offers humanity one exceptionally useful property; it has an extraordinarily
stable stock. There are 166,000 tonnes of the stuff above ground (worth about
$8 trillion) of which about 88% is held as a value store of sorts, in jewelry (52%) and bullion (36%). The stock is growing by
about 1.5% a year, from the combined efforts of all the world's miners.
It
is because gold is each of (i) geologically rare,
(ii) elemental (i.e. incapable of being manufactured) and (iii) industrially
useless, that it has this reliable stock quantity. Nothing else can do it;
not silver, which is 80 times more common in the ground, nor platinum, which
is far too useful as a catalyst to offer stock stability.
Reliable
scarcity is the key property savers require of money, which otherwise fails
to store value. But of course we don't need gold to deliver reliable scarcity, we can usually create that reliable scarcity
artificially, as we do with our modern currencies.
Now
the marginal utility explanation. When new currency is too freely issued
reliable scarcity becomes under-supplied, and savers go in search of it.
Having seen artificial reliable scarcity fail in one currency, the promise of
it in another is unconvincing, so they turn to natural reliable scarcity, and
demand for it increases dramatically as governments print money. This is what
drives gold up.
Mr
Sandberg is right though, that gold will eventually go down again, when
currencies' artificial scarcity once more becomes reliable, and when those
currencies start to generate a yield. But in the meantime it looks
irrationally optimistic to hope that the US government – faced with a
$21 trillion debt – will not print more and more money.
The
question, therefore, is whether the savers who own $100 trillion of dated
debt instruments in the bond markets will take fright at continuing money
printing policies of the US and other governments. That $100 trillion of
dated debt has already started running down the clock. It is shifting to the
short end, where it behaves more and more like cash. Maybe its holders will
demand cash (as is their right) at its redemption. The sums involved would
swamp the $15 trillion of cash and near-term deposit instruments currently in
issue.
People
who choose to buy gold are increasingly aware of this possibility. We don't
know whether the Dollar, the Euro, the Yen and the Pound (all of which have
started a debt market drift to the short end) will ultimately go into the
currency death spiral. We are just mindful that it is the usual destiny of
currencies driven by political expedience toward the printing press. It looks
like a possibility at least.
To
finish with here's the brainteaser which the Chinese are currently wrestling
with. Now that you know the US debt profile is slowly shifting to the short
end, and represents about six times the currency in issue, you are required
to choose today something to own in 2020. What would you (or China) rather
have – a tenth of the US Treasury's paper bond debts, or five times its
very large gold reserve?
At
current market prices these two are worth about the same. But in the
intervening 8 years, the US government has budgeted to issue $8 trillion net
of its own bonds, representing an increase in the stock of 57%. A further $1
trillion of gold will be mined worldwide, an increase in the global stock of
12%.
Paul Tustain
Director and Founder
Bullionvault
|
