Wednesday, August 17, 2011

Gold vs. Debt and GDP

Continuing a bit from the last post's subject, here's another comparison between gold and US debt: The value of the entire amount of gold in existence in the world vs.  total debt of the USA (a proxy for global debt), and global GDP.

According to the World Gold Council there were a cumulative 169,100 tonnes of gold mined by the end of 2010, all of it still in existence since gold practically does not degrade, react, corrode, etc.   At the recent high price of $1,800/troy oz. its total market value was $9.8 trillion, or 16% of global GDP.

Using data from the Federal Reserve (US debt) and the US Geological Survey (annual global gold production) I come up with the following chart.

The value of gold is essentially a psychological phenomenon, since it has very few tangible uses. At 15% of global GDP, up from 5% just six years ago, it seems to me like it is discounting a lot of panic (the euro will fall apart, the West will inflate away all of its debt, the US will devolve into a second-rate power, etc. etc.).

12 comments:

Anonymous said...

"The value of gold is essentially a psychological phenomenon, since it has very few tangible uses."

I expect you work in finance to produce such nonsense. At least from a historical sense.

The fact is that:
"The value of gold is essentially a MONETARY phenomenon, since it has very few tangible uses".

I understand that you may have been educated in finance after 1980.

I was before and certainly feel comfortable that this old hat education that still included some ridiculed or scolded chaps such as Bastiat or Rueff as much as Keynes and a few others offers more valid support for then current set of events.

Talking recent "financial theory" with an old time friend who happens to get back into banking after over 25 years in industry was enlightening as well.

Sorry I sticking firm onto the barbaric side of economics.

"At 15% of global GDP, up from 5% just six years ago, it seems to me like it is discounting a lot of panic"

True.

"the euro will fall apart, the West will inflate away all of its debt, the US will devolve into a second-rate power, etc. etc."

IMHO your list is not the right one. There may be some truth in it of course.

The true core of the list however is in the "etc. etc.".

Basically in the list of "net savers", taken from a monetary perspective (an individual saver in a country massively relying on external money is not really one, I mean a saver).

Net non OECDE savers currently find it extremely difficult to:
a) transform their savings into effective purchases of real money-making assets, hence the run to various kind of long-life commodities,
b) plainly protect their savings in any kind of monetary form.

Once again, you work in finance and/or banking.

This is an immense cognitive bias when tackling with gold.

The same David Goldman displayed in his recent Atimes post when trying to protect his long time friends:

http://www.atimes.com/atimes/Global_Economy/MH16Dj01.html

By the way, I feel, as for David, that your very strong level of intellectual and moral integrity is pushing you on the wrong side!

Sorry Sir:)

Anonymous said...

Anon, very interesting thoughts.

I was before and certainly feel comfortable that this old hat education that still included some ridiculed or scolded chaps such as Bastiat or Rueff as much as Keynes and a few others offers more valid support for then current set of events.

Do you have any recommended readings or blogs?


Net non OECDE savers currently find it extremely difficult to:
a) transform their savings into effective purchases of real money-making assets, hence the run to various kind of long-life commodities,
b) plainly protect their savings in any kind of monetary form.


A very precise description. That's IMHO also the reason for the current "flight" to treasuries after the downgrade

Hellasious said...

To Anon #1

My bias against the use of gold as a monetary medium/base is not founded on economic education post-1980. Rather, it is based on the need to do something NEW, something in synch with today's needs and challenges.

In my opinion, that's resource depletion, overpopulation (vs resource availability), climate change, environmental degradation. All REAL economy issues, NOT monetary flimflam.

Our "money" therefore, should reflect these challenges. Gold does not, as does not our current "Permagrowth" version of debt-money, which is based on faith alone.

That's why I have proposed The Greenback (search this blog under these words), a currency whose supply is dependent on the growth of renewable energy resources.

We desperately need a new currency regime to fit our present and future, not a throwback to the 17th century. We don't apply leeches anymore to cure illness, after all..

Rufus said...

"...the need to do something NEW, something in synch with today's needs and challenges."

Exactly. Gold is abhorrent because of its history. When was the last time gold was used as a practical currency exchange? Was finance any more efficient and effective under the gold standard, say during the Great Depression?

How about "The Parable of the Talents." Is that relevant today?
Hoarding gold is about fear. Investing in new enterprises is about courage.

Greenie said...

"I have suggested"

Who are you?

Hellasious said...

Well, hello Greenie. Who am I? One who can only suggest. If I could impose or even just propose, I would be someone else :)

Dr John said...
This comment has been removed by the author.
Anonymous said...

Hello Hell.

Never, and I mean NEVER, argue with those who value gold!!! It is nearly pointless. It parallels arguing Gods vs Science.

Trying to convince someone gold is "truly" worthless in a practical sense other than fear can easily be pointed out to that person by just telling them to: apply their Gold world theory. Just say: OK. The system collapses. We go gold. Now what? How does Molly buy a Hot Dog from the street vendor?

Ya see, you can never defeat the historic argument... but they can never apply the future scenario.

...and that belief system is strong. It's faith. In what? an object? Why that object? History?

Well, what god do you believe in? Why that god? History?

It's faith.

I couldn't be with you more when it comes to looking forward. I remember the Greenback theory, but never fully absorbed it because I was busy/consumed with working on my own theories. I'll have to look it back up.

Tying it to energy production, though it makes sense, can cause valuation issues. If people took a week off from using energy... would we have surpluses... thus depreciation of the tied/monitary unit/asset?

For my work, I came to a conclusion that Capitalism needed "caps". ...and that was the answer. Annually, predesignted caps, and everything fit in parallel value under that cap. ...there was a lot more, but I'll spare you the details.

All the best, Miss America/Rich H

Hubert said...

Let us look at it this way: Assume, you have 500 million in a Bank account in Switzerland. For two decades it was in equities and bonds. You are sceptical about the world economy and you do not know if minority stakes in traded companies will survive what´s coming. You only see negative returns coming in bonds and fear being trapped with capital controls.
So where do you put your money: Brazilian farms yes, but now many of them do you want to own? What else ? You want it to survive and provide to you valuable chips for the next system if and once it arrives. You do not care about losing some in the interim, only one thing is important: The chips have to have value in the next system.
So what would you do ?

Motley Fool said...

Hey

"The value of gold is essentially a psychological phenomenon, since it has very few tangible uses. "

You got this mostly right. I would add that gold has value because it has so few industrial uses.

"At 15% of global GDP, up from 5% just six years ago, it seems to me like it is discounting a lot of panic"

Haha, brother, you ain't seen nothing yet.

Does 15% of your income this year equal your entire savings? This is the correct analogy to draw.

As you should be aware all fiat returns to it's intrinsic value eventually. It's about time for our one world fiat system to do so.

A large part of the savings in existence will flow to gold. :)

Peace

TF

OkieLawyer said...

Well, I see you are writing again. I just had to drop in on those that remember Thai's contribution regarding fractals. Well, that same math is now contributing to the advancement of solar energy:

The Secret of the Fibonacci Sequence in Trees on Solar Energy

Anonymous said...

I was before and certainly feel comfortable that this old hat education that still included some ridiculed or scolded chaps such as Bastiat or Rueff as much as Keynes and a few others offers more valid support for then current set of events.

Do you have any recommended readings or blogs?

Of course there is plenty to read on these subjects.

A lot of theoretical work can be found at the Mises site (aka Von Mises).

As a European I have quite a bunch of leftist views on monetary and fiscal issues and am certainly no leaning into the current take of your fellow Austrian economists in the US. But I admit to appreciate fofoa and Jesse blogs to name a few on those specific issues.

Hoarding gold is about fear. Investing in new enterprises is about courage.

I expect that you are joking. Are you not?