As a mathematical matter if a large proportion of the the folks with substantial net worth in the US (never mind the world) tried to up the gold portion of their portfolios to even 5%, wouldn’t the price of gold skyrocket because the supply is almost completely inelastic?
So you think you need 100 ounces of gold at $2500 to get to 5% of your $5M portfolio. You could do it.
But when everyone with a $5M portfolio tries to do it, the price will go to $25,000 an ounce and you’d only need 10 ounces to hit your target.
Not understanding? The constrained supply vs demand which may increase under various circumstances is the basis of how it potentially serves a function as part of an asset mix.
I don’t personally understand crypto, and have decided that I don’t care to.
All those problems exist with any investment and are more likely to happen and more likely to lead to greater losses when people make investments based on a TV commercial. If you’re going to waste money wasting it on gold is not the worst way to waste it.
If people with real money tried to invest in gold in a big way (the 25% of portfolio quoted above) the price of gold would rise significantly because the supply is very constrained. Unless the governments holding gold as reserves decide to release them in response to higher prices.
Cryptocurrency is an outlet where people spooked by fiat currency can invest in a commodity where there is artificial (rather than natural) scarcity.
I get that both are constrained in supply. Both unfortunately cause environmental harms to mine. Both may move in ways poorly correlated to other assets. The demand for both is either mostly or completely unrelated to either actually having any purpose other than as a marker.
Gold though has a long track record of its demand. I am not getting why there being a real thing with real supply constraints associated with my shares of a gold ETF is a downside.
It’s the same psychology at work in both. Crypto exploits it in a way that gold cannot (since most of the gold is already out there in millions of people’s hands).
Crypto is like gold where the inventor of gold keeps a stash for themselves and hopes that it takes off and their stash becomes valuable, despite it being intrinsically useless.
Several western countries would love to sell off much of their gold reserves. Canada has actually done this. It sold off all of its gold reserves reaching 0 in 2022.
These countries realized it was a waste of resources to hold onto something not really useful economically.
It’s really the same question as for personal portfolios.
Something is useful economically because it can be used directly (like wheat or oil) or because others agree that it has some arbitrary value and are willing to exchange other things of arbitrary value for it. The value rests on the confidence that that shared belief will continue and that gold, over the time scales they care about, will be part of a basket that provides a hedge.
It is the simple tautology that it has economic value because enough governments and other players believe it does, and they hold reserves because of that economic value.
Value held in reserve is its own useful function, able to be exchanged for other needed things held as having value when and if needed or when opportunities present.
Why else did some (individuals, companies, even governments) hold some currency reserves even when interest rates were zero, essentially stuffing some in the mattress?
I believe that the Federal Reserve Bank of New York building has an enormous vault containing gold owned by various governments and organizations. So when one wants to pay another, a gold bar just has to move within the vault. So that’s one, perhaps now obsolete, reason for a government to hold gold.
Well, yes and no. Gold can in fact be used directly - if, for instance, people stopped wearing jewelry, or if the electronics industry stopped using gold, I think the price of gold would drop precipitously, whether or no we agreed it had value.
Yes and no right back. Yes it functions as commodity and currency both.
Jewelry seems to be where the lion’s share of world gold exists, I can find a 45% estimate.
But even there I am not so sure its “value” is always the piece of jewelry itself as much as it is primarily the value of the gold contained. As evidence of that position a decade or so ago (time flies) our family had our parent’s estate to liquidate. There were some gold pieces that no one wanted for sentimental reasons and selling them they were worth the price of their gold, with no value for them as works of jewelry.
Whoever is holding them now is holding them for the value of the gold in any shape, not for their function as jewelry.
So is gold in jewelry a commodity? A currency? Both?
In any case the gold held in reserves is, I suspect, not held to shore up potential needs for gold as a commodity in jewelry, electronics, as a catalyst, or even a few medical uses; it is held exclusively for its function as a means of holding value.
I suspect it’s not something either of us can prove one way or the other. Still… do you honestly think that if gold looked like lead, we would value it as much as we do now? It’s no coincidence, in my mind, that traditionally the most valuable metal we have is also the shiniest.