Gold, even when viewed as a commodity, is unique in that it is not consumed.
As there is little cost effective industrial application for the yellow
metal, little to no “natural” industrial demand exists. Virtually every
ounce ever mined from the earth is still above ground, either in a
vault or a safe or an earring. An estimated 170,000 metric tons sits
above ground, hoarded and unambiguously owned. Given that the annual
supply of mined gold is approximately 2,500 metric tons, how is it gold
not priced close to zero? After all, there is a 65 year overhang in
supply! Despite all that we know of supply and demand dynamics and
economic ‘law’, gold’s price is within striking distance of its’
all-time-high – in every currency on the planet.
Economists the world over can take comfort that the laws of supply and demand still largely rule the marketplace. However, we believe there is a noted exception for a yellow, largely useless metal.
A metal that just happens to have shaped the world’s monetary systems
for the last several thousand years. Gold’s “supply” traditionally
defined as global mining production is virtually meaningless in
determining its’ price. How can this be? Analysts pontificate that
global supply dynamics are integral in forecasting future metal prices.
We can only attribute this to the fact that these analysts still
myopically cling to the view of gold as a commodity.
A major contributing factor to gold’s price is that the vast
majority of the stock of physical gold is held in very strong hands.
It is largely held privately by very wealthy families or by governments
and their central banks. This gold lies very still, some of it not
changing owners or locations for decades, if not centuries. These giant
holders have little need to ever sell, holding gold as a long term store
of wealth or as a central banking reserve asset. Gold naturally appeals
to these super-savers because of gold’s history as the ultimate store
of value and lack of counterparty. Sure you can buy real estate, art, or
classic cars- and the extremely wealthy do. But beyond illiquidity and
subjective risk, these assets can become cost centers in themselves with
maintenance, storage, insurance, etc. Gold is universally recognized as
a wealth asset but is also infinitely divisible, portable, and highly
liquid. Gold’s value has been established over a millennia and is
ultimately the asset that denominates or values all others.
