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Friday November 10th, 2023 - Issue # 54
(Any views expressed below are the personal views of the author and should not form the basis for making investment decisions, nor be construed as a recommendation or advice to engage in investment transactions.)
“The utility, or intrinsic value of gold as a commodity is now considerably less than in the past; its monetary status has become extraordinarily ambiguous; and its future is highly uncertain.” - Benjamin Graham
Last week, I referenced a chart of certain characteristics that make good money. The topic I covered in Fool’s Gold was verification — how easy, or hard is it to tell whether gold is real. This week, I’m straying away from the chart a bit based on a few comments I received off the back of that article that essentially implied a difference in utility—gold’s physical applications versus Bitcoin’s digital nature—which might be a crucial factor in assessing their relative merits or roles as assets. The commenters invited thoughts on whether this aspect of utility significantly distinguishes gold from Bitcoin, particularly in terms of investment or valuation.
They noted that gold has tangible, practical applications beyond being a store of value or a medium for transferring value. Specifically, they mention gold's use in electronics, including electroplating chemicals, gold bonding wire, sputter targets, hybrid inks, solders, and especially as an electroplated coating on connectors and contacts. These uses demonstrate gold's physical utility in various industries, which is a dimension that Bitcoin, being a purely digital asset, does not possess.
Let’s see what I can do with this.
Actually, the electronics thing is tiny relative to the entire physical gold market. Admittedly, I was surprised to learn that the gold jewellery market is as big as ChatGPT says it is...
***By the way…I do not use ChatGPT to construct these articles, op-ed’s or whatever you want to call them. But, GPT-4 is pretty slick for real time information. It’s (hopefully) like an unbiased Wikipedia.***
Q: How much of gold's market cap is used for things like jewellery and electronics?
A: The jewelry industry accounts for a significant portion of global gold demand, with estimates for 2022 indicating that 46.6% of gold demand was for jewelry, which amounted to about 2,192 metric tons. In terms of market capitalization, the value of gold is currently around $12.978 trillion, calculated by multiplying the current gold price with the world's above-ground gold reserves.
For the electronics industry, approximately 7-10% of global gold demand is attributed to it. The electronics sector also makes up about 80% of gold used in technology. However, in 2022, gold used for technology purposes accounted for 6.6% of the global gold demand.
To provide a rough dollar estimate of how much gold's market cap is used in jewelry and electronics, we can do a simple calculation using the percentage shares of global demand and the estimated market cap of gold:
For jewelry (using the midpoint of 46.6%): 0.466×12.9780.466×12.978 trillion = approximately $6.05 trillion.
For electronics (using the average of 8.5%): 0.085×12.9780.085×12.978 trillion = approximately $1.10 trillion.
These calculations offer a rough estimate based on the given percentages and the current estimated market cap of gold.
So, this is all pretty bullish for gold, if I’m honest. But, check this out…
Q: How big is the paper gold market compared to physical gold?
A: The paper gold market is significantly larger than the physical gold market. Paper gold includes contracts and derivatives backed by gold but not necessarily redeemable for physical gold. In 2019, the global exchanges traded about $9.8 trillion worth of paper gold, which was 233 times the amount of physical gold purchased. Daily, there are estimates of 5,500 tonnes of paper gold traded, particularly in London, which is a major market for such trades.
The ratio of traded paper gold to physical gold is estimated to be between 200 to 250 to 1. Additionally, it's stated that there are around 109 ounces of paper gold contracts traded for every ounce of physical production, underlining the substantial difference between paper and physical markets.
This disparity indicates that the paper gold market is not only larger but also suggests significant leverage over physical gold, due to the volume of gold that is traded in paper form compared to the actual physical gold available.
Remember this scene from The Big Short?
As Mark Baum (Steve Carell) said after he realized how absurd this all is “I actually feel pretty sick.”
The shiny rock meant to hedge the most sophisticated, gargantuan investment portfolios is as crooked as Hillary Clinton *cough* I mean… *cough* as the mortgage fraud that led to oversized bets on the stability of the housing market, which were then packaged into risky securities that traders could gamble on.
***By the way x2 — here’s what the above ^ would look like if ran through ChatGPT***
The esteemed precious metal, traditionally employed to safeguard even the most expansive and intricate investment portfolios, is mired in complexities akin to the excessive speculation on housing market stability. This speculation led to the bundling of precarious loans into securities that became the subject of high-stakes trading.
Way too many big words. Not me.
I know, it’s really hard to come to grips with the fact that you were right and wrong at the same time. Gold’s intrinsic value is 32.6% real gold chains, rings and trinkets spread across the developing world and adorned for its shiny qualities stemming from Babylonian, outdated, and slowly depreciating pretences.
That was perhaps way too harsh, but it’s all in good fun.
The point I’m trying to make in this series of letters is that the case for investing in Bitcoin is far superior to gold in nearly every way. Gold absolutely has the upper hand on Bitcoin in that you can wear it to look cool, fancy and important, but the market is grossly messy and filled with fraud and manipulation. Just like seemingly everything in this world, it is bloated, controlled, and ripe for disruption. The only other upperhand gold has on Bitcoin is that it’s been around for millennia (track record). Perfect, I found a way to kill 2 birds with 1 stone here and cover off the track record characteristic, which can be done with one simple example:
Like gold, the history of physical mail spans thousands of years, with its origins tracing back to ancient civilizations. Then email was introduced to the business world in the 80’s which like any new disruptive superior technology, was initially met with resistance by the general public as they like what the know. Superior technology always wins eventually, so after a decade or so, email became widely adopted in the 90s with the advent of the personal computer. Within a few decades, technology erased a multi-thousand year track record because it allowed for mail to be delivered and received at the speed of light, without intermediaries making it safer, and more affordable among other key aspects. Sound familiar? When’s the last time you sent a letter?
Before email, this guy was running from kingdom to kingdom delivering mail.
Before Bitcoin, there was gold.