Gold or gold？ The gold price must prove that ＂the annual increase of 1.7% still exists＂ and the long-term fundamental supply and demand are challenged.

　　Whether the safe-haven value of gold still exists or not has become a hot topic of concern to many market investors. From a fundamental point of view, the price of gold must prove that the annual increase of 1.7% still exists, but the long-term fundamental supply and demand are being questioned and challenged.

　　Chimp Investor columnist Peter Elston mentioned that he considered what he could learn from the long-term price trend of gold, the so-called technicality. The final conclusion is that although the inflation-adjusted return of gold may still be poor in absolute value in the short term, it may still be better than that of stocks, bonds and cash, especially if the inflation rate remains high in the next few years.

　　He also suggested that in the past 50 years, the inflation-adjusted annual appreciation trend of gold price should remain unchanged at 1.7%, because the growth rate of global real wealth may continue to exceed this value. However, this is too simplistic and assumes that the fundamental reason for buying gold will not change much, which should be challenged.

　　This article focuses on the root cause of gold’s popularity, its supply dynamics, and its fundamentals, to see if they still prove that the above historical trend, the actual price increase of 1.7% per year still exists.

　　Gold is an iron-loving element, which means that it is heavy, easy to dissolve in iron, and doesn’t like to combine with oxygen. The oxide of gold is actually thermodynamically unstable. Therefore, its concentration is higher in the deep core and mantle than in the crust. Compared with the very low occurrence rate of the whole crust, the exploitable gold deposits are even rarer. In addition, the mineable deposits have now been exhausted, so that the annual output of gold has been flat since 2016. In the absence of major changes in mining technology and/or a drop in energy prices, this slowdown in annual output may continue.

　　The chemical inertness of gold makes it very suitable for jewelry, electronic products, dentistry, aerospace and value storage as gold bars and coins. The World Gold Council estimates that by the end of 2021, 205,238 tons of gold have been discovered/mined in the past 6,000 years, and the proven unexploited reserves total 53,000 tons, the latter figure is lower than 54,000 tons in 2019. It is also estimated that there are 15,000 tons of gold dissolved in the world’s oceans, equivalent to about 10 parts per trillion.

　　It is the inertia and rarity of gold that endows it with intrinsic value, that is, its practicality and practicality. Warren Buffett once wrote a famous saying that gold is dug out of the ground in Africa or somewhere, and then we melt it, dig a hole, bury it, and then pay people to stand around and guard it. It is not practical, and anyone who watches it from Mars will be puzzled.

　　But Elston doubts that Buffett will shine in the short term, but he will surely see that many people have done so for thousands of years and will almost certainly continue to do so. Besides, if he has a mobile phone or a tooth filling, he may benefit from the utility of gold to a greater extent than he is willing to mention.

　　As for the use breakdown of 205,238 tons of above-ground inventory, jewelry accounts for 46%, privately owned gold bars, coins and ETFs account for 22%, the central bank accounts for 17%, and other uses such as electronics, dentistry and aerospace account for 15%. It is estimated that as much as 80% of the newly mined or recycled gold is used for jewelry manufacturing.

　　Looking forward to the future of gold, it needs to be clear that Elston is not interested in the factors that may affect the short-term price performance of gold. They are essentially emotional-driven and unpredictable. In addition, compared with the long-term possible percentage change, the short-term performance is insignificant.

　　In other words, the really important factors are those related to basic supply and demand. They will determine the long-term performance of inflation-adjusted gold prices. For example, whether it will increase by 300% or decrease by 75% in the next decade. In his view, this is exactly what the market should pay attention to, not whether the nominal price of the US dollar will fall below $1,500 in the next few weeks.

　　As mentioned above, the annual gold production has been declining and has been flat since 2016. Environmental problems limit the potential of new discoveries. The progress of mining technology is related to the use of unmanned aerial vehicles, virtual reality, self-driving cars and blasting optimization. They didn’t, in fact, solve the basic law in a meaningful way, that is, the deeper you want to dig, the more energy you need.

　　Although 75% of the annual gold demand is met by mining gold supply, the shortage is made up by recycling, mainly jewelry. In the short term, the supply of recycled gold is sensitive to the price of gold. In addition, the dynamics behind the basic supply of recycled gold are unlikely to change significantly.

　　About 6000 years ago, the first known use of gold was as decorative beads. It is hard to see how this established popularity will fundamentally change. According to the data of the World Bank, since 1971, the real GDP of the world has increased by 3.1% every year, while the appreciation trend of the real gold price in the same period is 1.7% every year. Generally speaking, in the past 50 years, the world’s real GDP has increased by 360%, which is 130% higher than the real gold price. In other words, the rise of gold prices in the past 50 years has been supported, proved and explained by the growth of global wealth.

　　In recent years, the net purchase of gold by central banks has been quite stable, with an average of about 500 tons per year. The use of gold, whether as jewelry or as a means of value storage, is inseparable from its chemical characteristics. Therefore, it seems unlikely that central banks will lose interest in holding physical gold in their vaults in the near future or even the distant future. Net purchases may vary from quarter to quarter, sometimes very different, but the long-term trend seems to have been established.

　　The demand for private investment in gold is probably the most interesting of the four main sources. Its utility as a private value store is similar to that of the central bank, that is, it is related to its chemical properties. However, economies of scale make it expensive and/or risky for private individuals to store gold at home, so most people hold gold in paper form, that is, certificates and ETFs. Proponents of cryptocurrency have seized this obvious inefficiency, claiming that things like bitcoin should be regarded as digital gold, thus invalidating the current utility of gold as a private sector value store.

　　The use of gold as jewelry and storage of private and public values is inseparable from its chemical characteristics, in other words, the demand for gold bars goes hand in hand with the demand for jewelry. Bitcoin and other cryptocurrencies don’t have such basic attributes, and they never will. A USB flash drive storing encrypted access codes is unlikely to be worn as jewelry. Unless, of course, they are made of gold.

　　Elston said that the most interesting reason for the demand for private investment is that in difficult economic times, gold may be sold to buy more necessities, thus putting downward pressure on prices. However, in the severe economic difficulties, due to high inflation, people lose confidence in legal paper money, and the demand for it as a means of value storage will increase.

　　He is not sure whether he wants to live in a world where gold has replaced paper money as the main currency, but this does not mean that economic difficulties will continue but increase gradually in the long run. For example, global temperature rise, war, famine and epidemic diseases will not lead to the appreciation of gold prices.

　　Describe the various ways of gold, namely, value storage, inflation hedging, safe haven and investment. As should be clear, value storage is something that actually keeps its value. Gold has always been a means of value storage, and its inflation-adjusted price has shown an upward trend in the past 50 years. However, if you bought gold in 1981, you are actually still underwater. In other words, the actual decline of gold may exist and has existed for a specific period of several decades.

　　The reputation of gold as an inflation hedge tool was established in 1970s, 1980s and 1990s, but the relationship has not been obvious since then. It is true that in naughty times, when inflation fell, the real price of gold rose by more than 400%. Therefore, Elston is not sure whether the argument that gold is an inflation hedging tool is valid, except in severe economic difficulties, such as the use of hyperinflation in Germany.

　　Is gold a safe haven, that is, defensive? In other words, when risky assets such as stocks and high-yield bonds perform poorly, does it perform well? Similarly, there is no real evidence that this is indeed the case. It has not performed well this year, which is a period of poor performance of risky assets.

　　Finally, Elston never considered physical gold as an investment. This is because physical gold is different from stocks, bonds or property, and the former does not actually generate income. It is more similar to cash, and the portfolio allocation of physical gold should be regarded as a cash substitute. He finally stressed that this does not mean that high cash distribution is appropriate, and gold should be more popular as cash than legal tender.