My DeFi Journey: Tracking My Net Worth and Investments – #1
August 7, 2023
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October 11, 2023
Is gold an asset? The short answer is yes, but let’s unpack the real truth that no one actually tells you. There are of a lot of problems in the way that gold is bought by the typical consumer or investor. A lot of investors buy gold that is held in storage by a private firm, which is a big problem.
Most of these firms almost use fractional reserve banking like actual banks do with the USD. They tend to sell more gold than they actually have in reserve. Another issue is we have no real clue how much gold is undiscovered on the planet. South Africa produces about 500 metric tons of gold a year. There may be thousands of kilos of gold waiting to be unearthed, this would inflate the amount in circulation.
Another problem is the most of world’s gold consumption is either in jewelry and investments. Only about 10% is used in technology, which means there isn’t really that many use cases for it. So if you think about it, if an asset is only worth what the next person is willing to pay for it, is it an asset? If an asset is assumed to be scarce and there is no valid way to know how actually scarce it is, is it an asset? If an asset doesn’t produce or make anything is it an asset?
What Is Gold?
Gold (AU) is the 79th element on the periodic table and a precious metal that can conduct heat and electricity. It is also yellow, soft, and malleable, which is why you see so many gold plated objects including toilets.
| atomic number | 79 |
|---|---|
| atomic weight | 196.96657 |
| melting point | 1,063 °C (1,945 °F) |
| boiling point | 2,966 °C (5,371 °F) |
| specific gravity | 19.3 at 20 °C (68 °F) |
| oxidation states | +1, +3 |
| electron configuration | [Xe]4f145d106s1 |
Gold’s Recent History
Gold has been used for thousands of years and in the last hundred years used as a hedge against inflation and a store of value. Truthfully though during high inflationary periods gold investors have seen mixed results. Sometimes gold goes up other times it doesn’t move at all.
Below is a chart of gold’s price per ounce in the last 20 years. So if you bought gold in 2003 you would surely be in profit, but if you bought at the peak in 2011 you would have stayed relatively flat.
Now below is a picture of the S&P 500 index over the last 20+ years. You will notice it is pretty much a consistent uptrend. This would be pretty much betting on the best 500 companies in U.S the past 20 yrs. A thing to note is that there were periods where it was down as well, but it basically just went up.
Which begs the question, is the only real reason gold is considered an asset is because of inflationary monetary systems? Because if so wouldn’t a better asset have just been a good mutual fund index?
Gold’s Ancient History
Gold has been around pretty much forever. It was used on the tombs of Pharaohs and also as a form currency in ancient civilizations. Gold was also used as a form of decoration in ancient times by Egyptians and also the Aztec Empire. Gold throughout history has been seen as a symbol of wealth. Even pirates looted gold “Booty”, which is what we now think of when speaking of lost treasure.
For perspective, the mask of Tutankhamen, who died in 1323 BC, had about 100kg of gold in it. That mask in gold alone, would be worth 6.2 million dollars today. Eventually gold started being minted as coins and it was used as a form of currency or backing of currency until 1971, when we went off the gold standard.
People also used gold to make statues of their gods and deities. Society has used gold throughout history for just about everything. If you asked me would it be better to use rocks or gold as a store of value, the answer is obviously gold. The reasons being gold’s perceived scarcity and the ability to break it down into smaller parts. Also for new gold to be put into circulation, that would require mining and refining the gold.
No Passive Income
Another huge drawback on investing is gold is that it doesn’t generate passive income. Unlike stocks, bonds, real estate, or businesses, gold does not yield dividends, interest, or rental income. If you buy gold, you are solely relying on capital appreciation to make money. With capital appreciation you only profit if you sell gold to someone else at higher price than you bought it.
Stocks and real estate allow you to benefit from both capital appreciation and dividends. In times of financial turmoil or volatile markets, passive income can sometimes act as a shield from the downside. Being forced to sell your gold for a cheaper price in a bear market would suck. Owning a share of “O” realty income stock, by contrast could be down as well, but you would still get a sweet 6% dividend.
Storage and Security Concerns
Another big concern is storing your gold. Because if you don’t want to buy “fractional reserve” gold, or gold that you hope or assume is being stored by someone else, you have to store it yourself. That means you now have to go out and buy a safe or a deposit box, hopefully a good one. If you do a deposit box, you are now also adding a active yearly expense, which the gold will not likely appreciate enough to cover.
A safe is awesome because it is a one time expense, but you now have a safe you must worry about and protect. Hopefully you also live in an area without any frequent or recurring natural disasters, such as hurricanes, earthquakes, volcanos, etc. In the event you need to evacuate or move out of your house, you now must move your gold, which isn’t easy if its a lot of gold.
Lastly, it would probably make sense to check the authenticity and purity of your gold every so often. It would suck one day to find out your gold had either been swapped out or someone sold you fake gold from the beginning.
Opportunity Cost
Opportunity cost should be weighed when making any investment, but especially with gold. Every dollar you put into gold could have been allocated into other investments. There are other stocks, bonds, real estate, fine art, wine, businesses, etc., that you could be investing in. So while some people may say that gold is a safe haven, the upside is a lot smaller than tech stocks, crypto, etc. In my opinion, investing in the S&P 500 is just as safe with more upside potential.
Bitcoin vs Gold
Gold and bitcoin are often referred to as “store of value” assets. People are now actively debating which asset is better for the job. Gold is tangible and has been around for thousands of years, while bitcoin is only about 14 years old. The biggest difference to me is the fact you know there will only ever be 21 million bitcoin. While the total amount of gold on other hand is constantly inflating. The other big improvement with bitcoin is the fact it is easy to move bitcoin around anywhere on the planet.
Moving a million dollars worth of gold would require a lot of things, especially security. Gold’s advantage though is that the regulation on it is clear. While unlikely, Bitcoin could possibly be outlawed tomorrow. Other than that bitcoin is the superior asset.
Should I Buy Gold?
You should reach out to a licensed financial advisor to answer this question. I do not currently own any gold, because I don’t think its really worth it for the average investor. If your a bank with trillions in assets then diversification is great. In my opinion, the best case scenario for gold would be for the internet and all infrastructure to be destroyed, otherwise there really isn’t much use for it, other than jewelry. We have far superior assets and systems in the 21st century. Remember that land and houses can’t be duplicated :).
Disclaimer: The information provided in this blog series is for informational and educational purposes only. I am not a financial advisor, and the content presented here should not be construed as financial advice or recommendations for making investment decisions.