Gold, Math, and Investments

After reading several different pages (because if its on the internet it must be true), the general consensus is that a total of about 160,000 tonnes of gold has been mined from the Earth throughout history, which if melted together would make a single cube with sides about 20.15 meters long, or 8,187 cubic meters total volume. Motivated by Dr. RosenRosen's comment in the previous post, I found an Olympic-sized swimming pool has a volume of about 2,500 cubic meters, so we are looking at 3.275 Olympic swimming pools full of gold in the world. That said, the gold held by the world's central banks is only about 30,000 tonnes (just over half of one swimming pool). To put India's purchase of 200 tonnes in context, they bought 0.666% of global bank gold reserves, or 0.125% of all gold ever mined. But the irony is in where that gold may be located. New York City:

... five stories down into the solid bedrock underneath the New York Fed, 30 feet below the level of the New York subway system and 50 feet below sea level.

There the New York Fed has a vault containing about $300 billion in gold bars.

It's the largest single gold hoard in the world. It holds more than Fort Knox. Almost all of it is held in custody for foreign governments -- very little of it is owned by the U.S. government, and none of it by individuals.

More math, but if my numbers are right, this vault holds over 12,400 tonnes of Gold, or over 40% of global bank gold reserves. Here is the rub, if the US Dollar did fall off a cliff, wouldn't the Fed be a little hesitant to ship off this gold it is holding for everyone? Hmmm... Why does all of this matter?

The longer the Fed keeps interest rates at zero, the more worthless paper money becomes. That creates the impression that gold is more valuable -- in fact, this week it hit all-time highs at almost $1,100 per ounce as the Fed announced the indefinite continuation of its zero-rate policy. But that's not gold becoming more valuable. That's the paper money in which the price of gold is denominated becoming less valuable.

In other words, gold is the constant. Its value doesn't change. Its dollar price changes, but not its value. So when investors come to me and ask me how they can hedge against the falling value of the dollar, I always tell them to buy gold.

I am not the world's biggest gold bug, but as a half-libertarian, I can be considered a half-gold bug. Yes, it sounds crazy, after all it is just a shiny metal, but it is a shiny metal that has remained valuable throughout history, regardless of the rise and fall of empires.

I don't know if the Luskin's predictions are correct. As far as predictions from the crazy libertarians/contrarians, I have read everything from another stock market slump with DOW @ - 6,400 on one end to Gold @ + $2,300. We could theoretically see both (although probably not at the same time) if the economy experiences a series of crises. Even then, the problem comes in predicting the timing and sequence of events.

All to say that gold can be part of a fully diversified and conservative investment approach. Such a portfolio will never have the highest rate of return possible, but it doesn't rely on "sure bets", and can limit downside risk.