Gold Valuation - Total Value of Above Ground Gold vs World GDP
FAQ
1. Why is gold compared to World GDP a measure of gold valuation?
Since gold has been used as a currency, it makes sense to compare its value to all the transactions that take place in an economy in a year, which GDP provides one measure of.
2. What is the point of going back to 1900?
In the late 1800s and early 1900s, much of Europe and the United States were on gold standards. That period would serve as a benchmark for the value of gold if the world returned to a gold standard.
3. What is a gold standard?
A gold standard is when a country's currency is measured in terms of gold. A country will typically hold gold. A country will then be willing to buy and sell gold in exchange for its currency at a fixed price.
4. Why was the gold standard abandoned?
There was a massive deflation in the early 1930s that led to significant unemployment throughout the 1930s until World War II. The thinking is that the gold standard in the US prevented the Federal Reserve from stimulating enough during the 1930s. The countries that devalued their currencies relative to gold in the 1930s tended to rebound quicker. That is evidence that policy was too tight in the 1930s. By the 1970s, the price level had risen substantially in the US, but the price of gold in dollars was unchanged since the 1930s. This gap in pricing allowed other foreign governments (US citizens were banned from holding gold from 1933 until 1975) to exchange dollars for gold at extremely favorable prices. Instead of adjusting the price of gold higher, the US abandoned the gold standard entirely.
5. Will we ever get back on the gold standard?
When the colonies started the American Revolutionary War with Great Britain, they issued the Continental currency. Within a few years is lost 99% of its value. When the United States was formed, it then required all money to be backed by gold and silver. So currencies have gone without gold backing before. Currencies have been depreciated into worthlessness before. People have lost faith in currencies before. So we can't rule out similar things happening in the future, but we can't rule out a currency being trusted for a while, either. So it is about keeping an eye on what is happening and trying to pick up any warning signs.
6. Hasn't the dollar already lost a lot of value?
Sure, it has. In terms of dollars, from 1900 to 1967, gold went from $20.67 to $35 an ounce. Since 1967 gold has gone to over $1700 an ounce. It didn't even double after 67 years, and since then, it has gone up over 40x. However, on a year-to-year basis it hasn't been losing value, in terms of inflation, anything like past hyperinflationary periods. So year to year, it has been tolerable enough for most of the people in the United States that it hasn't created the political will for change.
7. Why hasn't measured inflation, such as the CPI, been even worse?
This is a good question, maybe the question of our time. One thing that has happened since 1980 is the rise of countries like China. China likely has contributed to price pressure for inputs, such as commodities. However, for finished goods, the massive influx of cheap labor may have been keeping inflation down in the developed world. However, once Chinese wages become more in line with the most developed countries, the deflationary pressure it brings may likely come to an end. That is when I would expect sustained inflationary pressure to emerge.
Bitcoin Valuation - Total Value Relative to World GDP
April 27, 2021 - Bitcoin, Gold, Valuation
FAQ
1. What is valuation?
Valuation gives some benchmark to know whether an asset is undervalued, fairly valued, or overvalued.
2. Why use gold as a benchmark?
For Bitcoin to have value, it needs to be used as a currency. Gold is a commodity that has been used as a currency in the past. Central banks still hold gold as a form of reserves. The amount of gold relative to world GDP serves as one benchmark for the value bitcoin needs to have to be used as a currency for the world.
3. We used gold as a currency?
On August 15, 1971, the US stopped being willing to convert dollars to gold. Before that, the US had a Gold Standard, where the US dollar was backed by gold. If the US printed too much money, dollars could be converted to gold at a fixed price. In 1971 that price was $35. Gold in recent years has traded above $1000.
4. What if Bitcoin isn't adopted throughout the entire world?
To the extent Bitcoin becomes a niche currency, it should be expected to attain some fraction of the target gold valuation. Currently, it is priced at about 10% of gold's valuation. That could translate to 10% of the currency used worldwide.
5. What if gold is undervalued as a potential worldwide benchmark?
Gold's undervaluation would mean bitcoin's potential is even greater.
6. What about silver and other cryptocurrencies?
Silver has been used as a currency in the past. Silver has also been used with gold in various forms of bimetallism in the 1800s in the United States. So it is conceivable other cryptocurrencies could be used in conjunction with bitcoin. An expanded analysis that includes silver and other cryptocurrencies has some merit.
7. Will bitcoin become a major currency?
Seemingly unusual things have been used as currency in the past. Salt was used as a currency in China. Cowry shells are still used as currency on the Papua New Guinea island of East New Britain.
Currencies come and go throughout history. The fiat Continental Congress currency used during the American Revolutionary War fell by 99% within a few years and was replaced with the US dollar. It was one reason the US dollar was backed by gold in the first place.
So the limited amount of Bitcoin combined with people being interested in using it as a currency means it could have a role as a currency. As far as becoming a major currency, it is hard to imagine the world transacting in bitcoin overnight.
In time, it may evolve into a major currency. There could be tremendous volatility along the way, as there has been in the past. If it becomes a major currency, it has a huge upside, but if it is abandoned in the future in favor of something else, it could become essentially worthless.