Gold: Blowing up all banknotes, ushering in a historic cycle
Original Liu Xiaobo
Recently, the price of gold has been hitting new all-time highs.
Last night and this morning, gold in New York rushed to $2,448.8 an ounce and weakened at the end of the session, falling to $2,359.24.
There are signs that with the advent of great changes unseen in a century, gold is ushering in its golden age.
My judgment is that this round of rise is not a small cycle for gold, but a new long cycle.
The basic logic is:
It has been nearly 80 years since the end of World War II, and the existing international order has been maintained for nearly 80 years. Over the past 80 years, the international situation, especially the economic map of mankind, has undergone tremendous changes, and a number of emerging countries are rising, beginning to grasp a certain right to speak, and have the idea of "winning the long-term and looking at Shu". The old powers do not want to see these countries rise, let alone change their destiny.
Throughout the history of human development, it is a basic law that the international order needs to be redefined through fists every few decades or 100 years.
So we see that in recent years, the international order has been turbulent, Ukraine, Gaza and other places are in a state of war, near the Red Sea is a quasi-war state, and there are a batch of powder kegs "flashing yellow lights".
At such times, ordinary investors, institutions, and even countries have a hedging demand. It is against this backdrop that the gold price continues to reach new highs and will continue to do so.
The chart below shows how the 30 countries with the largest gold reserves have increased or decreased their holdings over the past 10 years.
It can be seen that Russia and China are the largest gold holders, both increasing their holdings of more than 1,000 tons of gold.
This is followed by Uzbekistan, India, Poland, Kazakhstan, Singapore, Thailand, Iraq, Brazil, Turkey, etc.
Among them, Russia is the most typical case, after it sent troops to Crimea in 2014, it has continuously adjusted the structure of foreign exchange reserves, sold US dollar assets, increased holdings of gold, euros, etc., and transferred foreign exchange reserves to Europe.
Even away from the United States, Russia's foreign exchange reserves in Europe have been frozen by about $300 billion since the outbreak of the war in Ukraine. This shows how wise it was to increase Russia's holdings of gold before.
China's increase in gold holdings in the past 10 years has approached Russia's, and it is estimated that it will be significantly exceeded in the future, because China's economy is larger, the scale of foreign exchange reserves is higher, and the demand for safe-haven is greater.
The countries that have increased their holdings of gold the most are either countries that do not have good relations with the United States, or countries that are at the crossroads of different camps, such as Poland, Singapore, and India.
However, India and China are a bit special, both have populations of more than 1.4 billion, and gold is very important in traditional culture, and ordinary people like to hold gold.
Previously, Chinese people were keen to buy houses, because houses have been the best rising asset in China for more than 20 years, and gold has been underperforming. In the future, the value of houses will be highly differentiated, and it will be difficult for houses in most third-, fourth- and fifth-tier cities to rise, coupled with the high risk of the stock market and the difficulty for retail investors to make money, so the demand for gold from Chinese people is rising.
China's central bank has been increasing its holdings of gold for the past year, and by a significant amount. Even so, the amount of gold purchased by China's central bank in 2023 is only a quarter of that of ordinary Chinese.
According to the statistics of the China Gold Association, the national gold consumption in 2023 will be 1,089.69 tons, including 706.48 tons of gold jewelry, a year-on-year increase of 7.97%, and 299.60 tons of gold bars and coins, a year-on-year increase of 15.70%.
It is generally estimated that the gold in the hands of ordinary Chinese people should be more than 11,000 tons. This figure may seem scary, but it is less than half of India's private gold ownership, which is around 25,000 tonnes.
If China's central bank increases its gold reserves to the level of the United States, and the Chinese people increase their gold holdings to the level of India, how far will global gold rise?
The safe-haven asset that can compete with gold is cryptocurrency. Bitcoin has also risen a lot in the past six months, and the total market capitalization of Bitcoin even exceeds the total market capitalization of silver.
Bitcoin is superior to gold in that it is easier to evade official regulation and is a powerful tool for money laundering and asset transfer.
The downside is that cryptocurrencies have a "back door", and the wealth is not really in your hands, and it may be hacked one day in the future, especially by quantum computing. For example, Ren Zhengfei once said in an interview that in front of quantum computers, digital currency may be worthless.
Therefore, any country with a little brains will not include cryptocurrencies in its foreign exchange reserves, and only small countries that are in a hurry to go to the hospital do so.
Both gold and bitcoin have a "deflationary" property, that is, their number naturally decreases, rather than increases.
Theoretically, both gold and bitcoin will be mined continuously. But because they are excellent safe-haven assets, wealthy people tend to keep them secret after they have been acquired and disappear with the person's death.
For example, when the Marquis of Hailun died, he took 120 kilograms of gold with him. As for bitcoins, the total number is currently about 19.8 million, but 3 million of them have been "sunk", either because the holder has passed away or the password has been forgotten, and these bitcoins are no longer in circulation.
In the future, gold and bitcoin will continue to deflation, which is the so-called "bad money drives out good money" law.
The natural deflationary nature is an important reason for gold to retain its value.
Looking back at human history, gold may not have performed well in a short period of a few years or more than a decade, but if you look at it over a "long period" of several decades, it can beat all hard currencies.
Let's take a look at the relationship between the British pound, the dollar, Japan, the ruble and gold.
The British pound is the oldest currency still in use today. It was officially adopted on the gold standard in 1821 and contained 7.32238 grams of pure gold per 1 pound.
So today, that is, after 203, what is the gold content of 1 pound? According to 2400 US dollars per ounce, 1 gold ounce is equal to 31.1 grams, and 1 US dollar is worth 0.8031 pounds, the gold content of 1 pound is 0.016134 grams of gold.
In other words, the purchasing power of 1 pound in front of gold has evaporated by 99.8% over the past 200 years, leaving 0.2%!
If your ancestors bought 7.32238 grams of gold for £1 in 1821, it would be worth £453 today, a 452-fold increase in 200 years!
Look at the dollar again.
Over the past 100 years, the United States has adopted the gold standard several times. For example, around 1914, it was stipulated that the gold content of 1 US dollar was 1.50466 grams. After World War II, with the establishment of the Bretton Woods system, the US dollar became a global currency, and on December 18, 1946, the International Monetary Fund officially announced that the US dollar had a gold content of 0.88867 grams.
Later, due to the need to be the world's policeman and constantly printing money, the dollar was finally forced to decouple from gold. Based on the current purchase of 1 ounce of gold at $2,400, the gold content of 1 dollar is reduced to 0.01296 grams.
From 1914 to today, the gold content of the dollar has evaporated by 99.14% in 110 years.
If your ancestors bought 1.50466 grams of gold for $1 in 1914, it is worth $116 today. In 110 years, it has risen 115 times.
Look at the yen again.
The currency of the defeated country is more tragic.
In 1871, the yen was born. At that time, the official rule was that 1 yen was equal to 1.5 grams of gold. In 1897, Japan adopted the gold standard for the second time, when the yen depreciated by half against gold, and the official rule was that 1 yen was equal to 0.75 grams of gold and 1 dollar was equal to 2.005 yen. This exchange relationship lasted for more than 20 years, until 1917.
After World War I, the Great Kanto Earthquake, and World War II, the yen depreciated rapidly. By July 1948, 270 yen could be exchanged for 1 dollar.
If the latest 153 yen to 1 dollar is calculated, the gold content of 1 yen is almost negligible.
In order to let everyone understand, let's change the algorithm: suppose the ancestors of a family bought 1.5 grams of gold for 1 yen in 1871, and the value of these gold is 17,710 yen today, and in 153 years, gold has appreciated 17,700 times against the yen!
If you look at the ruble again, it will be even more interesting.
In 1897, it was officially stipulated that 1 ruble was equal to 0.774234 grams of alloy.
Today, 1 dollar is equal to 93.3 rubles, and we can calculate that the latest price of gold is 7220 rubles per gram.
But today's ruble and the ruble of 1897 are separated by six currency reforms. In chronological order, the six currency reforms were deleted in 1921 by 4 zeros, in 1922 by 2 zeros, in 1924 by 4.5 zeros (1 ruble was exchanged for 50,000 rubles), in 1947 by 1 zero, in 1961 by 1 zero, and in 1998 by 3 zeros.
If your family held 5,000 trillion rubles in 1897 (which could buy 20,000 times the amount of gold ever mined by mankind) in cash, it was converted into new currency after each currency reform, and today it is 1 ruble.
How much gold has appreciated against the ruble over the past 100 years, I don't know.
At the time of the currency reform in 1961, the Soviet Union officially stipulated that the gold content of 1 ruble was 0.987412 grams, which was easier to calculate.
1 ruble now is equal to 1000 rubles at that time. If your ancestors bought gold for 1000 rubles in 1961, you could buy 987.412 grams. If he had been holding banknotes and exchanging them for new ones, now only 1 ruble remained.
987.412 grams of gold, which in today's rubles is 7.13 million rubles. In 63 years, gold has appreciated 7.13 million times relative to the ruble! Of course, this in turn shows that the ruble has depreciated rapidly.
In short, the longer the time, the more valuable gold becomes. There is no currency that can outperform gold over a long period of time. Unless, in the future, humanity cracks the secret of low-cost synthetic gold. When that day will come, no one can predict.