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Why the U.S. Doesn’t Get Gold
According to the IMF, in 2012 Vietnam had the 57th largest economy in the world with a nominal GDP of $156bn. To put that in perspective, that is 0.96% the size of the US economy. On a per capita GDP basis, perhaps the best measurement of income, Vietnam ranked 134th out of 187 countries at $3,788 – versus $51,704 in the US, which ranked 6th.
In 2012, Thailand had nominal GDP of $366bn making it the 33rd largest economy in the world and 2.2% of the US. GDP per capita was $9,503 or 92nd highest globally, which is still obviously well behind the US but on par with China – the world’s second largest economy.
However, there is one area where both Vietnam and Thailand outpace the US by a wide margin, both nominally and per capita: gold bar and coin demand. According to the World Gold Council, US demand for gold bars and coins totaled 53.4 tons in 2012. 53.4 tons was 81.4% of the demand from Vietnam (65.6 tons) and only 68.4% of Thai demand (78.1 tons). Looking at total per capita consumer demand (gold bars, coin, AND jewelry), the numbers are even more eye-opening with Vietnamese demand 1.67x larger than the US and 2.38x larger in Thailand – even though all three pale in comparison to the hard-money purists in Switzerland (chart below).
The chart above shows that the US is actually slightly above the world average (.0157 oz. per capita vs. .0142 oz. globally), and higher than Indonesia – a growth market for gold. However, if you look at gold demand as a percentage of income, the US isn’t even close. Consumer gold demand per GDP clearly shows that Vietnam and India are in a league of their own. The global average for demand as a percent of income is more than 4x that of the US. Not surprisingly, the US is joined on the lower end of the spectrum by other G7 countries like Japan, Italy, France, and the UK (chart below).
The obvious rebuttal to this argument would be that this data doesn’t include products like ETFs, futures, or official reserves which would clearly boost the US up on these rankings. We would argue that this this does not truly reflect the demand from “strong hands” in the marketplace. Official reserves are more about sovereign balance sheet composition, and the bulk of exposure through ETFs or futures is funded with leverage which makes it prone to trading (weak hands) and therefore not a good store of wealth.
That physical gold demand in the US lags that of China or India is hardly a new development, although the divergence has been especially extreme this year. But when countries like Vietnam and Thailand start outpacing the US on a nominal basis it’s clear that there is a stark difference in philosophy. By almost every metric Americans are better off than most ASEAN citizens, which begs the question: do Americans know something that these ASEAN countries don’t or is it simply a difference of perspective?
This year is the 80th anniversary of Executive Order 6102, signed on April 5, 1933 by President Franklin D. Roosevelt which required all persons to deliver all gold coins, bullion, and certificates owned by them to the Federal Reserve, in exchange for $20.67 per ounce. Violation of the order was punishable by a fine up to $10,000 (more than $180,000 today) or up to ten years in prison. Most citizens with large gold holdings had them transferred to countries like Switzerland in order to avoid prosecution.
By this point, prohibition had been overturned, making it legal to walk around in public with liquor but illegal to carry gold bullion. Later on in 1934, the US government profited handsomely when the price of gold was raised to $35/oz. This price remained in effect until 1971 when President Richard Nixon announced that the US would no longer convert dollars to gold at a fixed value, thus abandoning the gold standard – even though ownership was still banned.
Finally in 1974, President Gerald Ford signed a bill to “permit United States citizens to purchase, hold, sell, or otherwise deal with gold in the United States or abroad” and the 41-year saga was over but the legacy was lasting. Those were 41 very important years in American history, and multiple generations did not understand the value of storing wealth in gold simply because it wasn’t an option.
In addition to history, a lot of important monetary principles were developed over that time period. Modern portfolio theory, which attempts to maximize expected returns for a given amount of risk, was developed between the 1950’s and early 1970’s. You could also make the case that Warren Buffett doesn’t like gold simply because he doesn’t understand it. Buffett was schooled in the early 1950’s by legendary “value investor” Benjamin Graham who put an emphasis on cash flows. Not only does gold not have any cash flows (although it has a sustainable competitive advantage – something Buffett does look for) but it was illegal to own at the time. Perhaps Buffett would have a better feel for gold’s intangible value if owning it had been an option during his formative years?
Gold (orange) – Berkshire Hathaway (A-class); both normalized to 100 on January 1, 2000
Following the break of the gold-standard, the rest of the 1970’s turned out to be a fairly tumultuous period in American history. And by the time 1980 rolled around, inflation was around 15% Y/Y and gold was at its inflation-adjusted all-time high above $2,000/oz. So while the country was gripped with fear over soaring oil prices, the Iranian hostage crisis, and the imminent Cold War, gold was in its halcyon days. However, quickly after assuming the head of the Federal Reserve, Paul Volcker immediately stamped out inflation by raising interest rates to above 20% which yanked the carpet out from underneath gold.
When Volcker concluded that inflation had been sufficiently defeated in 1981, he started cutting interest rates which would mark the beginning of the bull market in US treasuries that continues to this day. Since the early 80’s, all US financial crises have been at least partially deflationary in nature. In deflation, the real interest rate on bonds rises and increases their attractiveness in the process. Meaning that for the past 32 years, investors have been rewarded for buying bonds, especially during recessions or market panic, leaving them little incentive to seek out gold as a safe haven for their savings.
US 10-Year Treasury Yield
The point of this piece is not to show that with interest rates stuck at the zero-bound, the bull market in bonds has little upside from here – although that is likely true. The point is to show that for roughly 6 (1974-1980) out of the past 80 years, Americans have had little ability or incentive to own gold. In the same way that soccer is a gigantic global sport that never really took hold in the US, gold is still really a niche vehicle for most US investors.
That is not the case for people in Vietnam. Having lived through over a century of wars and occupation, the Vietnamese have learned how to protect their savings. In fact, their ability to operate under an unofficial gold standard, where gold is the preferred form of payment, has frustrated the government to such an extent that they have taken steps to restrict gold denominated transactions. And even aside from their grim economic history, it still makes complete sense for Vietnamese citizens to hold savings in gold because the US Dollar (USD) has appreciated over 32% against their currency, the Dong (VND), since 2008 and nearly 95% since 1993. Vietnam has had two Y/Y inflationary peaks greater than 20% since 2008. This is clearly not an environment where wealth stored in financial assets does well, and the Vietnamese understand that. Hence their affinity for gold.
Vietnam CPI Y/Y
Thailand has a similar history of economic turbulence. Following World War II, where the Thai allied with Japan, their economy suffered when they had to supply 1.5mn tons to Western countries without charge as reparations. That was followed by a military coup in 1947 and turmoil continued until 1950 when the US stepped in with economic support. The 1970-80’s were just as tumultuous with high inflation, soaring oil prices, limited foreign investment, and multiple currency devaluations. And finally, Thailand was at the forefront of the Asian Currency Crisis during the 1990’s when the Thai Baht (THB) lost over half of its value vs. USD in a matter of months. All of these events taught the Thai people a valuable lesson about storing their wealth in hard assets – especially gold.
Thailand and Vietnam are just two examples chosen at random. The story is similar across great swaths of the globe, especially the emerging and frontier markets. China and India now account for over 50% of total consumer gold demand, which is staggering when you consider how poor their population is relative to the developed world. This is an important theme to understand because these are the investors whose wealth will be growing fastest in the coming years.
To say that Americans are naïve for not owning gold is unfair. US investors have many more options for their savings relative to citizens of China, India, Vietnam, Thailand, etc. For example, property rights in a lot of those countries are limited and the domestic equity/bond markets are typically illiquid – for a lot of them gold is their only choice. Americans on the other hand can easily put money into stocks, bonds, real estate, cars and other rare collectibles.
And while those storing their savings in gold have looked foolish the past two years, as prices underperform relative to other asset classes during a period of extremely low volatility, the Thai and Vietnamese people expect/know that volatility, unstable prices, devaluations, etc. will come again and that the key is to have a gold allocation before this happens. Since 1960, nearly 70% of the world’s market-based economies have had at least one year in which inflation ran at an annualized rate of 25% or higher. On average, those inflationary periods wiped out 53% of purchasing power. It would be irrational to think that the US is somehow immune from such a scenario.
These ASEAN countries are smart in the sense that they know inflation can change lives. They have seen the damages caused by profligate governments on a micro-scale, which is relevant on a macro-scale today. Americans, arguably for no fault of their own, just don’t understand gold and probably won’t until it’s too late.
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