Proof Of Time: A Different Way To Think About Gold
February 3, 2023 Simon Black
Gold is really an amazing metal when you think about it. It doesn’t corrode. Coins buried underground or sunk at the bottom of the ocean for hundreds of years are routinely pulled up and brushed off, and they’re good as new. This strength and durability is precisely what makes gold so interesting as an inflation hedge.
It undoubtedly takes a lot of work to produce a gold coin or bar– so much labor, energy, technology, etc. A gold coin essentially represents all of the work… all of the effort and labor… that went into producing it.
This is not unique. In the same way, a bushel of wheat represents all the labor that went into producing the grain. An iPhone represents all the labor and effort that went into producing it. Except that wheat doesn’t last. iPhones don’t last. Gold does.
So gold essentially encapsulates all of the resources, including TIME, that went into producing it… in a way that lasts forever.
Right now, for example, it costs major mining companies about $1,270 to mine a single ounce of gold. So if you buy gold today, you’re essentially locking in a $1,270 production cost.
This is the reason that gold does such a great job of maintaining its value against inflation, because, over time, production costs tend to increase. And higher production costs eventually result in higher prices.
This is true with just about any product or industry. We’ve seen companies like Procter&Gamble, Unilever, CocaCola, McDonalds, etc. all increase prices because their production costs are rising.
Again, though, you cannot use a Big Mac as a store of value. It won’t last forever. It won’t even last a day.
But gold lasts. You can buy a Canadian Maple Leaf coin today, and, ten years from now, your 2023 coin will be worth exactly the same as a brand new coin minted in 2033.
And if you anticipate that inflation will push up production costs over the next decade (which tends to happen), you can easily make a case that gold prices will be higher by then.
This is the topic of our podcast episode today; we take a deeper look at why gold has long-term value– a variation of ‘proof of work’ that I call Proof of Time.
We start out in Yap Island, in Micronesia, and discuss how the natives there developed one of the most advanced financial systems in the history of the world based on the concept of ‘Proof of Work’.
Anthropologist William Furness wrote that, despite the Yapese having no understanding of economics, they realized that “labor is the true medium of exchange and the true standard of value.”
I believe this is true. But more than labor, I believe that TIME is real standard of value.
Time is the ultimate scarce resource. No one, no matter how rich or powerful, can create any more of it. And once it is used, it is gone forever. Labor is one of the ways that we use time. And gold is a rare asset that transmits both time and labor… forever.
We also talk about different BUY signals for gold. We talk about miners’ gross profits– and why it makes sense to think about buying when profits are low… or even when the price of gold falls below the price of production.
In a way that’s like buying a house for less than the cost of construction; it’s a SCREAMING deal and definitely worth considering.
Gold isn’t at that level right now. But it could be soon… and that’s why it’s worth understanding how to think about gold, and many other assets, through this lens of ‘time’.
You can listen to this week’s episode here.
To your freedom, Simon Black, Founder Sovereign Research & Advisory