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I have gold in my long-term investment portfolio and I am worried about sudden over-supplies of gold. If a City of Gold (e.g. El Dorado) or the Nazi gold train is discovered in the future, how can I reliably estimate the effect on gold prices? How can I protect my portfolio against a free-fall in gold prices caused by the sudden realization that worldwide gold reserves are much larger than previously thought?

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  • Invest in silver. I would vote to close this question as it show zero research and the assumptions are just silly. – SZCZERZO KŁY Aug 24 '20 at 7:30
  • @SZCZERZOKŁY Which assumptions are silly? What do you mean by zero research? I couldn't find an answer through web searches. – Thomas Gold Aug 24 '20 at 9:02
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    A) sudden appearance of mythical source of gold that wait in bars b) Really? In February 22 India announced they found 3000 tons of gold. That didn't affect price of gold in the slightest. Web search means "looking at price of gold" – SZCZERZO KŁY Aug 24 '20 at 9:04
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To make a reasonable answer to your specific questions,

A) The ElDorado idea is silly

B) There's about 30,000 tonnes of gold bullion. (FYI see the discussion on this specific figure, it may be bigger.) From time to time, a few 100 or even 1000 tonnes is discovered; as you would expect there is no effect. The urban-legend "Nazi gold" is a couple of hundred tonnes. So even if it was real and not a story, it's nothing. Miners dig up that much gold all the time, it's a non-issue.

C) Note that demand for gold swings wildly all the time. If you are worried about a (tiny) increase in supply, that is not rational, since demand swings tremendously.

D) You don't really "invest" in gold. You take a position if, on the time scale of let's say, 5 to 10 years, you believe the price of gold is about to shoot up.

Essentially it's a "political-economic" trade or position.

If you think the world's going to enter a period of perhaps unrest, hyperinflation, war, or other trouble with government currencies, you take a big position in gold and hope that, indeed, it is one of the many times when gold skyrockets in price.

So it's not really an investment, it's a "hedge", a "swing trade" or a "long-term position".

(It's rather like trying to guess about real estate. You may think something like "over the next ten years, this city will boom" or "because of the aging population, this state will boom" or "Eastern Europe is surely the next Riviera .." It's very much a "5 to 10 year" type of thing.)

{Some people say you should keep a small amount of your folio in gold - let's say a few percent, maybe 5% - as a kind of hedge against economic unrest, hyperinflation, or the like. I think this is completely stupid. Say your overall wealth is $1m, and you set aside $20,000 against the zombie apocalypse. So, there's a war or the like. Your million completely disappears. Your $20,000 shoots up ...... to a whole $60,000. Yay. It's kind of a pointless strategy.}

Just one general point if you're thinking of buying some gold. As of writing (2020) I'd just completely forget it, for the very simple reason that the price just shot up for the last couple years.

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It would be completely pointless buying after such a runup, unless, you are a totally dedicated full-time trader with specific ideas and vast intimate day to day knowledge of the market.

I'd just completely forget about it for 5 or 10 years, and then look in again. Fooling with gold is rather like having a wine cellar, from time to time you just have to forget about stuff in there for the odd 10 years.

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  • A nice answer, but may I ask where you got 30,000 tons of existing gold? The last I looked at articles from one of the gold councils, I thought they were 6,000,000,000 ounces of above ground gold in the world this would be over 180,000 tons. Even so, you are correct that is sudden discovery of less than 1% new gold coming to market will not cause the price to crash. – JTP - Apologise to Monica Aug 24 '20 at 13:00
  • Great point, @JTP-ApologisetoMonica - (1) you know, it's "usually said" there is something like 2-3 billion ounces of gold "bullion" (this can be googled on crap internet sites, eg sdbullion.com/blog/how-much-silver-gold-is-there) meaning bullion coins in little old lady's safes, government reserves etc (2) {A good Feymann estimate on that, USA gold reserves ("in Ft Knox") are ~270 million ounces, so "a couple billion" overall sounds about right (3) it's possible the figure you mention, also often heard on the interweb is more like "all gold ever mined"? ... so including industrial, lost etc – Fattie Aug 24 '20 at 13:09
  • (.. and possibly including jewelry?) and (4) whenever I've tried to look in to this it just seems to be the case that nobody has a clue and everything's a bit of an estimate (whether you mean "just" "money bullion" or "all"), so in short IDK and IDTAD (I don't think anyone does!). Additionally many sensible folks say the US (and likely anyone else with a stock) "leased" it all away decades ago and the only thing in Ft Knox is some social-security-style IOUs (hence for example the Germans seemed to want theirs in storage there back, and the answer was "uh, we'll get right on that"!) ... – Fattie Aug 24 '20 at 13:13
  • So with or without general conspiracy theories, IMO all the info on the matter is a bit flakey. Here's a site with spectacular graphics anyway! :O demonocracy.info/infographics/world/gold/gold.html – Fattie Aug 24 '20 at 13:15
  • (There's a blast from the past! I just clicked on a zerohedge web page :) – Fattie Aug 24 '20 at 13:16
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I have gold in my long-term investment portfolio

This is unwise. An investment is something producing return:

  • Forest grows
  • Bonds pay interest
  • Stocks pay dividend
  • Real estate pays rent

With an investment, $1 today will be more than $1 tomorrow.

However, gold has no inherent return mechanism. It just is, not becoming anything more. Gold is digged from underground in gold mines, and then stored underground in vaults. The only true value gold has is that it it used in minuscule amounts in some manufacturing processes such as integrated circuit / electronics manufacturing. Even then, you would be much better off investing into a gold mine rather than "investing" (or more accurately, speculating) with physical gold. For a short-term speculative portfolio, physical gold could be a speculation instrument but then you're 50% guaranteed to lose some money.

Part of the appeal of gold is that it is inflation protected. In the current environment of low interest rates (below inflation), having something inflation protected could be beneficial. However, forest, stocks and real estate are inflation protected too, and have much less risk (price volatility) while at the same time having true yield.

I am worried about sudden over-supplies of gold

An over-supply of gold would destroy the value of your investment.

how can I reliably estimate the effect on gold prices?

The problem is, you can't. Gold prices are based on psychology, not on any true value.

How can I protect my portfolio against a free-fall in gold prices caused by the sudden realization that worldwide gold reserves are much larger than previously thought?

If you have 100 pounds of gold, and if you protect your portfolio for the value changes in 100 pounds of gold, you essentially have a risk-free instrument. Well, except: holding on to the 100 pounds of gold does not pay interest unlike a true risk-free bond would do.

Why would you invest into 100 pounds of gold and protect your portfolio against value changes in 100 pounds of gold? You're much better off investing to risk-free bonds.

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  • Are all precious metal investments unwise? – Thomas Gold Aug 24 '20 at 9:04
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    @ThomasGold Yes, physical metals are not investments but speculation. If you want to invest, invest in a precious metal mine. But, it would make sense to diversify your investments, not putting all to precious metal mines but rather in all kinds of stocks, some precious metal mines but most in some other business. – juhist Aug 24 '20 at 9:30
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    Anyone who's made the odd few million bucks trading gold, would laugh at this page and say "yes, don't use the word investment". So yes, holding gold is a "hedge" or "trade", don't use the term investment. (That being said, it's normal to use the overall phrase "my investments" or "my portfolio" to include useless placeholders like bonds or money market, risky stuff like metals, gambling stuff like stocks, "investments" such as index funds, and real estate, in your overall "portfolio" or "investments". But yes, metals are a trade or hedge, not really an "investment".) – Fattie Aug 24 '20 at 12:14
  • A dividend does not produce total return. – Bob Baerker Aug 24 '20 at 13:29

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