Let’s Explore What Gold Means For Growth

Vanguard recently ran a multipage ad in The New York Times that stood out for me for being simultaneously striking and completely unremarkable. In the paragraph that most caught my eye, Vanguard recommended that investors own a diversified mix of equities and bonds. And that’s totally unremarkable – the well-trodden path long followed by investment houses and pension funds as well. For pension funds, a typical allocation is 60% stocks, 40% bonds.

So why did I find the ad so striking? Because of what it left out – which was any
reference to commodities, and in particular to gold. That’s astounding because it totally overlooks that over the past 20 years, gold has been the top-performing asset. It has outstripped stocks by 200 percentage points and bonds by more than 250 percentage points.

Even more relevant is that gold will almost surely continue to outperform, and by a
rising amount, over the next 20 years. Steering investors today into a mix of stocks and bonds, and ignoring gold, is akin to outfitting your high schooler with a manual typewriter instead of a laptop – something that made sense a while back, but no longer.

My latest book, China’s Rise and the New Age of Gold: How Investors Can Profit from a Changing World, describes in detail what has powered gold’s rise so far this century and why truly stupendous gains lie ahead. It’s not a random prediction, and it goes far beyond the usual view of gold (among most American investors, at least) as mainly a safe haven in times of unusual turmoil. It’s a complex picture with a lot of different parts that work together. Here I want to focus on just one aspect of the underlying forces propelling gold upward. It has to do with a massively significant change in the relative importance to global growth of the developing world vs. the developed, or high-income world. This may sound arcane, but it’s crucial to understanding a dramatic shift in the investment backdrop.

The table presents some pertinent data. It compares the growth rate of high-income
countries (for which the OECD can be a reasonable proxy) with that of developing
economies over more than 50 years. As you can see, prior to the 21 st century, high-income countries – accounting for only around 15% of global population – racked up faster growth than poorer, developing countries. The big got ever bigger while the small got smaller. The disparity was so great that per-capita GDP of the rich was more than 20 times higher than for the rest.

Starting this century, however, and led by China, growth in the developing world
began to quicken and eventually to surpass growth in the developed world. The gap in per-capita GDP narrowed to where high-income countries are nine times, not 20 times, wealthier than the world’s have-nots. Better, but still a long way to go.

What does this have to do with gold? Everything. Growth in developing economies is
qualitatively different from growth in developed ones. Specifically, growth in developing economies requires a lot more commodities per capita. Developed economies, by contrast, are primarily services-driven. In 2019, about 70% of GDP in developed countries came from services compared to 55% for developing economies. A generation earlier, at the start of this century, the percentages were 65% for developed countries, 45% for developing countries.

A good proxy for commodity needs is per-capita energy use. As long as a country is
developing and has a relatively small service sector, its growth will require rising energy usage.

Readily available data show that 67% is, roughly speaking, the magic cut-off number.
Once a country’s service sector reaches 67% of GDP, per-capita need for energy, and
commodities overall, starts to decline.

Currently the service sector accounts for 55% of GDP in the developing world. That
leaves 12 percentage points more to reach the magic 67% level. It took 20 years for the figure to climb by 10 percentage points, from 45% to 55%. This suggests we likely face at least another 20 years during which per-capita demand for commodities from developing countries, by far the biggest part of the world, will be rising.

Inevitably this will lead to commodity scarcities and rising commodity prices,
accelerated by the push to transition to renewables because of climate concerns. Moreover, rising demand for commodities already has reduced reserves for many critical commodities such as copper. The bottom line is that we face at least two decades of pressure on commodities.

This brings us to what gold means for growth in the developing world. For reasons that I detail in China’s Rise and the New Age of Gold, when commodities rise, gold, which is both a commodity and a currency, rises faster. Commodity scarcities will be among several forces pushing gold far higher in coming years. The bottom line: Investors who don’t own a hefty chunk of gold-related investments, whether in the form of mining stocks, gold ETFs, or bullion itself, will be missing out on the biggest investment story of the next 20 years.

Stephen Leeb is president of his own money management firm and editor of the investment newsletter The Complete Investor. He is the author of eight previous books that uncover underlying geopolitical trends and explain how investors can benefit from them.

what gold means for growth


Dr. Stephen Leeb is a prolific author, investment adviser, and money manager who has been analyzing financial markets for more than 40 years. He is known for his prescience in connecting the dots among hidden or overlooked trends – macroeconomic, scientific, and geopolitical – and accurately describing the investment implications, often going against the conventional wisdom. He is the author of nine books on investing and geopolitical trends including his most recent book, China’s Rise and the New Age of Gold: How Investors Can Profit from a Changing World (2020, McGraw-Hill Education). He is founder and editor of the award-winning investment letter The Complete Investor, published by Investing Daily. Stephen is chief investment officer of Leeb Capital Management in NYC.

Dr. Stephen Leeb Ph.D.