One aspect of the legalization of cannabis, is its entrance into the world of asset trading. A lot is being said about cannabis as a commodity, especially in comparison to gold. Which is worth more, and can cannabis show the same stability as gold over time?
Everyone knows of terms like the 'gold standard', and some of us might already know that our badly inflated currency (almost doesn't matter which country you're in when you read this) used to be backed by gold. There are reasons for this. Gold has maintained its value continuously, over time, and through changing markets, giving it a strength not known to many commodities. While cannabis is an entirely different thing, it's value might just be tantamount to gold.
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What's a commodity?
First thing to understand is the definition of a commodity. "A commodity is a basic good used in commerce that is interchangeable with other goods of the same type. Commodities are most often used as inputs in the production of other goods or services. The quality of a given commodity may differ slightly, but it is essentially uniform across producers." All of the following are examples of commodities: coffee, oil, steel, cows, honey, corn, cotton, diamonds, gold, and cannabis.
What do we do with commodities?
We buy and sell them. Most people are familiar with the idea of a stock market, even if they've never invested. Stocks, are essentially tiny shares of a larger company, and when an investor buys them, they're buying a share in that company which comes with a share of the profit if the company makes one, and which is subject to losses if the company loses value. So, if someone has a share of Google, they own a tiny smidgen of that company.
Of course, buying a share of Google, and buying a bar of gold are two different things, and they're traded in different places. Commodities – which are split into two groups: hard commodities like gold that must be extracted or mined from the ground, or soft commodities like corn or goats that pertain to agriculture and livestock, are traded in about 50 markets across the world.
Much like stock prices which we know can rise and fall depending on how a company is doing, commodity prices are much the same. When the reaction to the coronavirus was at its peak in April, oil for the first time in history recorded negative prices. For example, on April 20th, according to West Texas Intermediate which sets a benchmark for oil prices in America, oil prices for the day started at +$17.85 per barrel and ended the day at -$37.63.
It made sense, of course. People weren't driving, so the price dropped. Too much supply, not enough demand. Just like if there's a drought, and wheat can't grow as well, the value of any available wheat goes up because the supply has diminished, but the demand has not.
Gold as a commodity
No one ever said gold was the most stable commodity, or that it's the one you'd want the most in all situations. Think of a post-apocalyptic world for a second. Would you rather have a bar of gold and nothing to do with it, or supplies for purifying water or starting a fire, or actual food? Situations are certainly relevant to the value of a commodity, and whereas gold might not cut it in post-apocalyptic times, it has stayed relatively stable over many decades, leading it to be known as a commodity that more easily retains its value across time and situations.
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Why does gold retain its value? Part of it is psychological at this point. It's been associated with currency for literally thousands of years. It's associated with high end Jewelry, and luxury in general. It's been used to adorn royalty, and wars have been fought over it. It has been used as a part of cultural tradition all over the world. But these things don't give it an actual value beyond the belief we put in it, much like the currency we use today which is nothing more than paper without belief in it as money.
Gold has more realistic attributes that give it value though. It's non-toxic, which means it can be used in places like dental fillings, and it's biocompatible and won't hurt the human body. It's a highly efficient conductor of electricity and it doesn't corrode, which means it's good for all kinds of electronic equipment. Gold has medicinal value, going back at least 2,500 years to Ancient China where it was used to treat things like ulcers and smallpox. It also has the ability to be made into incredibly flat sheets creating gold leaf which can be used in decoration of all kinds, and taken internally.
Gold's ability to stabilize temperatures and reflect radiation make it very useful in spacecrafts and spacesuits. Gold is far more rare than metals that are easily found like copper, and zinc, and this has helped it retain its value as well. These are just some of the reasons that gold does serve a practical purpose that earns it its value. This graph shows the basic movements of gold over the last few years. It's not a straight line across, and would likely never be. But it stays within certain parameters, and generally doesn't leave them.
Cannabis as a commodity
The first thing to remember about cannabis, is that's what hemp is. Hemp has, through history, been one of the most valued commodities for its massive versatility. In colonial America there were even grow laws requiring farmers to cultivate the plant because of all its uses. From building and insulating houses, to making boats, to using it for clothing, ship sales, paper, in cosmetics, and even as a form of gasoline. And this doesn't include its value as a medicine (and a way to feel good).
All aspects of cannabis have been used through history, whether as medicines, as part of religious practices, and for industrial purposes. Cannabis has the ability to grow in many different climates, and technically doesn't need a lot of help, hence it's slang term: weed. This means that it's readily available even without cultivation, globally. Even without current marijuana markets, cannabis through hemp is an incredibly valued commodity.
The medicinal and recreational markets for cannabis present some other issues which could cause a problem for cannabis as a commodity. The main one is pricing. Now, I've been a cannabis user for 20 years. I've bought it in the black market hundreds of times and I've bought from dispensaries as well. Here's my basic thought on marijuana pricing – it stays about the same. For the last 20 years, it has cost no more or less than about $50 for 1/8 of decent quality pot.
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The fact that I paid the same thing across two decades, for the same quality product, across different states in the US, and different countries in the world, says quite a bit. Does it mean this is an airtight truth of marijuana pricing? No, not really. But it's also not nothing. What I buy is usually the mid-level. There's way better stuff that will always cost more, and what others refer to as 'ditch weed' to describe a much seedier (literally), less strong variety that will always cost less.
The pricing on all three has remained stable through my cannabis-using life. I've watched other prices in life go up and down through time, but I've always gotten to smoke for the same price. This is important because the bottom and middle price points are being generally ignored in product pricing and the introduction of high taxes in dispensaries. These are issues that could make cannabis as a legal commodity lose value, but it doesn't mean it would lose any value in the black market. In this sense, marijuana is extremely stable. So stable, that pricing above the standard and expected price, will likely only result in a bolstered black market at the same stable prices.
The last thing to remember is that cannabis cultivation was maintained around the world, for thousands of years, even during prohibitions. And this says a lot too. It says that the value of this plant remains, even when not one country legally permits it.
How do gold and cannabis compare?
Gold and cannabis both have long histories of use in the world in which they have retained value throughout thousands of years of history. They both have religious uses, industrial uses, medicinal uses, and personal value uses. Neither has shown to diminish in these values over time.
In terms of stability in today's markets, cannabis only just entered the legal trading markets. As a new addition, prices are all over the place, and there hasn't been enough time for prices to stabilize, or to make real comparisons yet to gold. Comparisons right now in stock prices for relevant companies miss the point of comparing and contrasting the overall stability of the commodities, something that can't be done without time for measurement.
While the hemp market should surely stabilize out more quickly, making for a good comparison point, how the medicinal cannabis and recreational cannabis markets will go – and how valuable company stocks will be over time – remains to be seen. If companies continue to price their products above black market pricing, the legal medicinal and recreational industries will likely hit a price-point ceiling, as has already been indicated by numerous stories complaining about larger black markets in LA and Canada.
This will affect stock prices for associated companies, and it won't matter how much people want to smoke cannabis, since they don't need a legal market to do it. In that sense, gold has more stability in legal markets for now, since most people will use legal markets for gold over its black market counterpart, whereas the same cannot be said for medicinal and recreational cannabis.
Conclusion
You can't grow gold, and most people aren't living the kind of life where going out to mine it personally is an option. On the other hand, should I want, I can grow a cannabis plant pretty easily on my own. Very different modes of acquisition, but I personally see the two as similar in terms of their appeal, staying power, and overall consistency, though I'm not necessary talking about legal markets.
You see, cannabis might be one of the most consistent commodities, but it doesn't mean it has to act this way in legal trading markets. And maybe that's the takeaway. Maybe gold and cannabis already represent the same kind of general stability over time in the world, but there's no rule that said this stability had to transfer over to legal markets.
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