What Would ChatGPT Say?
Part II - We asked ChatGPT’s thoughts on “investing” in gold. It almost cried.
We tracked the life of a hypothetical SEC employee between June 1, when it was their first day at work, and June 26, when they shared their first draft investor alert on crypto with their supervisors. To be clear, the draft investor alert is what we are hoping the SEC would say in the interest of investor protection. A ton of material is covered between these two bookends, and for anybody who wants to understand where the public stands on the word investing, we recommend that you check our archives.
The journey of the hypothetical SEC employee is probably over, but ours is just starting. Remember, this newsletter is a four-year project. We, as a society, have deviated so far from financial truths, we’ve got our work cut out for us.
Yesterday, we switched gears a little bit and started talking to ChatGPT. We asked: “What is Investing?” and here is how ChatGPT answered. Since ChatGPT views both gold and cryptocurrencies as investment vehicles, a popular but ultimately wrong opinion, we’d like to continue our conversation with ChatGPT and see how it will handle some additional questions. (Note: The conversation took place on June 28, 2023, around 8-9 pm PST. In what follows, all emphases are added)
F27: Why do you think gold is an investment?
ChatGPT:
Gold is often considered an investment for several reasons:
Store of Value: Gold has been valued and used as a form of currency for centuries. It has intrinsic value and is not easily subject to depreciation or devaluation. Throughout history, gold has maintained its purchasing power and has been considered a reliable store of wealth.
Hedge against Inflation: Inflation refers to the general increase in prices over time, eroding the purchasing power of fiat currencies. Gold is often seen as a hedge against inflation because its value tends to rise during periods of high inflation. Investors often turn to gold as a way to protect their wealth and preserve purchasing power.
Diversification: Gold is often used as a diversification tool in investment portfolios. It has a low correlation with other traditional assets like stocks and bonds, meaning that its price movements are often independent of those of other investments. By including gold in a portfolio, investors aim to reduce overall risk and volatility.
Safe Haven Asset: During times of economic uncertainty or geopolitical instability, investors often seek safe-haven assets that are expected to retain their value or even increase in price. Gold has a long-standing reputation as a safe haven because it is perceived as a stable asset that can withstand market turbulence and serve as a reliable form of wealth during times of crisis.
Liquidity: Gold is a highly liquid asset, meaning that it can be easily bought or sold in various forms, such as gold bars, coins, or exchange-traded funds (ETFs). Its liquidity allows investors to convert their gold holdings into cash relatively quickly and efficiently when needed.
It is important to note that while gold has been traditionally considered an investment, its value can still fluctuate over time. As with any investment, it is essential for individuals to carefully consider their investment goals, risk tolerance, and consult with financial advisors before making any investment decisions.
Gold has intrinsic value? Yes, we believe we found gold here.
F27: Why do you think gold has intrinsic value?
ChatGPT:
Gold is often considered to have intrinsic value due to its unique properties and characteristics:
Scarcity: Gold is a relatively rare and finite resource in the Earth's crust. Its limited supply adds to its value, as it requires significant effort and resources to mine and extract gold from the ground. The scarcity of gold contributes to its desirability and enduring worth.
Durability: Gold is highly resistant to corrosion, tarnishing, and degradation over time. Unlike many other metals, it does not rust or decay easily. Its durability ensures that gold can be stored and preserved without significant loss of quality or value, making it an ideal long-term store of wealth.
Malleability and Ductility: Gold is a highly malleable and ductile metal, meaning it can be easily shaped, molded, and drawn into thin wires without breaking. These properties make gold useful for various applications, such as jewelry making and industrial use, further enhancing its intrinsic value.
Cultural and Historical Significance: Gold has held cultural, historical, and symbolic significance across civilizations and time periods. It has been associated with wealth, power, and prestige, which adds to its perceived value beyond its physical properties. The enduring appeal and cultural significance of gold contribute to its intrinsic value.
However, it's important to note that the concept of intrinsic value can vary depending on perspectives and circumstances. While gold has intrinsic properties that contribute to its value, its value is ultimately determined by supply and demand dynamics in the market.
Right. In other words, it is a great adoption story, and it’s entirely about supply and demand.
Folks, this is serious. Really serious. If you finish college and decide to do an MBA, and if you are lucky enough to get into the Stern School of Business at NYU and lucky enough to have Aswath Damodaran as your teacher, this is what he will tell you:
The gist of it: “I don’t think you can invest in gold, you can trade gold… Gold is impossible to value… It’s set by demand and supply. With gold, there is no underlying fundamental that you can point to.”
Spot on, 100%. Solid demand does not mean an asset has intrinsic value. Intrinsic value is tied to cash flows. Gold does not have an intrinsic value; Damodaran has been on record for at least twelve years saying that. Maybe ChatGPT is not reading Musings on Markets? Time to press on ChatGPT some more:
F27: Define intrinsic value.
ChatGPT (after thinking three or four seconds, we are not sure why):
In finance and investing, intrinsic value refers to the inherent or fundamental value of an asset, independent of its market price. It represents the estimated worth of an asset based on its underlying characteristics, cash flows, potential earnings, or other relevant factors.
The concept of intrinsic value is often used in the valuation of stocks, bonds, and other financial instruments. It aims to determine the "true" value of an asset, which may differ from its current market price.
For example, in stock valuation, analysts may estimate the intrinsic value of a company's stock by considering factors such as its earnings potential, growth prospects, industry position, and other fundamental factors. If the estimated intrinsic value is higher than the current market price, the stock may be considered undervalued, potentially presenting an investment opportunity. Conversely, if the estimated intrinsic value is lower than the market price, the stock may be considered overvalued.
It's important to note that estimating intrinsic value involves making assumptions and forecasts, and different analysts may arrive at different valuations. Market dynamics, investor sentiment, and other external factors can also influence the market price of an asset, leading to deviations from its intrinsic value.
In summary, intrinsic value represents the underlying worth of an asset based on its inherent qualities and fundamental factors, providing a reference point for investors when evaluating investment opportunities.
Right. Supply and demand determine the price. Cash flows determine value. Pressed into the corner, ChatGPT came to its senses and did a 180. So now intrinsic value is about cash flows?
ChatGPT is about to go down.
F27: If intrinsic value is about cash flows, why do you think gold has intrinsic value?
ChatGPT (thinking for about 30 seconds, we are not joking):
Apologies for any confusion caused. You are correct that the concept of intrinsic value is often associated with cash flows and fundamental factors. When it comes to gold, its intrinsic value is not directly derived from cash flows or earnings potential like stocks or bonds. Instead, the intrinsic value of gold is attributed to its unique properties and perceived worth. Here are some points to consider regarding the intrinsic value of gold:
Scarcity and Limited Supply: Gold is a relatively scarce resource in the Earth's crust. Its limited supply and the difficulty involved in extracting and refining it contribute to its intrinsic value. The fact that it cannot be easily created or replicated adds to its desirability and enduring worth.
Industrial and Practical Applications: Gold has various industrial applications, including electronics, dentistry, and aerospace technology. Its excellent conductivity, corrosion resistance, and other properties make it valuable in these industries. The demand for gold in these practical applications contributes to its intrinsic value.
Historical and Cultural Significance: Gold has held significant cultural, historical, and symbolic value across civilizations for centuries. It has been associated with wealth, power, and prestige. The enduring appeal and universal recognition of gold contribute to its intrinsic value beyond its physical properties.
Store of Value: Gold has been used as a store of value and medium of exchange for thousands of years. It has maintained its purchasing power over time, acting as a reliable form of wealth preservation. The perception that gold retains its value adds to its intrinsic worth.
While the intrinsic value of gold may not be directly tied to cash flows or earnings potential, its scarcity, practical applications, historical significance, and role as a store of value contribute to its perceived intrinsic value. It's important to note that the intrinsic value of gold, like any other asset, is subjective and can vary based on individual perspectives and market dynamics.
Game, set and match.
With just four questions, we were able to make ChatGPT acknowledge its mistake. It is smart enough to realize that it is taking an inconsistent position. It is also smart enough to be polite; it apologized to us! That was nice.
That said, it’s not willing to fully acknowledge its inconsistency or reverse its position. After apologizing for the confusion, and validating our position (a standard technique taught in corporate trainings and parental education sessions), it went right back into regurgitating its original response.
ChatGPT did not change its mind, despite being faced with an obvious inconsistency.
You know the unpleasant truth? ChatGPT responded just as the majority of people would respond. Some might say that’s a feature, not a bug; it’s a language model that is trained on what it sees; but, shouldn't we expect more from it? Isn’t it supposed to rise above biases and inconsistencies and deliver us truths? If all it will do is reinforce existing biases, what have we really accomplished other than hearing regurgitated material in different terms?
This has real implications in all fields, but certainly, it’s a big issue in finance. The question, for both the SEC and Congress is: “What do you do when your mission is to protect investors, but investors themselves are fooling themselves?”
Don’t go away, ChatGPT. We haven’t even talked about crypto yet.
