Massive economic events have a tendency to displace wealth. Some people will get rich beyond their wildest dreams, while others will risk – and lose – everything they own.
One of the biggest events that can happen in an economy is the discovery or creation of new resources, especially when those resources are already in high demand.
This is the starting point for two stories that share an unlikely combination of threads: The historic California Gold Rush of 1849 and the soon-to-be historic legalization of cannabis throughout the United States.
While it might seem like these two events couldn’t be further apart, savvy business people and institutional investors are well-advised to use the Gold Rush as a historical model. The brave, clever pioneers who follow this line of thought will have a clear advantage finding opportunities to make enormous profits.
Similarly, the Gold Rush offers a clear set of examples on how not to approach the burgeoning cannabis industry. By learning from the mistakes of yesteryear, today’s institutional investors can put themselves on the proven track towards success.
First, it’s important to identify exactly what comparisons investors can draw between the 1849 California Gold Rush and today’s cannabis industry. We’ll also highlight areas where this comparison breaks down before moving onto the specific lessons it offers.
What Makes Cannabis Like Gold?
The key similarity between the California Gold Rush and today’s marijuana industry comes from commodity economics. Both gold and cannabis are commodities– goods that economic agents supply in a standardized, interchangeable way.
Until recently, cannabis could not technically be a commodity because its cultivation and sale was illegal. It couldn’t become a standardized means of exchange on anything other than the black market – which excluded it from benefiting from the kind of investment and development that legitimate commodities enjoy.
As US states begin to legalize recreational marijuana on a one-by-one basis, the economic benefits of its commoditization are virtually guaranteed to increase over time. Both gold and cannabis are useful commodities because they have industrial potential.
What Makes Gold Valuable?
The economic and industrial potential of gold is obvious. It has been a store of value and medium of exchange for thousands of years. But as a top-shelf electrical conductor, it also has important real-world applications: In 2017, electronics represented 34% of the United States’ market for gold. The element may even play a critical role in cancer diagnosis and treatment.
What Makes Cannabis Valuable?
As an agricultural commodity, cannabis follows slightly different rules than gold. Supply is variable, and factors like genetics and weather conditions can affect product quality. Most investors will be unsurprised to find out that the recreational cannabis market holds the lion’s share of its predicted market capitalization – a projected 67% of a $57 billion market by 2027.
Medical marijuana is slated to cover the remaining 33% of that projection. Ongoing research into the medical benefits of cannabis may drastically improve this estimate.
Commodity Economics:How Today’s Cannabis Industry Is Leading to a Gold Rush
From an economic point of view, one of the main differences between gold and cannabis is that using cannabis depletes supply. This is great news for institutional investors and savvy business people looking for the next big thing – it guarantees that the cannabis industry will need to sustain itself in a competitive market in order to continue meeting demand.
As long as people use cannabis, there will be a continued need for cultivators, refiners, distributors, testing laboratories, and a broad range of other secondary services that help get cannabis products into users’ hands safely and reliably.
Unlike gold, where supply is limited by the amount of metal the Earth produces, the “Green Rush” is only limited by demand – and demand is growing. In fact, demand is likely to grow far beyond even the most conservative predictions for the foreseeable future and beyond.
This is one of the areas where investors who get into the cannabis industry today are likely to outperform those who entered the gold industry back in 1849. The Gold Rush ended when there was no more gold to mine – there does not need to be a similar ending for cannabis.
Instead, there will be an increasing culture of adoption as CBD- and THC-based products penetrate further layers of society. This will lead to greater demand, and as cannabis use continues to normalize – more pronounced institutional attention.
But while the “gold rush” attitude may not come to an end, the potential gains to be made by investors are guaranteed to get smaller over time. Diminishing returns are as real for cannabis as they were for gold, and the market will unquestionably favor the pioneering early adopters who make the best long-term investments.
How Are Investors Approaching Cannabis Now?
At first glance, potential investors may find themselves attracted to the prospect of marijuana cultivation. This idea is appealing for a few reasons, the most obvious of which being that the cannabis industry is and will remain anchored to the primary product itself.
But this is one area where the Gold Rush can teach today’s investors an important lesson. Not every Californian gold prospector got rich in 1849. In fact, the vast majority barely scraped together enough money to live on while constantly looking for the next big claim.
As an agricultural commodity that can be refined into a consumable product, cannabis is likely to follow the route of fine wine, champagne, and craft beer. Investors who place their trust in the raw material will see steady gains as long as consumption continues but will find themselves excluded from the low-cost, high-margin opportunities offered by powerful brand-name products.
For insight into how this works, consider the difference between the manufacturing price of a bottle of Dom Perignon champagne and its retail ticket price. When it comes to consumable luxury products like that, the greatest profits don’t go to the vineyards; they go to the retail-oriented brand that spends approximately $25 to sell a $200 product.
Investors are already bringing large amounts of capital into the cultivation part of the industry. This is a sign that soon, the greatest economic gains to be had in the near future will already be spoken for – the low-hanging fruit of the cannabis industry will not stay on the vine for long.
This is easy to see just by looking at the salaries – and talent gap – of mature cultivators entering the newly-legalized industry in the Northwest. Cultivation assistants and managers can already command salaries of between $81,000 to $103,000 per year.
Demand for cannabis products can only grow at the rate of legalization. Investors who pour their resources into cultivation now may find themselves in a saturated market – in the short-term, at least.
Ultimately, while growing cannabis will represent a cornerstone of the market, investors who take their lessons from the California Gold Rush will approach the industry from a different angle.
The Real Profit in Cannabis Investment
The first millionaire of the California Gold Rush was not a gold prospector. He was a general store owner named Sam Brannan, who quickly monopolized the market on shovels and cookware – products no prospector could live without.
For an even more famous example of extraordinary success, look no further than Levi Strauss, whose denim blue jeans became another must-have product for rough-and-ready prospectors who needed clothing they could trust not to rip or tear over time.
This is the route that the greatest successes of tomorrow’s cannabis industry will take. Those who invest in the tools and services needed to produce cannabis products will protect themselves from the potential volatility of cannabis commodity prices.
As cultivators begin to produce more and more cannabis, prices will undergo periodic crises while the commodity price stabilizes and legislation generates new markets. Wise investors will fund the “shovels” of the marijuana trade. These include a broad range of products and services that cannabis cultivators, distributors, and users rely on:
- Distillation Services. THC and CBD distillation will remain in-demand no matter what happens to the price of cannabis. Post-production services for butane hash oil (BHO) extraction is key to creating concentrates – the preferred consumption method for recreational and medical cannabis users alike.
- Testing Services. With legalization comes regulation. Distributors who wish to remain in the law’s good graces will need to invest in chromatography equipment to analyze cannabis products and provide users with clear, trustworthy information about the products they wish to buy.
- Refining Equipment. From simple ethanol evaporation tools to more sophisticated closed-loop extraction equipment, manufacturers are likely to see enormous growth shielded from potential price volatilities in cannabis as a commodity.
Invest in Services and Solutions Cannabis Cultivators Need
There is no doubt that the cannabis market is growing. While its expansion throughout the United States may come with growing pains, a certain subset of manufacturers and service providers will post remarkable profits while the rest of the industry stabilizes itself.
Investors who place a priority on top-quality American-made equipment for refining cannabis products into oils and concentrates are going to become the Sam Brannans and Levi Strausses of the next generation.