I can see that despite my not being enthusiastic about gold as circulating money, the recurrent fever of people lusting for it has returned. This time in the toned down version of a mild curiosity about limits on mining and total gold. So, OK, some vague hand waving numbers.
I’ve already noted that miners choose to mine their lousy ores when prices are high and reserve their cheap ores for when prices suck. That way they can have consistent profit despite wide swings of gold prices. Thus the notion of “average cost to mine” is useless. The “average cost to mine” depends on the current price of gold…
Similarly, when prices are high (call it $2000 / troy oz.) then ore that costs $1800 / oz. to produce is an economic “reserve”. When prices drop to $1500 / oz. that “reserve” ceases to exist as an economic substance. The “reserves” available drop. The total “resources” available to mine stays the same. There’s jargon for those two things, but the exact terms have changed a little over the years. It leads to endless confusion. Last I looked “ultimately recoverable resources” was what could be mined with current technology at any price, while “total resource” was everything everywhere, recoverable or not. “Current Reserves” are what you can mine and sell at a profit today.
The bottom line is that “current reserves” depend on price.
Now think about that just a minute. Both the total amount you can mine (“current reserves”) and the average cost to produce, depend on “price in the market”. Price in the market for metals, and especially “precious metals” is highly highly volatile. Silver can run up to $50 / oz, or drop to $8 in months. In just the last few decades gold has been as low as $300 / oz and as high as $2000.
So it is an inherent fact that you can not answer at all:
a) How much can be mined?
b) How much would it cost?
c) How fast can you mine it?
Unless and until you know “What is the price?”, and that price is largely hand waving speculation for any future moment in time.
Now, let that all sink in for a while. Go get a cup of tea or coffee. Ruminate on it. At a VERY fundamental level it is NOT POSSIBLE to answer the questions folks want answered with any truth in the answers.
Now, realize that THE largest supply and demand is the Nation States of the world. When they were “dumping gold” it ran down to $280 or so / oz. When they buy some they can run it up to thousand or two levels. Everybody else is the tail on this donkey. So “What is the price?” is only answerable by “What are the national Central Banks doing?”. Anything else is self delusion. (That, BTW, is also one of the reasons why gold does not make a very good money. It is easy for a large producer (Russia) or a large consumer (China / India) to cause large price swings and game the market price. In large part the USA went off the Gold Standard as the USSR was prone to making large gold sales in one annual lump just to screw with our pricing for everything in the economy.
Maybe you would like to add some whiskey to that coffee now?
Pressing On – How Much Gold?
Say it’s about 190,000 tons. Also that 2/3 of it has been mined since 1950. Call that 190,000 x 2 /3 /70 = about 1810 tons / year. About 1% of existing stocks is mined per year.
Now, either you will NEVER have your economy grow faster than 1% / year (globally) OR you must have deflation baked in the cake. Normally technical advances grow production about 3% / year. In some cases population growth can cause faster economic development than that, but we will ignore those cases, being conservative. This means that you WILL have a 2% deflation, per year, globally. To do otherwise would require a tripling of gold production and that’s only going top happen with much higher gold prices.
This is one of the other reasons that gold is not a particularly good money. Deflation is hard on economies. Would you be happy if you bought your house for 1000 pieces of gold, but could only sell it for 500 pieces of gold when you retired?
Remember that that relatively fixed volume of gold MUST cover all the financial transactions, so if you will have 3% more per year then either you get a lot more gold, it moves hands ever faster (eventually needing speed of light gold…) or prices (grams of gold) drop to allow the same gold to cover more exchanges.
Now lets look just at the $US
Money is measured in M numbers. M0, M1, M2, M3, etc. It starts with just currency, adds “demand deposits” (stuff savings in the bank) and then grows through checking and credit cards and on. Folks caring can look up the specifics. I’ll quote two of them here. Realize the actual $ as gold needed will be more than M2…
Money Supply M0 in the United States decreased to 3260366 USD Million in July from 3274900 USD Million in June of 2019. Money Supply M0 in the United States averaged 792167.09 USD Million from 1959 until 2019, reaching an all time high of 4075039 USD Million in August of 2014 and a record low of 48362 USD Million in March of 1961. more
So that’s about 3 Trillion to 4 Trillion.
Note this one is given in billions as it’s bigger…
Money Supply M2 in the United States increased to 14872.10 USD Billion in July from 14755.10 USD Billion in June of 2019. Money Supply M2 in the United States averaged 4121.70 USD Billion from 1959 until 2019, reaching an all time high of 14872.10 USD Billion in July of 2019 and a record low of 286.60 USD Billion in January of 1959
So that’s running about 15 Trillion.
Now “do the math”… A ton is about 29166 (repeating 6) troy ounces. Our 1.9 x 10^5 tons x 2.9166 x 10^4 troy ounces is 5.54 x 10^9 ounces. 15 x 10^12 / 5.54 x 10^9 = 2.7 x 10^3 or $2700/ounce IFF:
1) ALL gold in the world is used for replacing the $US.
2) You do NOT need it for M3 or larger types of Money.
3) ALL other uses of gold cease. Globally.
4) Everyone in the world will give us their gold.
5) No other currency wants to be gold either.
Clearly none of those things are going to happen. So, the price of gold as a $US replacement would need to be much much higher than that. How high? Well, anyone can guess… My first guess would be over $20,000 / ounce. IMHO, that’s just not possible.
However, it might induce enough people to stop making cars, growing food, and paving roads to go out and mine enough gold to cover the 2%/year deflation that will also set in at once… Is it a good thing to have a new gold rush and stop making cars, growing food, building houses, etc. etc. and have millions of people sitting by riverbanks with gold pans? Maybe not so much… Think this is crazy? During the gold rush in California a single egg would sell for a minor fortune…
But say the rest of the world doesn’t want to just give us their gold. How much does Fort Knox have and what would it need to price at?
It currently holds roughly 147 million troy ounces (4,580 metric tons) of gold bullion, over half of the Treasury’s stored gold. The United States Mint Police protects the depository.
So let’s call it 300 million troy ounces total. 3 x 10^8 troy ounces. 15 x 10^12 / 3 x 10^8 = 5 x 10^4 or $50,000 / ounce.
Now that’s if we empty every single ounce of gold we have, mint it up into coins, and use that to replace all the M2 currently in circulation.
Of course, at that point, the rest of the world would start rapidly spending their gold to buy up our factories, land, stuff of all kinds. Eventually an equilibrium would be reached, but only after a lot of chaos.
Which points up another of the issues with gold as currency. A very small bit of gold, of limited inherent value, must cover ALL the financial transactions in the society. A quantity vastly out of proportion with the actual utility of the gold. So gold has to rise to an insane price in comparison.
As to questions like: How fast could we ramp up enough production? and What would it take to get back on the gold standard?
Well, the simple answer is years and years of intense disruption, and a great deal of trauma. Huge global disruptions of the other economies of the world.
Now realize these are just a few of the problems. Inevitably someone will say “But we can use Sliver too!”. When that only makes a minor change in the end state; BUT… it brings with it all the problems of “Bi-metalism”. That’s a well studied bit of economics that covers a few volumes.
One simple problem: How do you keep the ratio of the value of the two metals “in sync” as production technology and mines available change? The present ratio is closer to 40 : 1 silver to gold. At the time of the US Constitution it was 16 : 1. It varies regularly. There are a LOT of other problems…
I hope that gives you a few of the answers sought. I also hope it gives some perspective on the use of one scarce metal as surrogate for ALL economic transactions in an economy.
Do note that I just blew through the math. It could bear checking. I don’t really care enough about the topic to put in a lot of due diligence validating things…
The use of metal or metals as money is not as easy as one might think. I’ve not even mentioned the issues that arise in settling national balance of trade (how many tons / year of gold will be lost at sea, on the docks, in the trucks? How much money spent to guard and ship it?) Or such little things as shipping your ounces to Amazon and waiting for them to send back your little bag of dust for your “change” along with your packages…
Precious metals can work well as money in small lots for small economies. On a global scale it “has issues”.