Some Golden Speculation

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.

Caveat:

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?

These folks:

https://www.gold.org/about-gold/gold-supply/gold-mining/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…

https://tradingeconomics.com/united-states/money-supply-m0

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.

https://tradingeconomics.com/united-states/money-supply-m2

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?

https://en.wikipedia.org/wiki/United_States_Bullion_Depository

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…

In Conclusion

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”.

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About E.M.Smith

A technical managerial sort interested in things from Stonehenge to computer science. My present "hot buttons' are the mythology of Climate Change and ancient metrology; but things change...
This entry was posted in Economics - Trading - and Money and tagged , , , , . Bookmark the permalink.

10 Responses to Some Golden Speculation

  1. H.R. says:

    Well, I found the numbers online…. here ;o)

    Thanks for taking a quick rake through the leaves, E.M. That was plenty good enough for the basic answer that I expected to find which is, you can’t get there from here. We really can’t replace paper currency with gold.

    I already knew that an actual number was impossible to come up with, but I was looking for a
    reasonable guess at the boundaries, and you’ve come up with some that are “close enough for government work.” You could be off by a factor two or three or four, but the second part that goes with the dollar number is the disruption and distortion to all other market and production activities.

    Of late, I have been running across more than the usual “we must go back to gold” talk and I suspected it’s not in the least bit feasible to do so without massive disruption that’s totally unacceptable even to the people leading the charge for the change.

    Niggling in the back of my head was the Democrat analogue, “We must stop using fossil fuels immediately and switch to renewables, NOW!” Going to gold or renewables, NOW! creates much the same problems and disruptions and both have the same answer; you can’t really get there from here.

    Thanks again for taking a stab at the numbers, E.M. They are plenty good enough for the questions I raised.

  2. jim2 says:

    When it comes to mining, if you do it for a living long-term, you want a dredge!

  3. Christian says:

    A nice analysis of why gold doesn’t work today due to scale – not enough gold and not practical to mint for all. But ‘money’ is just a means of exchange. It replaces barter and in theory has no intrinsic value – a dollar is just a piece of paper, a contract. And now electronic.

    However it does have a widely perceived value as an asset – otherwise no-one would buy it. I think it is a type of insurance against the failure of the currency in which you live. Same as having a posh painting on the wall, an antique vase, but more fungible.

    As a miner, there are many other factors affecting the mining cost – for example, when the price goes up management pays less attention to operating costs, which always run up. When the price corrects, quick action is needed or the mine closes. Classic supply and demand reactions.

  4. p.g.sharrow says:

    It is not a matter of money( currency) . It is a matter of WEALTH, Money (currency ) is just a measurement tape that is a bit rubbery (inflation/deflation) that is used to measure wealth. Money is not wealth. Gold and Silver represent wealth because of the energy/work it takes to “:win” it from the Earth.
    Go to any Mall parking lot during the day and examine the vast Wealth parked there. Multiply that by the vastness of America’s consumer driven society to get an idea of the wealth created and accumulated by The Americans. All of this is Wealth. America has 11 Carrier Groups they can field, more than all the rest of the World. That is in your face Wealth of man and material. But even more important is the amount of wealth being used to create more wealth. Free people create more wealth than they consume by their astute management of their resources to create more wealth. Bureaucratic over burden of regulation and taxation can restrict wealth creation to the point where government eats up more wealth than is produced and society degrades as it’s wealth erodes…pg

  5. u.k.(us) says:

    “I don’t really care enough about the topic to put in a lot of due diligence validating things…”
    ============
    You would fit right in at the U.N. :)

  6. jim2 says:

    EM would make a good climate scientist :)

  7. Pouncer says:

    “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.”

    Yeah, and that would be bad. I guess. Maybe.

    Uhm, how bad? Compared to IN-flation, I mean? Which trend certainly seems to be “baked in the cake” by all central bankers, all the time — and mightily misused by Evil Bastard Governors fairly often. Is 2 percent deflation worse than 15% inflation? 50% inflation? Zimbabwian 1000% ? After most of my lifetime of inflation I sometimes wonder if a reversible short term experiment with deflation might not be a pleasant change. I say this, of course as a person of age with more savings than debt …

    It also seems to me “bad” — though perhaps less bad than alternatives, I don’t really know — that the Fed and other central banks “target” inflation rates, then abandon those targets for other goals as the mood strikes. Employment targets, bail outs, lately “saving the democratic institutions from abusive Orange Man” … It’s not clear to me that if the money supply were correctly matching the real growth of the economy that inflation rates would be targeted at anything much higher than zero — or that rates that ARE set several points higher than expected growth accomplish anything except drive investment into riskier ventures.

  8. E.M.Smith says:

    @H.R.:

    Glad I could help.

    FWIW, my “answer” to this was a “basket of commodities” unit of currency. You would have an account and in it could place your “value” in any given mix of commodities you liked. Each would move with the market for that commodity. At the national level, your unit of exchange (call it the c$) would be a defined basket of the most common commodities. One c$ would be redeemable for x of Steel, y of gold, z of silver, a of copper, w of wheat, l of soybeans, b of beef, p of pigs, c of chickens, j of lumber, … Now the exact amounts might be an ounce or a gram or who knows what, but the point is you could get physical delivery.

    Now in your account, you would have the u$ and you might choose to put it 100% in wheat. Every day the wheat price would be your u$ value and it could be easily computed how many c$ are in a u$. Now most folks will likely just hold c$ as they will be the most stable. Some folks will choose a g$ that’s a gold certificate. A wheat farmer can literally sell his 2000 acres of wheat for exactly the w$ equivalent, then, when he feels like it, convert his w$ holdings into c$ or g$.

    Effectively, this lets you use the entire commodity market as your currency, both in a combined basket, and as individual commodities. You could even have r$ based on a basket of real estate.

    It is made possible by the huge compute power and communications speeds available today and the highly liquid commodity markets.

    The thing about gold is it is the most easily divided, and traded, commodity. So make all the other commodities easily divided and traded…

    FWIW, there IS a way to go “back to the gold standard”. That way is to NOT use gold as currency, but to use a gold certificate, redeemable in gold, much like in the 1800s. That way you only need enough gold to cover redemptions, not all currency uses, and you need to keep the currency value as high or higher than the gold backing (which is why bankers and politicians do not like it).

    @Christian:

    Gold is a wonderful material, and very useful as a “store of value” or unit of wealth. It just has some practicality issues as a currency. (The biggest one being how gold and silver coils slowly wear away in circulation…)

    @P.G.:

    As a unit of wealth, gold and silver have few rivals. It is as currency that it’s a bit harder to work.

    It is rather like land or factories. Long lasting assets of wealth. But buying a pizza with a house, a toy factory, or an ounce of gold is hard to do…

    @U.K.(us) & Jim2:

    Now, now, no need to get nasty and insulting ;-)

    But yeah, it was in that “style”…

    @Pouncer:

    The general history has been that deflations are more damaging than inflations. That is why all central banks have a target inflation rate, not a deflation rate.

    The basic problem is human perceptions. IF my house is “worth more” every year and my mortgage is a smaller part of the paycheck, I’m happier and continue to spend (the economy continues to run). IF my house is worth less, my paycheck is smaller each year, and my mortage is a larger part of my pay every year, I’m not happy and I must spend less. The economy slows and stops.

    To get out of inflation, you just cut back on the money printing and raise interest rates. A bother, but doable. To get out of deflation you… Well, flooding the money supply sort of works, a little, but a lot of folks will just take the money and stuff it in a safe. The economy won’t get going until wages rise and people buy more, but wage won’t rise until AFTER the economy has been running well for a while. House prices will eventually rise, but only AFTER folks have been working long enough to feel OK about buying again.

    Essentially, it is easy to cut back on a little inflation. It is very hard to get people to spend, hire more folks, increase wages, build things in a depression… In a very real sense that’s what we are seeing today in Europe. Interest rates at zero or even a bit negative, and it isn’t enough… Teetering on the edge of deflation and depression. (The Great Depression was the last one of those…)

  9. H.R. says:

    @E.M. – Hey, hey, hey! I really like that commodities-backed currency. It has a lot of sensible features, which of course dooms the idea to oblivion right off the bat. Beats the heck out of “just gold.”
    .
    .
    .
    .
    Just throwing this in because the thread has branched out slightly – does anyone remember $1,000 bills? I saw a few in my younger days. Not many can say that nowadays.

    Dad was a coin collector and had an interest in guns, albeit a rather odd taste in guns. Dad let me tag along to some gun or coin focused shows when I was in my pre-teens, and there would be the occasional $1,000 bill on display. A bit wide-eyed, I remarked to dad about the bills and he said, “Oh, that’s their buying money in case someone comes in wanting to sell a collection or a particularly valuable piece.”

    I am guessing that those were silver certificates, but anyhow, they were banned sometime during the ’70s, IIRC. Too easy to hide 20 or 30 of those bills on your person as you were leaving the country. (@#$&!-ing government!)

    Oh, here we go. A bit of info on the high-dollar value bills.
    https://www.answers.com/Q/When_were_the_US_500_dollar_bill_and_1000_dollar_bill_discontinued

    What with inflation, since 1969, they should probably start printing them again, although that will never happen. The gubmint is trying to get rid of cash altogether.

  10. cdquarles says:

    If I am not mistaken, the USD is both gold (doesn’t circulate) and oil (does circulate as just a paper IOU). The IMF special drawing rights are a combination of gold and a basket of paper currencies.

    Many years ago, I visited Las Vegas. There was a display there that had several old gold and silver certificates. The gold ones were taken out ca 1934. The silver ones in 1965, I think. Country to country conversion of old certificates in 1972.

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