From Commodity Online:
Global gold production is projected to exceed 2.6 thousand metric tons by next year, according to GIA.
In its global report on gold mining stocks, Global Industry Analysts Inc said production is being primarily driven by increasing gold prices, which are improving the economic viability of hitherto unviable resources*, and technologies...
Gold supply is a mix of mined gold, central bank supply, and scrap recovery. About two-thirds of global gold supply is met from mined gold. In 2009, mine production broke away from a trend of decreasing production that began in 2006.
For comparison, the total amount of physical gold held above ground is estimated to be about 80,000 tons (that's what they said on that Dispatches programme on Channel 4 yesterday, other sources say it's a bit more than that), so annual new production of 2,600 tonnes is pretty heroic (it's enough to increase physical supply by over 3% a year - if only the housing market were as responsive!).
Just for fun, let's divide 80,000 tons by world population of 6.8 billion, that's enough for about 12 grams each, i.e. about £400's worth at today's prices. That would do for coinage, jewellery, but not much more than that. We can't all magically stick our life savings into gold.
* Resources = stuff that is physically there, whether it's economically viable profitable to mine it or not. Reserves = resources which are worth mining. So the amount of reserves can go up and down rapidly; the amount of resources is fixed.
Tuesday, 28 June 2011
The Joys Of Supply And Demand
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16 comments:
"Viable" has become a way to evade the use of "profitable". I fart in its general direction.
D, go on then, seeing as it's you.
I have been thinking about this recently, how has the supply of gold compared over the last, say, fifty years with the expansion of paper? I.e. if we had stayed on the gold standard as some people wish we had, would there have been significantly less inflation?
BE, that's a bit of a red herring I think.
When we had the 'gold standard' it did not mean that all payments were made in gold coins, it merely meant that the value of currencies was vaguely linked to the price of gold.
i.e. it is perfectly possible to have fractional reserve banking even if the base currency is gold coins, because debts and deposits can both be denominated in terms of gold coins.
Clearly, denominating everything in gold coins would tend to dampen price inflation, but not necessarily monetary inflation.
i.e. we've been having land price bubbles since time immemorial, and share price bubbles since shares were invented (and a tulip bubble) even though at the time, we used the gold standard.
What always impresses me about gold and other heavy metals is how they were synthesised in the first place! In a supernova. And a long time ago too, for gold et al on Earth.
Just for fun, let's divide 80,000 tons by world population of 6.8 billion, that's enough for about 12 grams each, i.e. about £400's worth at today's prices. That would do for coinage, jewellery, but not much more than that. We can't all magically stick our life savings into gold.
Of course we could. You've completely ignore supply and demand.
If everyone put their life savings into gold, it would very quickly change from "£400 at today's prices".
OP, a small number of people have recently tried putting their life savings into gold and the price has already trebled in a couple of years.
If more people try it, then gold will become so ridiculously overvalued that some people will start selling again and buying silver, tin, platinum, oil and so on and so forth.
And think about the person from whom you want to buy the gold - his life savings are ALREADY in gold, so how can you pay him if he doesn't want to accept cash money?
That's as maybe; but you've switched from what would happen in your hypothetical "everyone uses gold" scenario to the real world. It's easy to see what happens in the real world... we just look. Gold is already the right price, but equally, we're not trying to store all the world's wealth in it by giving everyone 12 grams each.
I was merely pointing out that you can't use the current price of gold as a demonstration that gold doesn't have enough value to store the whole of the world's wealth. If the world suddenly decided the only way was gold, it would get a lot more valuable very quickly. More valuable to the extent that it would hold exactly the wealth of the world.
And think about the person from whom you want to buy the gold - his life savings are ALREADY in gold, so how can you pay him if he doesn't want to accept cash money?
I could pay him in hair cuts, or plumbing, or carpentry, or welding, or tax advice.
The flip side of the gold-increasing-in-value coin is that paper money would be decreasing in value. The last ounce would cost all the cash left in the world; and would probably be bought to play monopoly with or to heat the living room.
I'm often silently amused at the phrase "monopoly money" being treated as synonymous with worthless. Someone should tell The Parker Brothers.
OP: "I could pay him in hair cuts, or plumbing, or carpentry, or welding, or tax advice."
Taken to its logical extreme, the current holders of gold would thus own every bit of all output for ever more.
On a practical level, this simply won't work, take it from me.
A practical level
???
Who said anything about practical? You're the one who wanted to divide the total gold store by the population of the world to prove gold wasn't valuable enough. I think you've mistaken me for a goldbug -- I have no wish to use gold as a currency, on a practical level it's just not physically possible, never mind economically.
That doesn't mean your calculation is valid though: the correct method would be to take the total cash of the world (let's say 8 trillion dollars) and divide it by the total amount of gold, to find that one tonne of gold would be worth 100,000,000 dollars.
Taken to its logical extreme, the current holders of gold would thus own every bit of all output for ever more.
I'm sorry but that is nonsense. The current holders of gold would buy the next round of output; but then someone else would own some gold. Owning gold doesn't create wealth. Productive work creates wealth. All currencies are simply a way of moving that productive work through time and space.
You might as well argue that the current holders of pound notes will own all the output of the UK for ever more.
OP: "I'm sorry but that is nonsense."
Probably it is (but it was you who started this pointless but enjoyable debate) and you yourself said: "The flip side of the gold-increasing-in-value coin is that paper money would be decreasing in value. The last ounce would cost all the cash left in the world."
So why wouldn't the last ounce also be worth all the hair cuts or plumbing in the world?
So why wouldn't the last ounce also be worth all the hair cuts or plumbing in the world?
Being worth all the worthless cash in the world is not the same as being worth everything in the world.
Let's say one ounce of gold is worth one hair cut, and all the dollars in the world. Logic tells us that a hair cut is worth all the dollars in the world too.
When paper money devalued to that extent, then I might perhaps find it better to buy gold using my skills rather than my savings. Just as now I find it better to buy a house with my skills rather than my collection of 1980s copies of the Beano.
Thought Experiment: Alice owns all the gold in the world. Bob owns everything else in the world. Alice is willing to buy all Bob's stuff and Bob is willing to sell it to her.
What does that imply? Well it implies that Alice prefers owning all the non-gold to owning the gold and Bob prefers owning all the gold to owning all the non-gold. In other words the gold is more valuable to Bob than everything else in the world and less valuable to Alice.
Now in supply and demand terms an item's value is equivalent to the value of any item that it can be exchanged for. So in this case the gold is indeed worth the value of "everything else in the world".
So they carry out the exchange. Now Bob owns all the gold in the world and Alice owns everything else. However after a while Bob changes his mind about his preferences. Alice does not. So although Bob is willing to exchange the gold for "everything else in the world", Alice is not. No exchange takes place.
A third person, Chris, would be willing to exchange something for Bob's gold but since Alice and Bob own everything between them, Chris doesn't have anything to exchange for the gold. In supply-and-demand terms, the gold has become worthless as Alice does not want it and Chris doesn't have anything to swap for it.
A few weeks later Alice dies, leaving all her worldly possessions to Chris. Bob suggests an exchange to Chris. Chris is not willing to exchange "everything else" to Bob but is quite happy to swap half of "everything else". And Bob agrees. So at this point "all the gold in the world" is now worth "half of everything else". But once the transaction has been carried out Chris has no more interest in exchanging anything for gold. So once again the value of the gold falls to zero.
So what does this unrealistic little tale tell us about the value of gold? Well, I think it says that the value of any item, gold included, depends on the existence of people who own stuff which they are willing to swap for it. In principle, the value of all the gold in the world is equivalent to the value of all the items (including money and legal rights) owned by people who would be prepared to swap them for a portion of the gold. That may be a lot of stuff but it is very likely less than the total sum of everything in the world.
Thanks Derek. That neatly illustrates that gold, unlike any other substance, is valuable simply because it's valuable, rather than being valuable because it's useful. Even silver is mostly found as ornaments, cutlery, silver iodide or something useful, but the vast majority of gold sits around in vaults doing sweet f a. If everybody suffered collective amnesia about gold, then they'd be saying "What's this yellow metal doing in our bank vaults? Can you do anything with it?" and it would all be sold to the electronics industry for very little money.
OP, D, that is too deep, even for me, so I'll merrily concede the point and move on.
B, as some bright spark once said: this whole gold thing is insane - we expend vast amounts of time and capital and human life in extracting it from under ground, merely so that central banks can spend more vast amounts of time and capital storing it securely below ground again. The whole process adds precisely f- all to human wealth or happiness and detracts huge amounts instead.
this whole gold thing is insane - we expend vast amounts of time and capital and human life in extracting it from under ground, merely so that central banks can spend more vast amounts of time and capital storing it securely below ground again
Now that I can get on board with.
As you (Mark) know I'm currently a bit taken with bitcoins as an alternative currency. They seem to me to have all the positive attributes of gold (save one) and none of the negative attributes (that we expend effort making big holes in the ground, for no real purpose).
The one property that bitcoins don't have that gold does is that gold has thousands of years of history as an accepted store of wealth. How annoying.
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