Gold is very expensive
When priced against real assets.
I know the gold bugs—and there are many of them—compare the amount of gold in existence (160 thousand tonnes being the total ever mined) with the amount of nominal money (including bank deposits etc) in existence. Gold adds up to $4.7 trillion at $950 per oz—nominal money maybe 60 trillion.
They thus assume that gold must go up.
I am not going to approach that argument—because much of the cash really is trash (or should be trash after we have got through throwing it out of helicopters).
What I want to note is the widespread headlines that maybe 50 trillion dollars of nominal wealth has been “wiped out” in this crisis and that something between 150 and 200 trillion remains. The official figure for the total US household wealth about 51 trillion. I don't have a number for the whole world—but just under 200 trillion is a reasonable guess in total—the US being just under a quarter of global activity—and having slightly more expensive equity markets than most the rest of the world.
Now does anyone really believe that the store of gold in vaults is worth over 2% of all tangible assets everywhere? Seriously?
Some would say that it is but how do you measure that value? What, precisely, is gold used for?
I know the gold bugs will hate this idea—because it harks back to the argument against gold—which is that it has no intrinsic value. We spend a lot of money (and kill a lot of birds with cyanide) to dig gold out of the ground only so we can bury it again with expensive guards on the vault.
Gold has no real value to other people; its very asset—that it is massively unreactive and does not tarnish—renders it pretty useless for any industrial process. You can't eat gold, you can't grow more of it, and it's pretty difficult to mine it—although this last has not stopped sudden influxes of gold causing massive inflation.
Gold is, essentially, only worth what people think it is—a fact that pretty much applies to our paper money too. Gold is not some magical store of wealth: although it has held its value when considered over centuries, even over the last twelve years it has fluctuated from about $280 per ounce (the Brown Bottom) to rather more than $1,000 per ounce. That is not what I call a stable currency.
Furthermore, there simply isn't enough gold to back the rapid economic growth—even that which is stable. As Bronte Capital has pointed out, at current prices (in other words, what people think gold is worth right now), there might be enough gold to cover 2% of world economic value (even after adjusting for the drop in value—correction of value?—induced by this crunch). And then what?
If we switched to entirely gold-backed currency, then the price of gold would have to go up by fifty times—to about $47,000 per ounce. That would, it's true, save a lot of governments' debt problems (although not ours: cheers, Gordon).
Alternatively, you would have to devalue the assets of the world to match the current price of gold. Which would make the current crunch look like child's play.
And then what? Economic growth stagnates? Do we need to mine more gold before we can see any real growth? We'd put our money supply into the hands of miners rather than governments and I'm not sure that either will be better than the other.
But there really isn't that much gold—it's rare, hence the only value that it has—so economics would, in effect, become a zero-sum game: for the rich to get rich, the poor would have to get poorer—which, despite the twitterings of the likes of Polly Toynbee and her Grauniad stablemates, is not currently the case.
Or have I totally misunderstood the situation? Hmmm, I don't think so although, since I am not an economist (and nor have I ever formally studied it), I am sure that there are nuances that I am missing. Please do comment.
And, just before people pop up and point out that I'm running contrary to the LPUK monetary policy, as seems to be tediously routine these days, I am not really. LPUK policy is to use multiple currencies, one of which would have to be backed by gold and would offer a store of value—for, in terms of what it can buy, gold has, as I said, held its value over centuries—should people wish to use it.
