Forbes: Applying The Numbers To Gold Supply And Demand

2% “fabrication premium” we have today for bullion coins like American Eagles is similar to jewelry premiums in Asia.

Nathan Lewis, Contributor
I write about monetary and tax policy for the 21st century.

One thing you often hear about gold, as a monetary asset, is that the supply of gold – the amount of gold in the world – increases by about 2% each year due to mining. We don’t really consume gold. Most of the gold that has ever been mined (the U.S. Geological Survey estimates 85%) still exists today as bars, coins and jewelry. Even the small bit that is used in industry is often recycled.

The next thing you typically hear is that a gold standard system works because the “money supply” increases at a stable rate, in line with mining production. In other words, the rate of growth of quantity is stable.

This is totally incorrect. If you look at any historical gold standard system, such as the Bank of England in the 1880s, you find that the “money supply” (base money) is in fact quite variable, and doesn’t follow this “2% per year” rule at all.

For example, in 1900, the U.S. monetary base increased to an estimated $1,344 million, from $1,126 million in 1899. That’s an increase of 19.4%.

In 1896, however, the U.S. monetary base fell to $944m from $1,022m in 1895, a decrease of 7.6%.

There’s nothing stable at all about the “money supply” with a gold standard system. It adjusts, automatically via the value parity, to the economic conditions of the time.

The “stable” part is stable value. The British pound maintained a defined value compared to gold. Gold, likewise, maintained a stable value in part because the supply was very large and stable.

Here is one of our favorite 19th century references, John Stuart Mill, on the subject:

“[O]n the whole, no commodities are so little exposed [as gold and silver] to causes of variation. They fluctuate less than almost any other things in their cost of production. And from their durability, the total quantity in existence is at all times so great in proportion to the annual supply, that the effect on value even of a change in the cost of production is not sudden; a very long time being required to diminish materially the quantity in existence, and even to increase it greatly not being a rapid process. Gold and silver, therefore, are more fit than any other commodity to be the subject of engagements for receiving or paying a given quantity at some distant period.”

Let’s look at some of the recent specifics. How is gold different than copper?

Continued on Page 2


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