Gold Beat? Standard.

AWoodside · #1 01-06-2007, 08:22 PM

Lurking on this board has convinced me that a gold standard is far superior to the funny money federal reserve system we have right now, but I have a question.

How does a gold-standard system react if something were to happen that quickly and sharply devalued gold. Say for example, a gold mine is discovered that can outproduce all other gold mines in the world by a factor of 10. Or some scientist developes a cheap way (cheaper than the energy/material costs in gold anyway) to create gold from lead.

My history is fuzzy, but didn't an influx of gold from the New World crush Spain's gold-based economy at some point in the past?

I imagine if we ever went back to a "gold standard" it would be a more robust system. By this I mean gold wouldn't be the sole commodity backing the currency. It would also be backed by silver, silk, land, etc. etc. so that if one of the commodities backing the currency got devalued all of a sudden the ill-affects would be mitigated.

Anyway, just curious about your thoughts. Basically, what happens in a gold backed currency if gold becomes abundant rather than scarce, and are there solutions to this problem (if I'm correct that it's a problem) other than the one I sketched out above?

hmkpoker · #2 01-06-2007, 08:32 PM

If gold suddenly exploded in supply, another similar limited-supply resource would take its place, like silver.

However, the reason the gold standard was selected was because this happens so infrequently. No one would have valued gold if gold mines were popping up all over the place. The ability to cheaply create gold from lead would be a challenge to the gold standard indeed, but if we actually develop the ability to cheaply produce any formerly scarce resource from an abundant resource, property rights may simply have little reason to exist.

Borodog · #3 01-06-2007, 08:37 PM

Nothing much happens, other than the people who open the new mines become very rich. The general price level would eventually increase due to the inflation, but its almost impossible to imagine it occuring to such a scale that it would cause any sort of problem, because it would probably only slow the general fall in prices due to increasing productivity in an environment with an (otherwise) fixed money supply.

Unless someone discovers an asteroid made of gold, starts mining it and shipping it down it's virtually impossible for the gold supply to increase by more than a tiny percentage every year.

Dan. · #4 01-06-2007, 08:47 PM

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Nothing much happens, other than the people who open the new mines become very rich. The general price level would eventually increase due to the inflation

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[img]/images/graemlins/confused.gif[/img] [img]/images/graemlins/confused.gif[/img] [img]/images/graemlins/confused.gif[/img] I thought the gold standard = no inflation?

hmkpoker · #5 01-06-2007, 08:52 PM

[ QUOTE ]
[ QUOTE ]
Nothing much happens, other than the people who open the new mines become very rich. The general price level would eventually increase due to the inflation

[/ QUOTE ]

[img]/images/graemlins/confused.gif[/img] [img]/images/graemlins/confused.gif[/img] [img]/images/graemlins/confused.gif[/img] I thought the gold standard = no inflation?

[/ QUOTE ]

The desired state of absolutely no inflation (defined as monetary expansion) is an asymptote of sorts; we can get closer to it, but we can't truly reach it (yet, anyway). Inflation can happen if new gold is discovered, and deflation can occur if people foolishly lose or consume their gold. But it would happen so infrequently that it's not a big deal. If someone finds a gold mine and becomes a billionaire overnight, meh, good for him. That ain't nothing compared to the Fed.

bobman0330 · #6 01-06-2007, 10:00 PM

[ QUOTE ]
[ QUOTE ]
[ QUOTE ]
Nothing much happens, other than the people who open the new mines become very rich. The general price level would eventually increase due to the inflation

[/ QUOTE ]

[img]/images/graemlins/confused.gif[/img] [img]/images/graemlins/confused.gif[/img] [img]/images/graemlins/confused.gif[/img] I thought the gold standard = no inflation?

[/ QUOTE ]

The desired state of absolutely no inflation (defined as monetary expansion) is an asymptote of sorts; we can get closer to it, but we can't truly reach it (yet, anyway). Inflation can happen if new gold is discovered, and deflation can occur if people foolishly lose or consume their gold. But it would happen so infrequently that it's not a big deal. If someone finds a gold mine and becomes a billionaire overnight, meh, good for him. That ain't nothing compared to the Fed.

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Presumably there would be appreciable inflation from everyone melting down their gold jewelery at some point in the future, when prices get low enough.

hmkpoker · #7 01-06-2007, 10:57 PM

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Presumably there would be appreciable inflation from everyone melting down their gold jewelery at some point in the future, when prices get low enough.

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Two factors are at play here. One is the amount of gold currently being consumed (the percentage that is used as jewelry) and the other is the rate at which people would want to convert their consumption into investment.

I don't know the numbers, but I have a feeling that the percentage of the gold supply being consumed is less than 10% (my gut actually says a LOT less, but I'm being conservative).

Most of the cost of gold jewelry is locked in the jeweler's premium, not the raw materials. Jewelry makes a poor investment; the amount of actual gold commonly in the jewelry is extremely low when compared to the cost (how much gold will you get by trashing your 20k yuppie Rolex? Two ounces? Three?) The only people who own gold jewelry with any significant amount of gold in it are rich. It's a status symbol. They don't want to invest it. I don't think Master P is going to look cool when he starts melting his bling-bling bedroom for investment purposes (and besides, as gold prices continue to rise, he can do that now anyway.)

If we assume that as much as 10% of the gold supply is being used as jewelry, and that in one year almost 100% of that gold will be melted and invested (which I seriously doubt the wealthy are in a hurry to do), then you're basically witnessing a monetary expansion that's about what we have now, except with an abrupt end in sight. Whoopee.

AWoodside · #8 01-07-2007, 03:22 AM

I <3 you guys.

MidGe · #9 01-07-2007, 03:43 AM

[ QUOTE ]
Two factors are at play here. One is the amount of gold currently being consumed (the percentage that is used as jewelry) and the other is the rate at which people would want to convert their consumption into investment.

[/ QUOTE ]

???

Gold consumption has little to do with jewelery, it has to do with industrial use, where it is hard to recycle. Jewelery, except for the aesthetic add-on costs is till gold and is used so (effectively as a storage of money) in most cultures that have a strong gold/jewelery use (Asia).

hmkpoker · #10 01-07-2007, 04:02 AM

I know little about the industrial use of gold. I know that the industrial use of silver is on the rise and I know they also have uses for gold, but my impression was that it is infrequent.

If people want to store their money as jewelry I don't see the problem. It's just savings. If gold gets consumed so much that it is no longer practical as an exchange medium, the market will simply select the next-best form of currency.