Jake Towne: Do you know how much gold is exchanged daily in dollars? If not, prepare to be shocked.
While gold trades as a currency (or “medium of exchange”) and also is a “store of value,” and even a “unit of account” for some, and very little is actually consumed. Economically speaking, gold trades even in the modern world as money.
Gold is a luxury good with insignificant industrial usage. Its major market as a luxury good is Indian women’s jewelry, but to these women gold is their money or insurance if their mate leaves, dies, or is disabled so the metal is not consumed — it can be easily recovered.
To make my case that gold is money, what seems to be little known is that the gold market is also quite large – the LBMA in 2008 traded about $80 billion USD per trading DAY per the data collected by the IFSL 2009 Bullion Markets Report [.pdf] — which I took the time to verify to be correct from its original sources — or $20.3 Trillion in turnover in 2008 and 254 LBMA trading days. (ISFL 3) However, the IFSL makes a significant note that this volume is quite likely three-to-five times larger since much of the transactions are increasingly netted out and cleared without appearing in the statistics. Please compare this to the 2008 GDP of the United States at $15 Trillion and understand the rough estimate that 75% of the world’s trade in gold (and half of the world’s silver) is traded via the LBMA.
On the other hand, silver serves as both an industrial metal and a “store of value” for silver investors. Both silver and gold are precious metals since there is very little aboveground stock. All of the gold stock in the world would fit into a cube 20.5 meters to a side. Due to high amounts of industrial usage, the silver stock is even smaller, less than 14.5 meters to a side.
However, as seen below, the silver market size at $10 billion is minuscule – just a tiny fraction of a percent – compared to the gold market. What is really mind-blowing is that the LBMA traded the entire annual mine production of silver every 6 days, while the annual mine production of gold was traded every 4-5 days, despite the fact that silver is priced as if it were a commodity similar to wheat, corn, or copper.
The aboveground stock of gold valued at about $4100 billion is equivalent to roughly 5.2 billion troy ounces of gold, but the annual mine production is only 0.087 billion. The aboveground stock of silver valued at $10 billion is estimated at roughly 1.0 billion troy ounces of silver and the annual mine production of silver is about 0.671 billion. (IFSL 5-8)
The annual “stocks-to-flow” ratio of gold is 60, meaning that there is the equivalent of ~60 years of production aboveground for every year of production. In contrast, for silver the ratio is about 1.5, which is much closer to typical commodities which all lie around one year of production in aboveground stocks for every year of production.
Gold is not just another commodity; mankind will never achieve perfection in all things, but nature’s “metal of the sun” is as close to perfect money as mankind is going to get. Modern-day gold mines are lucky to exceed 1 gram of gold from each metric ton (24,250 pounds) ground and processed.
If you never have, try holding a one troy ounce (31.1 gram) gold coin in your hand. It’s 2.5 times denser than steel and took a lot of effort and risk to mine.
The equivalent of the entire aboveground stock of gold is exchanged every 269 trading days while the equivalent of the entire aboveground stock of silver is exchanged every 9 trading days at the LBMA.
I interpret the all of the preceding information to mean that gold has never stopped being used as both a money and a currency, even in the last 38 years of floating fiat exchange rates. Silver is money as well, but is not traded in high enough volumes, in dollar terms since the price per ounce is too low, to be considered a currency. (Jason Hommel reinforces my point in his recent speech “Why Silver is Money“.)
Folks, this “stocks-to-flow” fact is well understood, but remains unstated, by the financial elite, most notably Obama’s chief economic advisor, Lawrence Summers. If the world population widely understands the above and begin to both acquire the physical metal and clamor for the restoration of gold and silver as honest money, governments and central bankers could very well lose what is amounting to a stranglehold over the global economy. The world would realize that central banks are not needed whatsoever.
“Financial crisis”? Screw that, this is an all-out Gold War. Go GATA!!
Per the Constitution of the United States, Congress and all states are forbidden to “make any Thing but gold and silver Coin a Tender in Payment of Debts.”
Jake is also a contributor to Nolan Chart.