RE: Embry's commentsDave,
I’m going to respond with two posts. This post deals with the problems associated with a gold standard, and the next discusses expansion of the money supply.
According to St. Louis Fed, as of Jan 29th, 2007 the M2 measure for money supply was $7.093 trillion dollars. I know that they recently dropped M3, but let’s stick with M2 for purposes of this discussion.
According to the World Gold Council, the entire amount of gold mined in the history of the world by 2001 is estimated at 145,000 metric tonnes. Production since then has been approximately 2500 tonnes/year. So, by now this figure should be around 157,500 tonnes.
Of this, the US government currently holds 8133.5 tonnes, or 5.16% of all the gold ever recovered in the history of human civilization.
8133.5 tonnes x 32,150 oz/tonne = 261,492,025 ounces
If we take M2 and divide it by the above we get:
$7,093,000,000,000 / 261,492,025 = $27,125 per troy ounce.
Of course, all of us gold investors would be delighted if this was the case! Imagine waking up tomorrow to the wonderful news and watching your penny gold stocks explode into the stratosphere.
However, aside from purely selfish vested interests you have to stop and ask yourself if this would really make a lot of sense. Does $27,125 truly reflect the value of one troy ounce of gold? What could someone in the 19th century purchase with the same ounce gold? In 1800 gold was $19.39, while by 1932 it was still only worth $20.67 cents or about a week’s salary for an office worker.
The problem is that the growth in the gold supply has been dwarfed by the incredible pace of our own economic expansion. What worked in pre-industrial society had become impossibly unwieldy by the middle of the 20th century.
And there is another issue as well. Why should the government control the price of any commodity? Shouldn’t the market decide how much gold is worth?
If gold really were fixed by the government at $27,125/oz, none of us could afford any.
-Bloomfield-