[OPE-L] [Jurriaan] Notes on gold

From: glevy@PRATT.EDU
Date: Sat Oct 08 2005 - 09:12:50 EDT

---------------------------- Original Message -------------------------
Subject: Notes on gold
From:    "Jurriaan Bendien" <adsl675281@tiscali.nl>
Date:    Sat, October 8, 2005 6:49 am

The amount of US dollar currency in circulation is probably more than
sixty times the value of official US gold stocks. But a currency/gold
comparison is not very meaningful these days, in view of the enormous
discrepancy between M1 and M3 in the USA (where M3 is seven times larger
than M1). Here's the evolution of M3 for the US$ (mid-year, seasonally
adjusted, billions of dollars):

2000 6863.5
2001 7666.2
2002 8221.7
2003 8847.7
2004 9293.0
Aug 2005: 9873.9

In excess of US$700 billion in cash is now said to circulate throughout
the world (outside U.S. Treasury, Federal Reserve Banks and the vaults of
depository institutions). It is said that over 60 percent of this cash is
used beyond American borders. http://www.federalreserve.gov/ For data on
government gold reserves, see the useful IMF template
http://www.imf.org/external/np/sta/ir/colist.htm The US data are at:

Obviously, this data does not refer to all the gold in circulation, since
an unknown quantity will be *privately* held (interestingly, Roosevelt
made private gold ownership illegal in the United States in 1933). A
special study made of the private gold stock is here:
www.gold.org/pub_archive/pdf/retailgold.pdf The author claims an end-2000
value of the above-ground gold stock of 22,000 tonnes of  bullion (bars
and coins) valued at about $200 billion, which he notes is peanuts
compared to the value of the equity of the S&P 500. But precisely because
of this, if only a small fraction of the world's investment capital is
suddenly diverted into gold, gold prices can skyrocket (see below).

Is a return to the "gold standard" really possible? Obviously this depends
on the extent to which total financial claims (or currencies) could in
truth be "backed by gold". But in reality, total gold stocks are simply
insufficient to back all financial claims or currencies, it can back only
a portion of them. Hence, if not in a hegemonic currency, a "value
standard" must be lodged either in a "basket" of strategic commodities, or
in a mandatory currency coupled with price controls (interestingly, when
the currency reform in Germany occurred in 1948, officially 10 Reichsmarks
were convertible to 1 Deutschmark, but firms had the right to "estimate"
when they chose the value of their own capital; most limited companies
profitably converted on the basis of 1 Reichsmark for 1 Deutschmark, thus
contributing to the "German Economic Miracle"!) .

The world gold council also can often provide useful information about
gold: http://www.gold.org/

As regards gold prices, here's some US$ data (compared with movement in US
Consumers Price Index, base 1967=100):

1960 $36.50 CPI = 88.7
1970 $37.60 CPI = 116.3
1980 $641.20 CPI = 246.8
1990 $423.80 CPI = 391.4
2000 $272.15 CPI = 515.8
2004 $455.75 CPI = 565.8
current spot price - $472 to $477 ; CPI = 582.8 approx.
(for more detail, see http://www.lbma.org.uk/statistics_historic.htm ).

However, we really need to know the total trading volumes for gold as well,
but data on this is not so easy to get (the weighting of gold in the Dow
commodity index = 5.08/100) . The Tokyo Commodity Exchange
http://www.tocom.or.jp/souba/gold/ extrapolates these figures:

Oct 2005  270
Dec 2005 1,102
Feb 2006 1,881
Apr 2006 4,389
Jun 2006 15,142

Looks like gold is in the lift.

"The late economist Robert Triffin explained that there are two ways in
which an economy can adjust to excess demand caused by excess financing
(money supply growth). An increase in domestic prices is one way. Under
certain conditions, however, a current account deficit may "constitute the
main channel of adjustment to inflationary pressures and reduce
correspondingly the extent of domestic price increases."
Triffin also explained that as long as the excess demand persisted, any
measures that successfully reduced the current account deficit would boost
domestic prices, and any measures that successfully reduced the domestic
price level would boost the current account deficit. Only the removal of
the excess demand (the excess money) could solve both problems."
: http://www.gold-eagle.com/gold_digest_01/milhouse071601.html

But maybe there's some new ways to mediate that contradiction...


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