According to a recent comment by a well-respected
analyst, one of the problems with using gold as money is that the supply of
gold could experience large swings due to changes in mine production. The
ignorance reflected by this comment is simply breathtaking. The usual
complaint about using gold as money is that the supply of gold doesn't
increase fast enough to facilitate strong economic growth, as if producing
more stuff requires more of the general medium of exchange. To know why the
'insufficient rate of supply growth' complaint is bogus you must have a basic
understanding of good economic theory, which most people don't have. However,
to know why the 'large swings in gold supply' complaint is bogus you only
have to take a cursory glance at some charts. It seems that the analyst
mentioned above didn't even bother to take a cursory glance at some charts
before spreading what is, to put it politely, misinformation.
The charts of relevance show what tends to happen to
money supply under the current global monetary system, that is, under a
system where the money supply is primarily determined by a central bank. But
before we get to these charts, let's briefly consider the global supply of
Over the past 100 years the total aboveground supply of
gold increased at 1.5%-2.0% per year, year in year out*. On the occasions
when the growth rate moved out of this range, it was only ever by a small
amount. There were periods of larger increases in gold production during the
1800s and early-1900s due to major high-grade gold discoveries and the
invention of the cyanide leaching process, but the current trend is towards
marginally lower global gold production. In any case, even if we make the
unrealistic assumption that an amazing new technological advance will allow
the global gold mining industry to double its annual output, the result would
only be an increase in the gold inflation rate from around 1.5%/year to
So, the global gold supply will probably continue to
increase at around 1.5%/year, but under an absurd scenario could possibly
increase as rapidly as 3%/year. It will never decline, because for the same
reason that gold can't be created out of thin air it can't disappear into
thin air. How does this compare with our fiat money?
Here are a bunch of charts that show how it compares,
beginning with a chart prepared by Mike Pollaro that reveals the year-over-year (YOY) rates
of growth in the supplies of the US$ (identified as TMS2 on the chart), the
euro, the British Pound and the Yen. The chart shows that with the exception
of the Yen, the annual rate of supply growth in the world's major currencies
has, since 2000, oscillated between -3% to 2% at the low end and at least 18%
at the high end. The Yen has been more stable in that its growth rate has
oscillated between -1% and 5%.
Turning to some other currencies, the following charts
1) Since the beginning of 2000 the YOY rate of growth
in the Australian True Money Supply (TMS) has gone from 15% down to 0% up to 26%
down to 7% up to 26% down to -3% (a brief period of monetary deflation) and
finally up to the 5%-10% range where it remains today. And the Reserve Bank
of Australia is generally considered to be one of the most prudent central
2) The YOY rate of growth in the Brazilian TMS has
swung wildly between 0%-7% at the low end and 20%-30% at the high end.
3) The YOY rate of growth in China's M1 money supply
spent the first seven years of the last decade oscillating between 10% and
20%. The swings then became even larger, with a decline to 6% in late-2008
and then a moonshot to almost 40% in early-2010 followed by a decline to 3%
4) The YOY rate of growth in South African TMS has been
all over the place. The South African economy has been careening between
monetary deflation and rapid monetary inflation.
And some people have the nerve to claim that
money-supply instability is a risk posed by a gold standard!
Large changes in the money supply get in the way of
economic progress and always end up occurring when central banks and/or
governments have the power to determine the money supply.
*As we've explained in many previous commentaries,
this is why changes in mine production can safely be ignored when attempting
to predict the future performance of the gold price.
This is excerpted from a commentary originally posted
on 9th December 2012.
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