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The importance of gold's stock to flow ratio is greatly
underestimated. I first came across the concept in 2009 at a lecture by
Professor Antal E. Fekete in Szombathely, Hungary. It fascinated me and the
more I looked at its implications, the more amazed that I became, not least
of which because my search engine couldn't locate a single piece of writing
on the subject anywhere.
The stock to flow ratio of gold and its ramifications are
a book in its own right, but as this is a primer I will stick to the basics.
It is not possible to fully understand why gold is money without
understanding the stock to flow ratio and its significance.
For 6,000 years gold has been used to store wealth. Only
a small percentage has ever been used by industry. This means that the vast
majority of all the gold ever mined is still available for use. It is
generally agreed that 170,000 tonnes of gold has already been mined and is
still available for use. This is commonly known as the 'stock'. This figure
is a gross under-representation of the true stock of gold in the world, but
it will be used as the working figure to avoid becoming side-tracked.
Each year about 2,400 tonnes of newly mined gold arrives
in the market. This is known as the 'flow'. It is from these two amounts that
the ratio is derived. When the stock is divided by the flow we arrive at 71.
This means that the stock to flow ratio is 71 to 1. As I said, it is simple.
It is the ramifications of this simple ratio, when compared to the stock to
flow ratio of other metals, that is so startling.
That amount of flow (2,400 tonnes) is about 1.4 percent
of the stock. Even if gold production were to be doubled, then the annual
growth in the stock of gold would still be less than three percent. It is almost
impossible to imagine how mine supply could be doubled. Enormous new ore
bodies would need to be discovered. The stock of gold is far, far greater
than the amount of new gold arriving in the market each year. What this leads
to is a situation where the value of gold is very stable.
If for some reason the mine supply of gold (the flow)
were to completely cease for a couple of years, then again it would have no
effect on the value of gold. It is the large amount of easily available stock
that gives gold its stability of value. Because there is so much stock it is
uninfluenced by the amount of gold that is, or is not, entering the market
each year.
Nothing else (except, arguably, silver) has anywhere near
this stock to flow ratio. All other metals have a stock considerably less
than the flow; as fast as they are mined they are used. Commodity stocks are
rarely sufficient to last more than a couple of months. The reason that other
metals are mined is entirely different from the reason that gold is mined.
Most metals are mined to be used in manufacture; gold is mined because it is
money. Whilst readily available gold is equivalent to 71 years worth of
supply (stock to flow ratio of 71 to 1), most other commodities have far less
than 71 days worth of readily available supply.
Because of its scarcity, platinum has been suggested by
some as a new monetary metal. However, in the event that flow was to stop,
then stocks of platinum would be exhausted in a matter of weeks. In those
circumstances the value of platinum would skyrocket. That makes platinum far
too volatile for use as money. Platinum is a precious metal; it can never be
a monetary metal. Likewise if the flow of copper were to stop, easily
available stock would be exhausted in a matter of weeks and the price of the
copper would also skyrocket.
© The Gold Standard Institute
It is ironic that there is a common belief that gold is
money because it is precious. because there is so little of it. Gold is money
because there is so much of it. relative to flow.
When there is only a small stock of a metal (or any
commodity) compared to flow, then the price of that commodity can fluctuate
enormously. A new large mine would increase the flow and drop the price of
the metal. A sudden closing of a large mine would increase the price
dramatically. Such volatility in supply would cause great instability in the
perceived value of any metal with a small, above ground stock.
It is the stock to flow ratio that ensures that gold
continues to hold a steady value. Because of its high stock to flow ratio,
gold holds its value with a stability that is matched by nothing else, and
can be matched by nothing else. Because gold has been successfully used
as money for so long, it is now impossible to imagine how anything else could
ever succeed as money.
Even if a new commodity appeared that satisfied the many
functions and requirements of money, it still would not be able to achieve
the high stock to flow ratio necessary for real stability of value over time.
It is the high stock to flow ratio of gold, higher than anything else, which
ensures that gold holds its stable value over the longest period of time.
Gold has been accumulated for over 6,000 years to achieve the stock to flow
ratio that it has today. How could anything else ever match this?
Gold has a stock to flow ratio, with the consequent
stability of value, sufficient to ensure that it will forever remain the only
money. That is the significance of the stock to flow ratio. The stock to flow
ratio underpins the whole theory of gold as money; it doesn't get any more important
than that.
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