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http://www.goldstandardinstitute.org/Article....Name=PB20120409
The importance of goldâs 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 couldnât 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 âstockâ. 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 âflowâ. 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 doesnât get any more important than
that.
Philip Barton
16th July, 2011
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