Courtesy of Sandeep Jaitly @ Fekete Research:
Should gold be considered an ordinary commodity like copper or lead? At first blush, this might be a reasonable assumption to make, but on closer inspection it doesn’t quite hold up.
Gold has constant margin utility. This means that, for any individual, the satiation point is so far removed as to be infinitely far away. Each ounce of gold is accepted on the same terms as the previous ounce of gold already owned was accepted. A consequence of a substance having constant marginal utility to us will be a large ‘stock to flow’ ratio. The stock to flow ratio is the ratio of global (above ground) finished inventory to annual primary production.
Assuming a total gold inventory of around 150,000T in 2002, it can be seen that this as a multiple of annual primary production is currently in excess of 65X. According to the World Bureau of Metal Statistics (WBMS), primary production of copper was 19.8Mt in 2011 and total copper inventory was around 0.78Mt. This puts the stock to flow ratio for copper at 0.04X (in 2011) – over 1,600 times less than gold’s stock to flow ratio. What about wheat? Total global wheat inventory (from United States Dept. of Agriculture) was around 175.6kt at the end of 2011. This compared to primary wheat production that year of 418.5Mt giving a stock to flow ratio of 0.05X.
The following is a (not exhaustive) list of common views on gold:
1. Gold is a useless commodity compared to, say, oil.
2. Gold is a rare metal.
3. Backing money with gold prevents inflation.
Each of these statements will be examined for their merit. Continue reading