Wednesday, May 27, 2009

Gold Trading

Gold Trading

There is no permanent ideal basis for a monetary system. The optimal solution is cyclical because it depends on economic conditions.

Token money systems are best when there is useful productive work to be done, because it is easier to arrange a supply of capital to get such projects underway. Conversely gold is best when getting projects underway should be avoided because of the poor economic outlook. Gold's limited supply rations capital. It cannot expand into all the crackpot schemes and phantom opportunities offered by an advanced but creaking economy.

Because the ideal money system is cyclical any attempt to resolve it once-and-for-all will fail. Working systems are destined to continue oscillating - expanding and contracting, succeeding and failing.

In the world there are currently somewhere between 120,000 and 140,000 tonnes of gold ‘above ground’. To visualise this imagine a single solid gold cube with edges of about 19 metres (about three metres short of the length of a tennis court). That's all that has ever been produced.

Divided amongst the population of the world there are about 23 grams per person, about 1.2 cubic centimetres each. This equates to about $250 - $350 worth per person on Earth, depending on the current price.

The value of that short tennis court sized cube is about $1.8 trillion. This compares to the US government’s sovereign debt of $6.9 trillion, which until 1971 was part-backed by gold. The US Gold Reserve is just over 8,000 tonnes - which is about 6% of the total gold ever mined. It is worth about $100 billion, or 1.5% of the US national debt.

$1.8 trillion is about one fourteenth of the paper based international bond markets, which themselves, at about $26 trillion, are about two thirds composed of western government sovereign debt almost all of which has appeared, co-incidentally, since 1971 and the declared supremacy of paper money, which was what allowed governments to borrow without caution. The total gold content of the world would pay - at current values - about 7% of the international bond market's sovereign debt. But of course 75% of the world's gold is not available to governments - being held privately as jewellery, bullion and coin. In fact only about 30,000 tonnes, about 1% of the world's sovereign debt is what is held in central bank gold reserves.

Meanwhile the entire gold stock of the world - including the privately held bulk - is much less than one half of one percent of the underwritten risk in the global financial derivatives markets.

The world has placed absolute trust in paper currency denominated assets. Investors have shunned gold for about twenty years while the notional value of paper based financial assets has exploded

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