Would an Abundant Gold Supply Lower Its Price or Hike Government Interventions?
When we consider a scenario where the amount of gold usable on Earth is similar to aluminum, or even surpasses it, the implications are far-reaching for both individual economies and global markets. Would this unprecedented abundance result in a drastically lower price for gold? Or would states and governments take drastic measures to maintain gold's value? Let's explore the potential consequences and the intricate balance between supply and demand.
Pricing Scenario and Market Dynamics
While it's true that governments and powerful entities often attempt to keep certain commodities artificially high in price, such strategies rarely succeed for long. For instance, to maintain a fixed price for gold, the government would need to buy up all the gold from the market. This move would create a black market, leading to a shortage and black market trading, which would disrupt the official pricing.
The government would essentially end up with massive warehouses full of gold that people are unwilling to buy at the mandated price. This situation could lead to unprecedented inflation due to an increased money supply, as the state would have to pay off the miners at a fixed price, leading to a flood of newly minted currency entering the economy. This scenario is economically unsustainable and would eventually collapse.
Why Gold Never Became Common Currency
If gold was much more plentiful, it's highly unlikely it would have ever been used as a standard of currency. This is primarily due to the unique properties of gold that have made it valuable and practical for monetary use.
Durability: Gold does not rust or burn, and can be stored indefinitely without losing its shine or value. This makes it highly durable and suitable for long-term storage and trading.
Scarcity: Gold is relatively difficult to extract from the earth compared to more common metals like aluminum. This scarcity lends gold a unique value that is difficult to replicate.
Aesthetics: Gold is beautiful and lustrous, which makes it a popular material for jewelry and other decorative items. This aesthetic value can also contribute to its desirability as a store of value.
Misconceptions with Abundant Metals: Other metals have been used as substitutes, but these have proven problematic. For example, the Swedish 10 Daler coin from 1644, made of copper, is the largest coin ever created. It weighed 20 kilograms and measured 33x62.5 cm. However, such bulk and inflexibility made it impractical for widespread use.
Government and Central Bank Responses
The transition from a gold-based monetary system to one using paper money marked a significant shift in economic history. For instance, Stockholm Banco, established in 1661, was a pioneering effort in paper money. Later, the Riksbank, the world's oldest central bank, took over the issuance of banknotes in 1668. This transition paved the way for modern financial systems and demonstrated the adaptability of central banks in managing economic challenges.
If gold supplies became as abundant as aluminum, the value and usability of gold would inevitably decline. Price speculation and market manipulation would lose their edge, as gold's status as a store of value would be undermined by its newfound abundance.
Market Cartels and Supply Control
Currently, the price of gold is often controlled by cartels, similar to the way oil prices are controlled. However, should a large reserve of gold be discovered, its cost would likely stabilize around the marginal cost of mining and refining it, possibly even dropping due to increased supply.
Investigating the actions of a wealthy individual who discovered a vast gold reserve, my hunch is that they would likely proceed with extreme caution. They might keep the discovery secret for as long as possible, gradually releasing the gold into the market while covering up its true source. This approach would allow them to avoid the risk of an immediate market crash, giving them time to strategize and maximize the value of their find.
In conclusion, the discovery of a massive gold reserve would likely lead to a decrease in gold's price due to oversupply. However, governments and financial institutions would likely take steps to mitigate the impact, including managing the release of the gold into the market and possibly adjusting monetary policy to maintain stability.