Everyone loves to hear a good conspiracy theory. But how often can we actually participate in one? Well take a look at this idea of middle-class citizens cornering the gold market.
The 2007 US Census calculates there are 47 million middle-class households.
And I feel comfortable estimating worldwide there are at least 200 million such households. Suppose this middle-class community decides to take the family out and buy just one, soft yellow ounce of gold in 2009?
Over the last 30 years world gold production has climbed from 40 to 80 million ounces/yr. And the price of gold has also risen from $400 to $800 per ounce in the same time frame. Now suppose within the next 5 years, or even 3 years, the demand for gold grows still more. World gold mining production and the sale of government reserves create 360 million “new” ounces each year. If the middle-class, all 200 million, buy one ounce of gold we would increase yearly demand by 56%. And then suppose we bought another single ounce of gold in 2010. Our small annual investment in gold will skyrocket the price within a few years. Neither government nor private production will be able to satisfy the demand or collude to suppress the price. In 5 years we will have amassed the same gold reserves as all the world governments. Our middle-class households will have cornered the market and be sitting on a proverbial golden nest egg.
Sounds interesting you say, but why monopolize gold and what effect could it have on our society? Gold has a long history of storing wealth for mankind. It has two characteristics which make it well suited for this. First, gold is inert, it does not interact with other elements. If you put a piece of gold on the top of your desk and walk away for 50,000 years, you will come back to find only your gold, everything else will have disintegrated. Gold is essentially indestructible and for our purpose lasts forever. The other characteristic which defines gold is its rarity. How much gold is in circulation right now? Well, in the last 200 years about 10 billion ounces of gold have been mined. In the 2 or 3 thousand years before then, if we conservatively estimate 10 million ounces a year, the total amount of gold in circulation today would be above 32 billion ounces. Estimates place un-retrieved gold at no more than 30 billion ounces. By this estimate we have already mined 52% of all the gold on earth. Rarity and indestructibility make gold uniquely endowed for the storage of wealth.
There are both macro and micro effects to our society if the middle-class decides to join this conspiracy. Obliviously our households will have a more permanent, protected wealth with more profit from it. We middle-class will be market-makers in gold and that means we must support the price of gold by holding our wealth.
The holding of wealth is more important than we realize. As mankind makes more and more wealth, we must hold that wealth in ways which do not overstimulate the supply and demand of society's needs. Imagine you have an extra million dollars at the end of the year. What would you buy or invest in? Buying real estate will increase the cost of real estate for everyone. Buying a stock will increase the price and dilute the value for everyone. Leaving the extra money in the bank will loan it out under the law of diminishing returns, increasing the cost of debt to everyone. The more wealth we have the easier it is to disrupt our economies, unless we store some wealth outside of economic necessities. Art, jewelry, precious gems, rare minerals like gold and silver, all provide storage of our wealth. Buying gold with your extra million dollars will increase the wealth of every gold owner. But will it increase the cost of your fuel or clothes or food or housing or college education or vacation? No, no more than if the Mona Lisa sold for twice her price.
The money we take out of our middle-class households to buy gold will not be available for other purchases or investments. As a consequence, there will be some reduction in the financial services and disposable goods industries. This will mildly trim corporate profits by limiting overall consumerism. Otherwise, there are no obvious negative effects to the middle-class when we buy gold and the price rises. The higher the price the more wealth is stored. The more wealth we earn and save in gold, the higher the price.
Gold maintains the relative value of wealth worldwide, its price fluctuates to adjust for political and economic security. If the price of oil increases for example, energy and transportation costs will rise. Gold prices will increase as well. The new middle-class demand for gold will act as a dampener on global inflation. Price increases are caused by extra money chasing the same amount of products. Storing some of your wealth in gold will soak up extra money, keeping downward pressure on the price of all goods and services we buy for quality of life.
What other repercussions will there be from our conspiracy? World governments have an estimated one billion ounces of gold. Rising prices will cause their economic reserves to grow enormously. I think this should add strength and stability to our governments. Second and third-world gold producing nations will see a rise in their standard of living. The cost of credit will decrease as the security of gold assets reduces or eliminates debt needs. The price of gold will rise until it is beyond the means of the middle-class to acquire it. At that point, the world’s rich will be a little poorer and the world’s poor will be a little richer, but our middle-class will sit on a yellow mountain of indestructible wealth, stabilizing our society and guaranteeing a better future for our next generation.
I own very little gold, nor do I work in the industry. But if I’m lucky enough to scrape up the cash, I will buy one yellow ounce in 2009.
Best to All
