Just the Right Amount of Gold

After his testimony to the Senate Banking Committee on March 1st Ben Bernanke was asked a question about the gold standard.  His answer:

"It did deliver price stability over very long periods of time but over shorter periods of time it caused wide swings in prices related to changes in demand or supply of gold. So, I don't think it's a panacea, and there also are other practical problems like the fact that we don't have enough gold to support our money supply.... I don't think that a full-fledged gold standard would be practical at this point." [emphasis added]

The idea that there is not enough gold to support a modern day gold standard is a widely held belief among financial elites and novices alike.  Ask almost anyone if they are in favor of reintroducing gold into our monetary system and you are likely to hear some version of what Mr. Bernanke said.  The problem with his argument, as with so many perceptions about gold, is that it is factually incorrect.  Today we not only have enough gold, we have just the right amount of gold to support our money supply.

There are two reasons for this.  The first is that all of the gold ever mined still exists.  Gold does not corrode or get used up and there is reliable data on how much of it we have taken out of the ground.  Today that number is about 168,000 tons or 5.4 billion ounces.  The second reason is that the growth rate of the world’s above ground gold stock is, as demonstrated by a century of production data, almost identical to the rate of growth of global population.  Year in and year out, each grows at about 2%.  The result - there is approximately 0.8 ounces of gold for every person on the planet today just as there was in 1900, 1950 and 1971, the last year in which dollars were convertible into gold.

Number of People vs. Ounces of Above Ground Gold

This uniquely tight relationship between the growth of the above ground gold stock and that of the world’s population is one of the reasons why gold has been an effective regulating mechanism of the money supply on numerous occasions in our past.  It is also the reason why there is no shortage of gold as it relates to the requirements of a modern day gold standard.

Back in 1980, when gold traded to $850 an ounce, the above ground gold stock was valued at 141% of the US money supply (M3).  In essence we had more gold than dollars.  Today, at $1400 an ounce, the above ground gold stock is valued at only 54% of M3.  While the gold stock continued to grow in proportion to the population over that 31 year period, the money supply inflated more rapidly than at any time in our history.  This should not lead us to conclude that a gold backed dollar is no longer possible.  Rather, the 400% rise in the gold price over the last 10 years is evidence that the market is narrowing the gap between gold and dollars and is quietly clearing the way for the acceptance of sound money.  For the first time in decades the media is allowing monetary thinkers to whisper the term “gold standard”.  Even Mr. Bernanke’s criticisms on March 1st were delivered with rounded edges, concluding with, “not practical at this point”.