Gold and the Problem of Capital Storage


"Given accelerating price increases, why hurry to extract the gold?"

One of the reasons gold retains its competitiveness as a capital-storage unit is the rather slow and plodding rate at which supply is brought to market. Since 1900, compound annual growth of world gold production comes in at 1.098%—below the increase for a number of other natural resources and, in particular, well, well below the rate of credit production—the "resource" that now plagues the developed world. Indeed, the overproduction of credit the past 25 years has once again driven capital back into hard assets like gold. This brings up an intriguing subject—the conversion of resources into financial capital and the conversation of financial capital back into resources. Let's take a look at the chart. . .

World Gold Production 1900-2008

The migration of capital, between the world of natural resources and that of finance, has been addressed by numerous thinkers, one of the more compelling being Harold Hotelling. Writing in the Journal of Political Economy in 1931, Hotelling proposed that a rational producer of resources would only be inclined to extract and sell that resource if the investment opportunities available with the capital proceeds were greater than simply leaving it to appreciate in the ground. Given Hotelling's theory of resource extraction, what has happened to gold production since 2000? Does the chart reflect geological and cost limits to increasing gold production, even as the price rose from $250/oz.–$1,000/oz.? Or, has there been some moderate yet gathering decision by global gold producers to extract gold more slowly? After all, why extract gold to merely convert gold into paper currency, beyond the need to pay for the cost of production and provide, say, a dividend to shareholders? Given the rate at which the price has been rising, why hurry to extract the gold?

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