Gold and the Problem of Capital Storage
Source: Seeking Alpha, Gregor Macdonald (10/27/10)
"Given accelerating price increases, why hurry to extract the gold?"
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?