Monday, April 23, 2012

Do You Own Your Share of the Gold?

This is hard to believe, but if you take all of the gold on the planet that has ever been mined and you distribute it evenly to every person on earth, then each person would have a little less than an ounce of gold.  It is impossible to know exactly how much gold exists (above ground), but the estimates put it at less than 7 billion ounces.  It would fill less than 3 Olympic-sized swimming pools.

If you own just one ounce of gold, then you are richer than the average person on earth, at least in measured with gold.  Of course, the only reason we correlate gold with wealth so much is because of its history as money.  We could talk about the number of cars people own, but most people don't need several cars and wouldn't buy extra cars as a store of value or medium of exchange.

If gold truly acted like money around the planet, then its value would likely be higher.  Gold is rare, as just discussed, which means that a small increase in demand on the margin could drive the price higher, in terms of dollars.

We should also remember that many governments/ central banks own gold.  This accounts for hundreds of millions of ounces, which means there is even less for individuals to own.

You can't eat gold.  You can't use it by itself to produce other things, aside from jewelry.  But gold has great characteristics for being used as a form of money.  So while gold itself does not really translate into wealth, it is a good medium of exchange and store of value.  So as long as the marketplace thinks it is a good form of money, it is a decent way to store wealth, even though it is really more like a receipt for wealth.

While society would be better off if the free market were able to choose the form of money we use (instead of governments), we should not forget that gold does not make a society rich unless it can be traded for real wealth.  Real wealth are the cars, houses, clothes, appliances, furniture, machinery, etc.  It also includes services and technology.  But if we want more of that real wealth, we will get more with a free market in money, instead of having a fiat currency imposed by governments, which serves to misallocate resources and slow the production of real wealth.

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