Inflation is appearing in global food prices, arguably the main cause of recent Mid-East unrest. Economic shocks from the spreading revolution are further stressing the fiat currency system. Central banks may need to expand their interventionist activities yet again, or try an altogether different strategy.
Can we find clues to the timing of monetary authorities’ next major change in tactics? In my last article, I discussed the possibility of a partial retreat by central banks to a semi-convertible gold standard, and the implications for the future of honest money. What might be a logical trigger for such an event?
Today, most physical bullion is already in the hands of long-term holders. Between central banks, the world’s wealthiest families, and the upper-classes of nations such as India where multi-generational gold ownership/inheritance is common, very little metal remains available for large-scale accumulators.
China, Russia and other major nations seek to dramatically increase their official government holdings, yet the institutional market may not offer sufficient deliverable metal. Is there another potential source? Yes – the cash-for-gold industry.
Gold advocates might have mixed feelings about the new mail-in or store-front gold refinery services. While such companies highlight gold’s rising dollar price, and also subtly remind people gold is synonymous with liquid cash, they may ultimately harm the cause of honest money.
First, the positive message to would-be gold owners implicit in these firms’ very existence is distorted by astoundingly bad logic from financial commentators. Gold buyers are advertising regularly, including Cash4Gold’s famous 2009 Super Bowl spot. But perversely this is held up as evidence that gold’s gain in value (the US dollar’s decline) is reaching an end – as though private corporations offering to buy gold from the public were the same thing as the public itself queuing to purchase metal.
To be fair, there are also numerous ads selling gold to the public, often at extremely unfavorable rates. Whether the amounts being purchased by the public offset the actual weight collected by mail-in refineries is unclear, however.
Second, the wide dispersion of gold jewelry in western households can cushion the impact of an unplanned (panic) transition to gold and silver money. To the extent it has been extracted, leaving people with no immediate ability to feed themselves when fiat money fails, there will be additional barriers to a successful transition. A man with no food and no clear hope for improving circumstances has little to loose by rioting.
How much gold jewelry is available in North America for refiners? (I will ignore Europe and Asia, given the higher regard in which gold is held there.) An industry contact tells me the average household owns jewelry containing 0.75 ounces of gold. With 130 million households, that represents approximately 3,000 tons – a major source for potential accumulators. It would not surprise me if the Chinese government was the final buyer for all these mail-in services, or perhaps even the true behind-the-scenes operator of them.
How quickly is gold being extracted from the public? Cash4Gold’s 2010 purchase rate was reported as in excess of 1,700 ounces per day – still less than 15 tons per year. Even assuming Cash4Gold represents only 25% of the market, 60 tons is only a 2% depletion rate. This suggests a long delay before available physical gold truly runs out.
But we know it is a dynamic process. There is a profit to be made… immediately on the operating margins and long-term through appreciation of gold’s purchasing power. So, free market economics correctly dictates that cash-for-gold competitors will pile in until the market is totally saturated and the 3,000 ton resource is largely depleted. Or until the return of gold and silver as money. Where the tipping point might come depends on other circumstances in financial markets. But if, say, 1% of this reservoir had already been processed before 2010, and the current 2% annual rate of extraction doubles every year, fully one-third of this gold will be gone by the end of 2013.
Some interesting recent commentary has highlighted another major pool of available metal. The largest gold exchange traded fund, the SPDR Gold Trust (GLD-NYSE), may also be serving as a final 1,200 ton reservoir for institutional investors, who can source physical gold through the delivery mechanism available to big purchasers. If true, this pool will be drained much faster than North America’s aggregate household jewelry, because of the simplicity of the ETF’s operation. At that point, whether gold mail-in operations can sustain the fiat system will depend on the extent (and rate) of jewelry extraction then prevailing.
Or, more accurately, it will depend on whether the average citizen has awoken to the monetary properties of what little gold he still possesses.