This is based on the original article, but has been slightly modified to form Chapter 3 of Dawn of Gold. PB
Truth, like gold, is to be obtained not by its growth, but by washing away from it all that is not gold.
Leo Nikolaevich Tolstoy
If it is true that stability of value is the crux of monetary matters, then an understanding of the stock-to-flow ratio is of supreme importance. If nothing else is gained other than a thorough grasp of this, then the reader will be ahead of most in the Gold community, and way ahead of the vast majority of economists. No valid understanding of Gold can be attained without it. The stock-to-flow ratio is the uncomplicated technical entry point into the subject.
Gold has been used to store wealth for thousands of years. Only a small percentage of Gold has ever been used by industry and much of that is recycled. What this means is that the vast majority of all the Gold ever mined is still available for use. Around 174,000 tonnes is quoted as being the total amount of Gold available in the world. This figure is known as the ‘stock’.
Each year about 2,700 tonnes of Gold is mined. This is known as the ‘flow’. It is from these two amounts that the ratio is derived. When the stock is divided by the flow (174,000 ÷ 2,700), it produces a stock-to-flow ratio of 64 to 1. The stock-to-flow ratio is a way of stating the total amount of above ground stock, relative to the amount that is being produced by the mines each year. It is no more complicated than that.
What this ratio lacks in complication, it makes up for in importance. The point to hang on to is that the stock of Gold is far, far greater than the amount of new Gold arriving in the market each year. This leads to a situation where the value of Gold is very stable. The larger the Gold stock becomes, the less influenced it is by the flow of Gold from the mines. Having been accumulated for at least 6,000 years, the amount of stock is now so great that Gold’s value is uninfluenced by variations in the amount entering the market from the mines each year.
It is this huge amount of stock that gives Gold its stability of value. No other commodity has anywhere near this stock-to-flow ratio*. What this means is that nothing else has Gold’s stability of value. Most other commodities have a miniscule stock-to-flow ratio; their stock is less than the yearly flow – almost as fast as they are mined, they are used. World stocks of ordinary commodities are rarely sufficient to last more than a few months.
* Silver also has an unusually large stock-to-flow ratio, though not as large as Gold’s.
When there is only a small stock of a commodity compared to flow, then its value can fluctuate enormously. A new large mine would increase the flow and result in a fall in the value of the commodity. A sudden closing of a large mine would increase the value. Volatility in supply would cause instability in the market value of any commodity with a small above ground stock. Because of its high stock-to-flow ratio, Gold holds its value with a stability that is matched by nothing else, and can be matched by nothing else. The stock of Gold is equivalent to 64 years worth of flow. The stock of most other commodities would be depleted 64 days after mining ceased.
If Gold were just a normal commodity, its value would tumble with 174,000 tonnes already in existence. It is the constancy of the demand for Gold’s stability of value that ensures that the stock grows ever larger and, because of that, the value ever more stable – they are mutually reinforcing phenomena. It is Gold’s incomparably high stock-to-flow ratio that ensures it is, and will always be, the most stable store of value available. Gold has been accumulated for at least 6,000 years to achieve the stock-to-flow ratio that it has today. How could anything else ever match this?
Because of its scarcity, it has been suggested that platinum** could be a new monetary metal. But in the event that flow (mining) was to stop, then stocks of platinum would be exhausted in a matter of weeks. In those circumstances the value of platinum would skyrocket. That makes platinum far too volatile for use as money; it can never be a store of stable value because its stock is too small. Platinum is a precious metal; it can never be a monetary metal.
** The Spanish first discovered platinum in Colombia. They named it ‘platina’, meaning ‘little silver’. It was regarded as a nuisance because it sank to the bottom of the pans along with the Gold and silver.
The idea that platinum could be a monetary metal is not new. Platinum coins were minted in Russia under Czar Nicholas 1st. They contained nine parts Gold with sixty-eight parts of “pure Urals platinum” and were produced at the Saint Petersburg Mint from 1828 to 1845. Apart from being a very difficult to mint coin because of the metal’s hardness, they failed to circulate. They were never accepted as money because their value was not stable. The ‘platinum for money’ proponents have laboured under the common misconception that Gold is money because it is scarce – rare. On the contrary, Gold is money because there is so much of it… relative to flow.
The logic has been forwarded that much of the Gold stock should not be regarded as such because it is not available right now. That is an argument that serves more to cloud the issue than to clarify it. ‘Stock’ should not be interpreted as meaning that the whole amount is available to the market at any particular moment in time. All that can be surmised from the phrase ‘stock’ is that it exists in an available form and could enter the market at any time were its owners so inclined.
Just because something exists, it cannot be assumed that it will be available to the market whenever the market wants it. What it does mean is that it can become available to the market at some point – any point. Opinions as to how likely it is that various entities will put their Gold into the marketplace are just that – opinions. They have no bearing on the designation of all above ground Gold as ‘stock’.
Gold follows an inviolable cycle: accumulation – dispersal – accumulation. The Gold is permanent; its whereabouts is not. The owners, seemingly impregnably entrenched during their own era, are inevitably blown away by the winds of time. History exposes them as mere temporary custodians. Where today is the Gold of Egypt that existed for at least 6000 years, or Byzantium or Manichaeism?
It has been assumed that it is wholly the stock-to-flow ratio that gives Gold its stability of value. There is enormous usefulness in understanding the stock-to-flow ratio and its importance to this essential feature of Gold but, despite the compelling logic of the theory, it is not the whole truth. To understand the story of money it is necessary to return right to the beginning.
From the entry point of the stock-to-flow ratio of Gold, we can not only move forward to an understanding of its stability of value and the ramifications and importance of that in the present day, but we can move backward to discover the origins of Gold’s importance. The stock-to-flow ratio is pivotal to unlocking the millennia long mystery of Gold and money.
There is a start to everything. A stock of 174,000 tonnes does not just suddenly appear; it is the end result of a long, process of incremental accumulation. At a moment in time, way back at the dawn of human history, the fateful decision was made to begin to accumulate Gold. One person made that decision. Others followed this first unknown and unsung hero.
Yet no one would put aside a dozen eggs or some iron bars and expect them to have value sixty years later, let alone sixty centuries later.
This is a crucial point to understand in the search for the origins of money. The lasting and worldwide agreement to begin to acquire and accumulate Gold informs us that right from the beginning, from the moment the first unrefined nugget was set aside, Gold was already considered a store of stable value. If not, the decision to hoard it would not have been made. Something with an unstable value would not be widely stored. This one step back was the foot in the door of Gold’s origins as money.
The Cro-Magnon people (European Early Modern Humans) were among the earliest accumulators. Their Gold, in the form of rough nuggets gathered from where they discovered them in the streams, or just lying on the ground, has been found in their burial sites and cave dwellings dating as far back as 30,000 BC. Crude Gold has been found among the remains of almost all prehistoric people. The earliest discovered large cache of European ‘worked’ Gold comes from the Varna Necropolis in modern day Bulgaria and is dated circa 4,500 BC. Both the original hoards of nuggets and the jewellery discovered at Varna were for purposes far more significant than decoration.
Gold was not hoarded or worn because it was pretty.
Gold Accumulation Pre-Dated Commercial Use
Two pertinent and closely related points emerge from all this:
1 Gold was accumulated for thousands of years before it was used in the marketplace, which means that,
2 Gold’s stability of value was formed before it became money.
These points are of the utmost significance to the unveilings of money’s origins. What these overlooked, but indisputable historical facts confirm is that long before its commercial use was understood, Gold was already perceived to be a store of stable value. The primary function of money was formed independent of the exchange of goods. This was the first Eureka moment in the tracking down of money’s origins.
However common money seems to us from our constant use of it, we should consider how good reason our forefathers had to amass it.
Cassiodorus – 5th century BC
Gold now has a stock-to-flow ratio, with the consequent stability of value, sufficient to ensure that it will forever remain the only money. But the proper sequence of events must be established if the correct picture is to emerge. Gold did not become a store of stable value because of the stock-to-flow ratio. This reverses cause and effect. Gold gained its high stock-to-flow ratio because it had already attained the status of a store of stable value. Only once this status had been granted did Gold then begin to be accumulated. It was this original status that resulted in the vast stock that exists in the world today.
What was the basis of the stable value that was assigned to Gold and that pre-dated its use in the marketplace by thousands of years? What caused Gold to be hoarded prior to the emergence of its commercial value? Why has Gold played a central role in every major society throughout the entire history of the world?
What is the real significance of Gold?