Can gold destroy the economy?

Question

If someone successfully located and mined all the remaining unmined gold on Earth and released it into the global economy within one day how bad would the inflation be? If the inflation isn't much would it still be able to damage the economies of individual countries?

Answer 1

Overall - it's unlikely

An article on phys.org makes this interesting claim:

There are enough precious metals in the core to cover the entire surface of the Earth with a four metre thick layer

So, if you really mean all of it, gold would become as worthless as dirt is. Most gold nowadays is used in manufacturing (particularly electronics and jewellery) rather than as reserves thus its impact on the world economy would be fairly limited.

The main place it would have an impact is if a major economy had a recession - during recessions and uncertainty, many traders move to gold as a safe haven. It's more likely though that some other commodity - something like oil - would become more commonly used as a safe haven instead.

Electronics as a counter-case

On the note about electronics, something very interesting happens. Computer chips would likely be entirely made from gold, or at the very least, all the traces would be plated in gold as they are on a typical satellite chip or in a quantum computer:

A radiation hardened chip designed for use on satellites

A quantum computer making heavy use of gold

This is to primarily make use of its excellent contact conductivity as well as its non-corroding properties. Gold is a great conductor and is also very durable so it's currently used where a reliable connection is vital to product performance. This is why the pins of e.g. a USB port are very literally gold.

Consumer chips made using a lot more gold would be more reliable. The modern world economy deeply depends on computing so it might even create a mini economic boom thanks to better electronics for everyone.

There would possibly be a huge crash in satellite prices considering the extensive use of gold, increasing the chances of space becoming commercialized and therefore boosting the economy too.

However..

Rather than releasing it into the economy, maybe it could all be ejected into space. Get rid of it instead of creating too much of it - that way it can't boost those functional use cases. This route would have more of an impact (particularly in the short term where the rapid cost rise disrupts multiple industrial practices) but ultimately industry would just swap to some other metal instead.

Answer 2

The function for money demand is the following, the equilibrium condition between the demand for real money and the liquidity preference function:

$$\frac{M}{P} = \operatorname{lp} \left ( r^-, Y^+ \right )$$

Rearranging this to yield a function for the price level, or the variable of which inflation ($\small \pi$) measures long-run growth (i.e. $\small \pi_{t+1} = \frac{P_{t+1} - P_t}{P_t}$), yields:

$$P = \frac{M}{\operatorname{lp} \left ( r^-, Y^+ \right )}$$

The price level is therefore dependent on three factors:

1. Money supply ($\small M$), as more money supply will lead to higher prices, something we can clearly see in the equation above.

2. Output ($\small Y$), as higher output shifts the level at which prices fall given some constant money. Mathematically, we see this in that growing income leads to a larger denominator, and therefore, a lower price level.

3. Real interest rates ($\small r$), as one must consider that the real determinant of inflation is really the demand for money, which is itself determined by the interest rate. Higher real interest rates would lead to lower real money demand, as people want to hold assets instead.

Now, let us examine the change in those factors given some massive change in the amount of gold.

First, the money supply. This is going to be constant given a massive influx of gold, because nobody is on the gold standard anymore. If you want an increase in gold to affect the economy, you would have to set your story in a world with the gold standard — where the amount of money a government can issue is tied to the amount of bullion it possesses.

Second, output. This is going to increase, marginally. While it would marginally increase due to cheaper inputs, which would then lead to a fall in price levels, the impact of this is very small.

From the US Bureau of Economic Analysis's commodity-by-industry direct requirements table, around 1.8% of the computer and electronic products sector's output is derived from all primary metal products.

As a back-of-the-envelope calculation of the cost savings, I am going to pretend that gold makes up 100% of primary metals, ignoring the fact that there are other metals like rare-earth metals which also go into production (or aluminium, which is increasingly used in laptop cases, etc). I am going to then pretend that transportation costs do not exist. This massively overstates the size of the impact. Even so, as 1.2 per cent of the economy is derived from the entire computer electronics industry, this optimistic estimate of cost savings would be somewhere around 6.7 billion dollars.

That sounds like a lot, but recognise that is across the entire industry. 6.7 billion dollars in cost savings is somewhere around one-tenth of Intel's gross revenue. Then recall that Intel is one firm in an industry of thousands of firms. I cannot overstate how minimal the cost savings are going to be in a major economy.

Third, interest rates are also mostly unchanged, as changes in the amount of gold don't really affect global credit markets. However, another answer did talk about the fact that people who have their savings in gold will have their savings wiped out. However, this effect is also going to be quite small – the Census reports that the majority of people's net worths are in their homes and interest bearing accounts, not bullion.

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Mathematical note: I use the Keynesian theory of money here mostly due to its helpfulness in explaining issues with liquidity preference and the liquidity trap. However, similar conclusions can be derived from the more basic relationship used in classical economics $\small MV = PY$. This yields the following expression for $\small P$.

$$ P = \frac{MV}{Y} $$

Thus, it is still clear that (1) increases in money supply affect prices at a positive proportional level $\small \frac{V}{Y}$, (2) increases in total output decrease the price level, and (3) increases in money velocity (V) lead to price growth, basically some measure of how frequently people change

Answer 3

A sudden huge increase in the supply of gold would not be inflationary except to things bought with gold. I.e. you'd need an awful lot of gold to exchange for anything else. A bit hard on someone trying to sell an inheritance of gold jewelry, but not something that would impact most people.

If anything, this would be deflationary. Gold would be cheaper and easier to obtain. Also, people wouldn't be able to sell jewelry for significant cash. So those people would be poorer. Both effects would be deflationary. However, I don't think that gold is a big enough part of the economy for that effect to be large.

Prior to Richard Nixon taking the United States off the gold standard, this would have been problematic. Gold rushes often did cause inflation. But not so much now. If there are any gold standard countries left, this would probably kick them off it. But certainly none of the United States, the countries in the Euro area, Japan, China, nor India would have that kind of problem.

Answer 4

Release into the economy is not really how it would work.

Gold is a good and the market would quickly establish a new price and you could not move it all in one day.

For the most part gold is not used as a currency. Gold coin would lose value. Any gold stores backing currency would be nearly worthless. Most countries are not on a gold standard and those on a gold standard would quickly come off the gold standard.

Gold has many desired characteristic in manufacturing and jewelry. You would see gold used (more) in circuit boards and many other devices.

Smart investors would buy gold up and hold it. Since all the gold has been mined it will eventually become a more scare good than it is today. Day by day gold will become more scarce.

Answer 5

It would cause the price of gold to crash, making your pile of gold essentially worthless.

Others would gobble it up and then slowly filter it back into the market as the gold price stabilises, making a killing. Which is what you should have done yourself in the first place of course...

This isn't limited to gold, it goes for any commodity. The question is discussed in some detail in discussions about the viability of asteroid mining, where it is sometimes suggested that the haul in precious metals from a single large asteroid would quickly be able to pay for the cost of the entire operation by just dumping it on the market.

For all the reasons already mentioned, that's not how it works. You'd rather have to release those tons of rare materials (platinum for example) in small batches, say a few percent of the yearly demand, unless maybe you were to at the same time introduce a new and highly lucrative use for those materials, which would increase demand to the point where a high market price can be sustained despite a greatly increased supply.

Answer 6

There are major differences between inflation and destroy(ing) the economy. It's very hard to predict whether inflation or deflation might result.

However, the worldwide economy would be seriously disrupted. A significant number of nations would probably be effectively bankrupted, as might numerous banks and other financial institutions, not to mention serious effects on many large and small individual investors.

But as @LukeBriggs points out, this shouldn't be an issue of all the remaining unmined gold on Earth. If that happened, where could it even be put? Worse, there'd likely be enough of a disruption of Earth's inner dynamics to make thoughts of a disrupted economy trivial. Another good article on "all of the gold" is How Much Gold is Left on Earth?

But what about only "all of the currently known and accessible deposits"? Well, that'd likely be more than enough for serious disruption; but it's pretty implausible given how deposits are scattered across numerous nations, and most are not likely to allow very-large-scale illegal mining.

Then again, since this has neither a hard-science nor science-based tag, some soft, hypothetical science might be okay.

The distribution of gold in the Earth's crust is reasonably randomly distributed. What that gives us is a good 71% of the Earth's surface that hasn't even been explored for gold mining much less seen any significant mining attempts. It might be only near-future that undersea gold-mining could be done successfully and economically with robotics. Simple 'random' extrapolation could result in more than twice as much gold as has ever been mined.

Now, about "destroying" the economy...

Although no world currencies are currently on a gold-standard, gold is still used by central banks of nations around the world for investments and for various important inter-governmental transactions. The largest amount of this physical gold is stored deep underground in the vaults of the Federal Reserve Bank of New York. Transactions between central banks of various nations are done by moving bricks of gold from one central bank's "bin" to another's.

(That Federal Reserve Bank is contracted to perform that service. It apparently charges "a $1.75 fee (in 2008) per bar to move the gold.")

Anyway, reasonably current estimates (2011) put the world's total holdings at approx. 171,300 tonnes with central banks accounting for (only?) 29,500 tonnes. (The Federal Reserve Bank of New York's vaults are reported at approx. 7,000 tonnes.) Amounts held world-wide for investments are around 33,000 tonnes.

It doesn't take much imagination to see the likely huge economic disruptions that would come from making 100,000-200,000 tonnes of gold suddenly available. Any inflation/deflation would result from the disruptions rather than from any clear relationship between currencies and gold, in the absence of gold-standard currency. The international valuations of holdings would drop significantly. Any number of investment institutions would effectively be bankrupted since value of holdings would no longer match up with debts. Plenty of individual investors would suddenly find that they'd lost maybe half of what they had, perhaps almost wiping out their planned retirements. The same things happen when stock markets drop.

Perhaps harder to gauge would be economic effects on various industrial processes. With a big drop in cost of gold, plenty of products might be produced more cheaply and with better performance. Rapid shifts in costs and prices by themselves can be disruptive to different industries.

Beyond any of that, it can depend on where and to whom the new gold is made available. Top "dollar" might be paid by one of two nations, the U.S.A. and China. I suspect that China could be top bidder. There seems to be various rumblings about China's intentions in the world of finance. They can afford more gold than anyone else and seem likely to want it. If they can achieve actual linkage of the yuan to a gold-standard, they can replace the US dollar with the yuan as the world's premier reserve currency, though they'd probably be satisfied simply with it being one of them.

The threat of that alone could be enough to send shock waves through world financial markets.

Answer 7

It would destabilize international politics somehow. For reasons I don't understand, various small countries pay their superiors for gold custodian services, only to find it has been held up over some political falling out. It seems analogous to sending a son to be a hostage at an overlord's medieval court.

If you make these reserves valueless, then either all the small picked-on countries are suddenly more free to do as they wish ... or would-be superpowers have to quickly send in their armies to seize a little chunk of their land as a bargaining chip instead, like Russia in the Donetsk People's Republic. But such small wars could get out of control, leading to the imminent death of all life on Earth...