MYTH: "There is not enough gold for world trade"

A $100 reward for anyone who can dispel the logic in this article.

I've heard this argument time and again: There is not enough gold in the world for trade. So, I would attempt to show why this is not the case in one single post, in the hope that I do not have to repeat myself again :)

I start with an excellent quote by James Rickards from his book "Currency Wars: The Making of The Next Global Crisis":

"Statements like this illustrate one of the great misunderstandings about the role of gold. It is misguided to say that there is not enough gold to support world trade, because quantity is never the issue; rather, the issue is one of price. If there was inadequate gold at $35 per ounce, the same amount of gold will easily support world trade at $100 per ounce or higher... If the price of gold was too low, the problem was not a shortage of gold but an excess of paper money in relation to gold."

I'll try to explain:

James Rickards said this statement in the context of the 1960s, when the popular notion was that there wasn't enough gold for world trade, and when gold was still artificially priced lowly at $35 per oz. The government had printed too much USD paper money, and was unwilling to adjust the price of gold upwards in reflection of this new supply of paper. As a result of this monetary inflation, prices of goods soared, and naturally, trade priced in terms of dollars went up too. When people take a high world trade volume (priced in terms of USD) and compare it with the $35/oz gold, the natural instinct is to think that there wasn't enough gold to support the trades. If the government had been honest and devalued the USD relative to gold, the price of gold would have soared, and people would have realised that the quantity of gold is not the issue.

Even if the amount of gold in the world today is cut by half, there will still be more than enough gold. With the advance in measurement and digital technologies, we can even measure the amount of gold using 'atoms of gold' rather than 'oz of gold'. There is more than enough gold!

Is there the other side of the coin on this issue? Well, as always, there is. The kicker is that the 'there-is-not-enough-gold' crowd will be right -- IF, say, an alien came to earth and stole all the gold, and left us with only 1000 atoms of gold. In that scenario, yes, there will not be enough gold to go around for world trade.

Even so, even if we take all the gold away from the world, and all the paper money away, trade will still go on. There may be some short term consequences, but the market will find a new form of money to use, if the government does not interfere in this natural process.

One must remember that money is a means, not an end. It is a medium of exchange, which we use to exchange all our real goods with each other. It's the exchange of real goods. It's not about export vs import, or buy vs sell. Export is essentially the same as import. To export is to import. To buy is to sell. The only reason why a nation exports is to import. Think in terms of 'exchanging goods' rather than 'export/import'!

Creating more unites of a medium of exchange (money) only stimulates price inflation.