Sunday, June 20, 2010

Fun with gold

As the crisis continues, the gold bugs cheerily anticipate rocketing gold prices. Some fling about wild notions like $50,000 per ounce, others try to be a bit more sober (or less drunk) and guess at $10,000. But there are so many imponderables, as I comment:

Can of worms, FOFOA. We live in a relativistic universe. How does gold relate to other things? And which other things in particular? And what is the role of debt in pricing?

Imagine a worldwide Jubilee Year: all debts paid or defaulted and no new debts contracted. What would assets be worth then? What, for example, would houses be worth if no-one had a mortgage?

Besides, in the past, far less of life was monetized. You could go into the woods, clear land, build a house, grow crops, keep animals. Money (or trade tokens like conch shells) was only to facilitate the exchange of surplus production. Now, money seem to be more important than people themselves.

Whether gold has any use depends on context. If we are hit by major ecological/economic disaster, gold may be no more than the equivalent of a word in a long-dead language.

But just for fun, let's assume everybody trades gold for productive land (arable/pasture/wood). Playing around with figures trawled on the Net I find that the ratio of gold above ground to said land is about 1 kilo to 73.5 acres, or 13.6 grams of gold per acre.

This farmer ( reckons maybe 160 acres to support a family - though that depends on the standard of living you'd expect (Papua New Guinea would set a different standard). Say a couple of kilos of gold. At today's gold prices, that family farm would have to cost about $88,000 US.

Latest (Jan. 1) estimates from the US Department of Agriculture value US agricultural land and buildings at $2,100 per acre. The same 160-acre farm would therefore currently be priced at some $336,000, or c. 52 grams of gold per acre.

So if (as seems most unlikely) gold was simply used as a medium of exchange for farmland, gold would shoot up to 4 times its present level. Say $5,000 dollars an ounce. On the other hand, in an equalized world unencumbered by debt, maybe farmland in the US would simply drop in value by 75% as priced in weight of gold.

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1 comment:

The Arthurian said...

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