What would happen if massive amounts of gold became available?

Per several ongoing threads regarding gold, which I didn’t want to hijack: The point has been made repeatedly that it would be utterly impossible for the amount of economic activity in the world today to be backed by gold, because gold is too scarce. So I was thinking of a scenerio where gold suddenly isn’t scarce, and had several questions.

Supposing that somehow a massive, incredibly large source of recoverable gold was found: a cubic mile of gold that somehow welled up from the Earth’s core and became lodged in the crust at site X. Supposing the recovery cost is negligible- measured in dollars per ton rather than ounce. Let’s say some entity that controls site X has a monopoly on extracting the gold. Ok, questions:

  1. Do the people with the gold flood the market, or do they ration out how much gold is produced to maximize their revenue?

  2. Even if they don’t flood the market, does public knowledge that that much gold exists drop gold futures considerably?

  3. Not counting the people who invested in expensive gold and got screwed, do any negative effects on the world economy happen? In line with question 1., do government policy makers around the world beg/ encourage/ threaten the producers to stick to a carefully rationed release?

  4. Does it make a difference if the supply is huge but still finite, as opposed to something like cheap nuclear transmutation, which would make the supply effectively limitless?

  5. Does gold continue to be considered wealth incarnate, or at some point does the supply “break” the monetary association? If gold is as common as lead, why is gold valuable and lead isn’t?

  6. Would going back on a gold standard be desirable now that gold is more available? Or is having the government control the volume of money in circulation an essential feature of today’s economies?

The Spanish Empire would collapse.

From here.

Just to add a comparison.

Those guys in suspended animation would awake in 100 years, and be fucked.

Silver would be the new Gold. Well, Silver and Platinum.

Unless they’re getting it from Eros or something like that, but that’s not possible with today’s technology.

No, the whole point of a gold standard is that there isn’t much of it, thereby preventing inflation. (That was also the source of Koxinga’s joke, the Spanish Empire having collapsed because their gold-standard economy was ridiculously inflated by all the gold they mined in the New World. Just goes to show that you can’t dig up free money.)

Vox Imperatoris

I would predict a strangulation of supply similar to De Beers and diamonds

Exactly. Somehow a cartel would control supply. Diamonds are not particularly rare but the cartel manages to keep the price artificially high. When the huge deposit of diamonds was found in Canada it was purchased by the cartel. And so it goes.

The government would have to recruit Wilson Fisk.

I haven’t read all of those threads, but this makes no sense whatsoever. When establishing gold inter-convertibility, you set the ratio (X ounces of gold = Y units of currency) so that both sides are of approximately equal value. From there forward, the money supply grows in accord with the gold supply. There’s no such thing as “too scarce”.

But typically, the economy grows faster than the gold supply, which leads to deflation, which is a very bad thing.

F. Scott Fitzgerald had a similar idea in his short story, “The Diamond as Big as the Ritz.” The family which had the aforementioned gigantic diamond kept it secret, chipped off and sold bits of it now and then so as not to flood the market, and prospered for many, many years (and had to occasionally keep, as prisoners, those who accidentally stumbled upon or saw it).

No, inflation. Deflation can result, but not without hyperinflation first (IIRC). The money supply expands faster than the goods and services backing it, therefore the gold-backed currency is worth less, and prices rise, and the next thing you know, you need a wheelbarrow to buy a loaf of bread.

Also, my ETF based on gold is completely in the shitter (not that it isn’t already).

I don’t understand why you think this would happen. As the economy expands, the finite amount of gold (which represents the entire value of your economy, if you back your currency with the metal.) stays more or less constant. Since the market grows faster than the gold supply, over time every unit of gold is worth proportionally more goods and services. This would be deflation, no? Obviously we won’t be mining gold at the same rate that we’re stamping out widgets.

I’ve been going by Vox Imperatoris’ post. The market and economy as it now is backed by a certain percentage of gold. That gold is marked in currency (we’ll call them dollars). At this point, the market (for goods and services) and the economy (the market, plus taxes, plus whatever the government imposes on it, plus financial indicators, plus exchange rates, plus etc…) is set to a certain amount of dollar supply (we’ll call that M1). Before the new shipment of gold from the new world (or from wherever), the economy was running on a determined amount of supply of M1.

Now, the government has all this extra cash. I suppose they could hide it, but that didn’t really work historically (see Spanish Empire). M1 rises faster than the economy can account for. With more money chasing fewer and fewer (people with money tend to consume more) goods and services, inflation starts. Given enough M1, then we have wheelbarrows of cash trying to buy loaves of bread, and eventually collapse.

The OP isn’t specific of what type of economy is envisioned, nor how much gold is a “massive amount.” But, it really doesn’t matter.

Ah, I see. We’re sort off on a tangent here started by Lumpy’s post about how a gold-backed money supply works in the real world. We should restrict this discussion to the hypothetical “gold is in abundance”.

Sorry for my part in continuing the hijack.

If X is controlling the mining of this mile long pile of gold, how do people get it? Are they being paid for their mining with it, and it enters the economy that way? Or, is X handing it out like Halloween candy?

Yes, probably. People have set expectations on how a market operates. The fact that what is effectively an infinite amount of gold will play a lot with supply and demand expectations.

This depends on whether or not X’s government issues currency backed by gold. Those countries that do have gold-backed currencies are definitely going to see their value plummet. Such countries are going to try and restrict the supply.

I’m not sure what you’re getting at.

If that massive amount of gold is indeed entering the economy, then people will most likely devalue it. The gold standard will be the silver or platinum standard.

No, it’s much more efficient (in theory) to have freely traded market exchanged currencies. In practice, since no one is really going to try and cash in their currency for gold, it might not have a substantial effect (particularly since this gold is going to be so common). Good question, I can see the possibility that there is no net effect (practically speaking).

A “cubic mile” of gold.