What is Gold?

Let's take a poll. What is gold? Is it money, currency, an investment or wealth? For clarity, I'll give you my definitions of each with links to some of the posts in which I've used these terms.

Money is credit (i.e., it is the way the economy uses credit balances to lubricate the flow of tradable goods and services).

Currency is what denominates money. It is often issued or at least standardized by the sovereign or a representative of the collective. The private economy trades using mostly credit (money) denominated in these standardized currencies, credit that is issued and cleared by private institutions using the currency itself for clearing. Currency itself also doubles as the "in your hand," "on the run," "money to go" element of the money system, so that discrete (and discreet!) "amounts" of said money-system can be transferred among individuals conveniently while operating temporarily outside of the institutional monetary ledgers. And currency is also exchanged directly with other currencies through a network of currency exchanges, often with the clearing function provided by private institutions, to facilitate equitable trade between regions that use different currencies.

An investment is something that you buy expecting a gain or return. It is a way of putting your money at risk in the hopes of obtaining more money. When an investment reaches an expected "top" or some level of overvaluation based upon the calculations of the investor using common metrics like earnings, interest or the sum value of its components, the rational investor is likely to sell that investment and move the funds into something he deems undervalued at that time.

Wealth is simple. It is literally anything physical that you can possess or at least own unambiguously. Tradable wealth is that which many people value similarly, therefore it is tradable. Durability makes some forms of tradable wealth a better store of value than others which can decay and perish over time. Common forms of durable tradable wealth include fine art, antiques, classic cars and many other collectible hard assets.

My poll is over to the right in the sidebar, and it is open to anyone, even those who have no "gold". I even made it possible to vote for more than one choice, in case you think that gold is two, three or all of the choices.

I cast the first vote on behalf of A/FOA. How did I know their vote? They made it crystal clear in one of their earliest comments:

"Gold is not money, not currency, not an investment, it is wealth."

I think this is the essence of all of this, of Freegold, of (THOUGHTS!), of The Gold Trail, of my blog, the key, if you will, to unlocking the view. But from the last thread of arguments against Freegold, it is obvious that some of you still think gold is just another investment. That's fine, because that's all gold is to almost everyone in the West, so you're certainly not alone in your opinion.

If we could get everyone in the West to vote in this poll, I think "gold is an investment" would win in a landslide. If we could get everyone in the precious metals blogosphere to vote, then "gold is money" would probably win. So, to most Westerners, gold is an investment. To the gold bugs and HMS crowd, gold is money. And to the bullion banks, gold is a currency (ISO code XAU) upon which credit is issued and traded. So what did A/FOA mean by the statement that gold is wealth, not any of these other things? I mean, surely gold is whatever its users think it is, subjective use value and all, right?

Actually, that's exactly right! Gold is whatever its users think it is. And the point A/FOA was driving at was that the vast majority of the above-ground gold, today somewhere around 165,000 tonnes, is held by people who understand it as wealth. And, in fact, the only opinions about what gold actually is that will matter on the day after the Freegold revaluation, the only "votes" that will count, are those who carried (i.e., possessed or unambiguously owned) that gold through the transition.

The real vote for "what is gold", the only "poll" that will matter, will not be like a democratic election with universal suffrage. You'll only get a vote if you have some, and your vote will be weighted by how much you have. This concept is highly relevant to Freegold, especially in the context of the last thread.

Probably (to us) the most relevant conclusion drawn from the abstraction we call Freegold (which is really just the end of the use of gold as a currency denominating credit) is a future gold price that is more than an order of magnitude higher than today's price… in real terms/constant dollars. This is also the conclusion that sprouts most of the arguments against Freegold. And the main argument against such a shocking revaluation is that it won't stick because of supply and demand.

There are two schools of thought on the organic emergence of Freegold. The one that I don't subscribe to is that it will be demand-driven… from the ground up. This school of thought says that we will only see Freegold once the average man on the street understands how precious physical gold really is. It says that the demand for physical gold will someday undergo a phase transition thereby overwhelming the supply flow and bringing us to a new, physical-only price range (in real terms).

The other school of thought, the one that I do subscribe to, is that it will be supply-driven… from the top down. My school of thought says that the average man on the street will only understand how precious physical gold really is after Freegold is revealed in stark relief. It says that the supply flow of physical gold will someday undergo a phase transition whereby it goes into hiding due to the crashing price of its paper proxies. It says that physical gold, during this phase-shift, will further consolidate in the hands of only those who understand it as wealth and nothing else, bringing us to a new, physical-only price range (in real terms).

In future hindsight, looking back on the transition, it may be commonly held as a chicken and egg question as to which came first, the new price range for gold or the change in demand. Cause and effect is sometimes tricky that way. At the top of Moneyness 2 I wrote:

What will change is how we view money and wealth
Everything else in Freegold flows from that!

This is a simple statement of demand-driven cause and effect, but it doesn't say what will cause the change in demand—how we will view money and wealth. For this I think we need to look at the supply side; who will have the gold, whose vote will count when gold is suddenly $55K/ounce (in constant dollars) and the question is asked, what is gold?

Above-Ground Supply

It is actually quite a bit easier for me to describe the people whose view won't change because of Freegold than to convince you of everyone else's view changing because of Freegold. You need only understand the distinctions between the views, what sets them apart, to draw your own conclusions.

It is possible that some of you at this blog who still view gold as an investment may indeed make it to the vote that counts, depending on how it all unfolds. But if you are lucky enough to get there while still clinging to the idea that gold is an investment to be sold at the top, or that "asset allocations under Freegold" should be rebalanced away from "toppy" gold, then your vote will be in the tiny losing minority of those who reacted like lottery winners. But based on some of the comments in the last thread, I bet that most who view gold as an investment will cash in that lottery ticket too soon. And even if that's not you, most others will and will thereby surrender their vote altogether, diminishing that tiny voting block even further.



I want to tell you a story about one of my readers. We'll call him Jumbo Shrimp. Jumbo Shrimp started reading my blog in 2009, and he was one of the very first people to send me a donation when I put up the button that year. It was a sizeable donation, and it was repeated several times. Turns out that Jumbo Shrimp is quite successful as a financial market analyst of sorts. He's about my age, maybe a few years older, but his net worth is around $15 million.

Jumbo Shrimp first got interested in gold almost a decade ago, and he bought himself quite a bit of physical with an average purchase price in the $500s. From what he told me earlier this year, he had accumulated around 1,700 ounces of physical which he kept in his immediate possession. He even sent me a picture of himself holding a 10kg (320 oz.) coin worth about a half million at the time.

We had many conversations over a couple of years. We even talked on the phone occasionally. And one thing I could always tell about Jumbo Shrimp was that, even though he loved my writing, he never quite understood my view. He still thought of gold as an investment, one of many, and he considered the idea that paper and physical could ever diverge leading to a revaluation of physical to be a conspiracy theory. His rationale for owning some physical was simply eliminating counterparty risk on a portion of his "wealth".

As I said, Jumbo Shrimp is a financial market analyst, and his method of analyzing his personal gold investments (which consist of more than just physical) centers on tracking the mining shares. His fundamental operating principle is, in his own words, "Gold stocks ALWAYS lead gold."

Anyway, back in early May I received a flurry of emails from Jumbo Shrimp which also went out to a lot of other people, making a very bold bottom call regarding the miners. I quote from the first email: "As low risk/high return as I have ever seen." He was making a technical call, a buy recommendation, and also putting his own money on the line. Unfortunately it moved decisively in the wrong direction just a day or two later.

I don't know if it was because of his personal stake in it, or from the sting of having made such a bold prediction to so many HNW people that went so wrong, but six days later he threw in the towel on gold, emailing me, "It was a fun ride while it lasted. I sold 95% of my gold at $1,645."

He certainly did make a nice profit. If my math is right, he must have booked a gain of around $1.8M on a physical investment of less than a million. My apologies to Jumbo Shrimp for airing his story, but I think it will be helpful to others and I actually hope that he reads this and reconsiders. He is much luckier than others will be in that it's not too late for him to buy back in.

My point in sharing this story is that calling and then catching the top in gold is a fundamental part of viewing gold as an investment. Jumbo Shrimp was early with his call, but whether the price of "gold" keeps climbing from here or falls off a cliff tomorrow, everyone who views their physical gold as an investment will eventually be put to the test at some point before "the only vote on what gold is that counts", just like Jumbo Shrimp was.

I want you to forget for a moment whether or not you think the Freegold revaluation will actually happen. The question I want to table is simple: If it happens, can it stick long enough for everyone's perception about what gold is to change?

I'll give you a quick "what if" hypothetical scenario to help you visualize the question. It is not important whether this scenario happens because there are many possible scenarios that I can imagine leading to the physical gold revaluation, some quite different from this.

Here's the scenario: Imagine that we have another financial market collapse like September, 2008, only this time the price of gold keeps falling even as there is no physical to be found. The market collapse leads to an emergency print-fest by the USG in an attempt to "stimulate" or shock the economy and markets back to life. Trading is stopped to interrupt the free fall atmosphere. "Gold's" free fall is stopped at $500 per ounce and over the next few weeks, anyone holding a claim that was previously exchangeable for physical gold is cash settled in the spirit of fairness. At the next quarter-end MTM party we find out that the Eurosystem has marked its gold reserves at the equivalent of $55K per ounce in constant dollars. We also find out that this price (in real terms) was derived by averaging actual trades mediated by the BIS and ECB during the blackout after the paper markets crashed.

So we have a sudden step up in the (real) price of physical gold from $500 to $55,000 dollars. It is basically an "overnight" revaluation, even though it wasn't literally overnight, because $500 was the only known price in the interim. Any trades of physical gold that happened during the interim ("gold in hiding" period) happened locally and did not affect the price of gold because it was technically frozen at $500.

I'm happy to conclude that this news (the new MTM price) will be a shock to almost everybody, especially to those who missed out on the revaluation, and that their initial reaction to the shock will certainly not be to rush out and buy tiny gold bars at $55K per ounce. That particular change in demand will take some time to manifest in any scenario I can imagine. So I think it is really more a question of supply as to whether this new price range can stick in the immediate aftermath.

And this brings us to the vote for what gold is! The two main contenders will be 'investment' and 'wealth', because those choices represent the two competing schemes of action that will be faced by those who actually did participate in the revaluation by carrying physical gold through the storm, and who therefore get a vote. In fact, action is the voting method, which is precisely why only those with gold will get a vote.

For example, those who somehow made it through the revaluation process while still thinking gold is an investment will, upon seeing it gap up from $500 to $55,000, either cash it in like a lottery ticket or at least rebalance their investment portfolio away from gold. And if too many people do this all at once, supply will flood the newborn physical-only market and the new price range could falter unless the Giants and CBs step in with unlimited demand. It is possible that the Giants and CBs would do this, but the point of this exercise is to explain why they won't have to.

Those who understand that gold is wealth, on the other hand, will react differently. People with durable, tradable wealth generally have everything else that they need. Wealth is what you buy with your excess. And if you need to tap into that wealth, for whatever reason, to support or improve your lifestyle, then you sell it in drips and drabs as needed. Or, if your wealth preferences change, you can also trade wealth for different wealth. So here we have three actions that the wealthy take with their wealth. They accumulate it, they sell it in drips and drabs for consumption purposes, or they trade it for other wealth.

I'm sure this seems like a ridiculous distinction to those of you who view everything as an investment. That's really a Western shrimp perspective, and I think it's probably why you are struggling to understand Freegold. So let's take a closer look at it from a couple different angles. Michael H pointed us to this comment from FOA just the other day:

FOA (12/13/99; 19:15:01MDT - Msg ID:20954)
Comment
Mr Gresham (12/12/99; 14:04:52MDT - Msg ID:20807)

" " "Econ 675, Advanced Graduate Level Money and International Banking: Market Disequilibrium Scenarios, otherwise known as USAGold Forum" " "

-------------

Hello Mr. G,
Ha! Ha! That is some class you are taking. One of the things Another wanted to accomplish is happening. That being, getting Western citizens to reconsider exactly what gold was in the eyes of other real people. In order for that to happen, people had to understand the evolving modern politics of gold and how it has created a "New Gold Market". One far different from the one goldbugs of the 70s had grown to know and love.

In the beginning, many readers had no basis for comparison when reading most of Another's Thoughts. Yet, we walk this evolutionary trail of gold today with eyes wide open and better able to grasp the impossible road ahead.

Onward:

I have seen one sure sign that Westerners don't really know what has happened to their wealth. This is demonstrated when one "bemoans the loss of good times" if gold goes very high. It comes across the same every time; " " "if gold goes to $30,000 we won't have a dime and everything will fall apart" " ". Well, Another made his point that the dollar said your wealth was worth more than it really was. Let me demonstrate.

Like this:

Ever been to a high priced auction. They bring out the "Strad" violin and start bidding at $500,000. After a while it goes for $1 million flat and it's over. After that we listen to the perceptions around the room.

One guy in the back, who has 10 million cash, thinks the Strad was cheap at one mill and will pick one up next year. In fact he may get ten if they are offered. Some rich woman has 3 million and she figures her wealth is equal to three "violins" if she ever wanted them.

All around the room the feelings are the same as perhaps 100 million in assets are represented. They all equate their buying power to this one auction. Even though only one walked away with physical, everyone knows they are "strad rich" in wealth. Each goes home for the evening cognac and relishes in this knowledge. Their lifelong effort of hard work and shrewd investing has positioned them to own the wealth of many rare violins. Life is good, very good.

The one problem with all of this is that they based their "wealth holdings" on the outcome of just one auction. Truly, had they all bid, the violin would have gone for much more and their wealth would seem "not so much".

In much the same way our world of dollar assets carries the same risk. All of us stand in the same world auction room and watch the daily bidding for goods and services. We watch the prices of cars, gas, houses, clothes, etc. and conclude our wealth balances based on what we could acquire at this auction should we choose to bid. We see our economy in a light of infinite goods and services but fail to balance this with the potential of others to bid, "in mass". In this light, few have a valid perception of just how many dollar assets are out there. Indeed, without this grasp of "dollar inflation" we blindly consider our wealth and position in life using the present price structure of "things". A system in which we trade paper IOUs of infinite number for real things of finite number.

So, our belief that life is good, largely rest not on the confidence in the dollar. Nor is it in the confidence that others will value and accept our dollars. Life is good, because all of us do not "bid" at the same time! If we did, our life would not be as good as our dollar wealth says it is!

This is the deception in our Western grasp of what wealth is. Our life savings are valued at what they can buy today, even though, in reality it is based on an unknown purchase price in the future. Just as all of the wealth at the violin auction was a phantom in self delusion, so too is our present good life and bank account numbers. The evolution of a people that once gripped gold for the real wealth money it was, has proceeded to the hoarding of bookkeeping entries of account credits. History has proven that once humans begin to question the value of this dollar "wealth owed them at a future unknown price" they run a race to outspend their loved brothers. Buying goods now at the "known" price quickly balances the books so no one is any longer fooled. The currency equivalents remain as a trading medium, even as real things are held in the background for value proof.

No, a high price of gold will not rob us of our wealth. It will rob us of this perception of money value that was but an illusion in the clouds. Wealth for tomorrow is found in this context for today; one cannot lose something they never owned. Buying physical gold at today's prices ($200 to $500) will not help you maintain this modern illusion of wealth we never had. But will allow us to later spend the true value of gold that presently exists today. A value few will accept or believe.

Thank you all,,,,,,,,,,,,,,,FOA

FOA made some great points in that comment, but I want to draw your attention to one that I think was inadvertently made. The reaction of the millionaires observing the "Strad auction" illustrates the paradoxical nature of Giffen or Veblen goods which seem to violate the economic law of demand. These observers didn't have their own Strads, but as the price rose and the auction settled, they instinctively imagined buying their own Stradivarius and they also considered their own wealth in Strad terms—how many Strads they could buy.

These types of goods are sometimes called positional goods or status goods. It has been observed that rather than people diversifying away from these goods or substituting other goods as the price rises, the opposite tends to occur with world-class durable, tradable and collectible wealth items.

You've probably heard of the wealth effect as it was applied to the housing bubble. It says that people tend to spend more when they actually are richer, objectively, or when they perceive themselves to be richer. The point here is that the behavioral change effect comes from the perception of wealth, not the liquidation of wealth.

Imagine a painting that was purchased for $10 million and sold a decade later for $100 million. We have seen a rise in the price of fine art over the last few years, so why haven't we seen all fine art flood the market like a bunch of lottery tickets trying to get cashed in? When a wealth item like that rises in value and that new value is revealed at the margin (the auction house), the wealthy people holding similar items simply feel a little more wealthy. But they understand that wealth is not a lottery ticket. Perhaps some people view fine art as an investment, but not the majority, otherwise we'd observe something different than what we've observed.

The point is that Giants, who hold a good portion of that 165,000 tonnes of above-ground gold, view physical gold as wealth and not as an investment. No matter where the price goes, they will not sell it en masse, or even in mass. They already have everything they need to live an exceptional life style and they understand that the best way to dishoard wealth is in drips and drabs over time as needed or as individual preferences change.

But we are not all Giants, are we? Some of us are likely to want to "upgrade" our lifestyle if our gold is suddenly revalued, right? Will we do so in drips and drabs as needed, or will we decide to dump it all at once to catch the top and lock in our profit? Well, let's look at this "upgradable lifestyle" portion of the vote. In the West it will be an extremely tiny contingent. In Eastern countries like India, it is likely to be a fairly large contingent.

First the West. When I say tiny, I'm talking about maybe one person in a million tiny. Someone who has, say, 2% to 5% of his wealth/savings in physical gold—and is able to hold strong through the transition without cashing in that lottery ticket or panicking out along the way—is really only going to stay even or see a small gain (e.g., see Michael H's revaluation/rebalancing exercise here). So in this Western group of "voters" who will be faced with the choice of drips and drabs versus all at once lottery ticket are really only those who have a substantial enough portion of their wealth in physical gold that they will see what could be considered a life-changing windfall profit.

The bottom line is that this Western group is too tiny to even matter in the final vote for "what gold is" after the transition. And the dynamics of the transition will likely shake out all but the strongest hands which are more likely to consider gold to be wealth like the Giants do.

In the East they already view gold as wealth. So even though they will have the ability to improve their standard of living, they will likely continue to accumulate, only choosing to dishoard as needed. This would be a good question for Anand. How many of the gold holders in India do you think consider gold to be wealth versus how many consider it an investment that you should dump at the top? And how will the average Indian react to a gold revaluation? Will she sell it all at once and live large like a lottery winner? Will she sell a little in drips and drabs as needed to improve her quality of life? Or will she continue to accumulate while feeling (knowing she is truly) wealthy?

I suppose it will depend on each person's individual circumstances, but we generally aspire to that which is already present in our vicinity. So I can imagine that a general improvement in the standard of living in India would play out more gradually than it would for, say, an American lottery winner or an NFL draft pick.

So who else is there on the supply side that will get a vote on what gold is? Oh, yeah, the central banks! They use/view gold as a reserve asset, which is to the monetary system as wealth is to the individual. So I don't think we have to worry about them dumping their gold like an investment "to catch the top".

I guess that about covers all those whose opinion will matter (except maybe governments, but we'll get to them in a moment). The opinion of those who don't carry above-ground gold through the transition won't matter, but it will be forced to change specifically because it won't matter! Think about that while we move on to gold in the ground.

Gold in the Ground

While there are an estimated 165,000 tonnes of above-ground gold, each and every bit owned by someone, a recent estimate revealed known and recoverable in-ground deposits to be another 67,500 tonnes spread out all over the world.



The distribution of these in-ground deposits is as follows:

North America 34%
South America 17%
Europe 2%
Africa 17%
Russia/Asia 17%
Australia 12%



The average rate of extraction for the last five years, according to the WGC, has been 2,602.2 tonnes per year.

One of the arguments against Freegold is that all of this mining supply, if it went to market at $55,000 per ounce (or thereabouts), would constitute a dump requiring an offsetting demand of $4.6 trillion per year (in real terms—global net production) to maintain that price. This is a powerful argument that, in my opinion, deserves some more discussion.

To understand the counterargument, there are a couple of things you need to know about the differences between in-ground gold and above-ground gold. First of all, gold that is still in the ground is not worth as much as gold that has already been mined. Gold in the ground is worth the market price of above-ground gold minus the cost of pulling it out of the ground and then refining it. The second thing is that, while every bit of above-ground gold is owned by someone, the ownership of in-ground gold is not what you think, especially in extremis. Let me explain.

It is a pure illusion today that the owners of mines also own the gold in the ground under their mines. It is an anachronism, a relic of a bygone era and it can only last as long as the price of gold and the cost of extraction are in relatively close proximity. Here's what ANOTHER had to say about it:

Date: Sun Apr 19 1998 15:09
ANOTHER (THOUGHTS!) ID#60253:

The governments will revalue gold and "demand" that the public carry it and use it! It will be the source of all gold, the mines, that will be controlled! That's Controlled, with a capital "C", not confiscated!

When confronted with the argument that governments are slow-moving leviathans and will therefore be slow to tax the mines with some sort of windfall profits tax, FOA remarked:

FOA (6/7/99; 7:45:04MDT - Msg ID:7282)

Steve, on this issue, they will move no slower than with the speed of one who finds a gold coin upon a sidewalk!

FOA

Mining companies are sitting ducks. Hat tip to reader "B" for this recent quote from Doug Casey:

"All the governments in the Western world are really bankrupt and are, therefore, going to be looking for more tax revenue. Mining companies are going to be in its sights because mining companies can't move their assets; they are the easiest thing in the world to tax. The good news is that makes mining stocks very volatile, and sometimes extremely cheap. Volatility can be your best friend."

Mmm, cheap and volatile thanks to being sitting ducks for the government! Here's some more FOA:

FOA (10/25/99; 19:57:57MDT - Msg ID:17447)
reply
elevator guy (10/23/99; 21:30:08MDT - Msg ID:17282)
@FOA
Why will gold stocks be a risky place to be?

Hello elevator guy,
We have covered this area many times before. Simply put, when this new gold market runs as never before seen, shares will under perform bullion because they only represent the ownership of a business not money reserves. As a mining business, they must overcome the negative effects of a banking crisis, massive cost inflation and taxes old and new. Their dividends will never return the equivalent of the increase in bullion nor will the equity. Most investors do not retain a good historical perspective between government confiscation and government regulation. Production regulation and taxation are a different control of mine reserves that greatly impacts stock values. Many stock promoters often try to inject the "confiscation issue" as one for bullion holders while ignoring this other dynamic as it pertains to mine shares. The race will be for bullion and large international players will discount the leverage of mine reserves in terms of the crisis financial atmosphere they must invest in.

Even so, some mines will be sought after as they will be perceived as the best positioned of the lot and the last to be interfered with.

Anyway, it's a long hard subject that many will pay dearly for as this transition proceeds.

We will talk again on this. FOA

Imagine if the mine owners actually had as strong of a claim on the minerals under their mines as most people think they do today. With a market price of $55,000 and an extraction cost of only $1,500 or less they could literally "spare no expense" on all the modern mining technology and equipment needed to blast and dig those lottery tickets out of the ground and cash them in as fast as possible! They'd surely run up the extraction rate a bit and put a strain, if not an outright crash, on that Freegold price range.

But they don't have that strong of a claim. The sovereign or the collective (i.e., the government) does. The catch word here, a word you will learn more about, is "royalties". It's not unlike the oil in the ground that the House of Saud allows American oil companies to extract and bring to market in exchange for… royalties.

Even at today's price of only about $1,700 per ounce, some in government already have their fast eye on FOA's "gold coin upon a sidewalk"!

Levy on gold could be budget windfall, U.S. lawmakers say
WASHINGTON | Wed Dec 12, 2012 5:49pm EST

(Reuters) - Revising a 19th-century U.S. law that governs the mining of gold and other precious metals could add billions of dollars to federal coffers at a time of tight budgets, according to some Democratic lawmakers and a government study released on Wednesday.

Taxpayers receive no royalties on metals pulled from federal land, and officials drew a blank when they tried to find out how much gold, silver, copper and other valuable metal is sold.

"Federal agencies generally do not collect data from hardrock mine operators," said the report from the nonpartisan Government Accountability Office, which looked at the market in 2010 and 2011.

But applying a metals levy of 12.5 percent - the benchmark government share for other resources - could deliver hundreds of millions of dollars a year to taxpayers, according to independent studies and U.S. Representative Raul Grijalva, who sought the report and other data from the mining industry.

"As we face these fiscal challenges, these are the pennies that we should pinch," said Grijalva, the leading Democrat on the panel that oversees public lands.

Grijalva, of Arizona, and Senator Tom Udall of New Mexico, who jointly called for the GAO report, say taxpayers should also benefit from a gold price surge that has boosted the bottom line for miners.

Applying Grijalva's royalty formula on the 1.1 million ounces of yellow metal pulled last year from Goldstrike mine in Nevada, the largest in North America, could have yielded $150 million to taxpayers, according to a Reuters tally of industry data.

Barrick Gold Corp (ABX.TO), the mine operator, said only a fraction of Goldstrike is on federal land, and the company's taxes have already quadrupled in the five years of climbing gold prices.

Taxpayers are entitled to a royalty from metal sales nevertheless, lawmakers said.

[…]

NO-ROYALTY RULE

The 1872 mining law that drove prospectors into western states such as California still governs much of the industry.

But this no-royalty law is a costly anachronism when mining giants can stake a claim on federal land for a few dollars an acre, Udall said. The coal, oil and gas industries, by comparison, have no such exemption.

"We are giving our gold and silver for free and don't even know how much we are giving," said Udall, whose father, Stewart, was secretary of the Interior during the 1960s and called mining law reform his great unfinished work.

Lawmakers who have occasionally tried to reform the mining rules have never cleared all the hurdles to pass new laws, as the industry has strong political allies.

Senate Majority Leader Harry Reid, a Democrat, counts on mining support in his home state of Nevada, and lawmakers say it will be difficult to persuade him to take a bite out of the industry.

But on Wednesday, the two top senators on the Energy and Natural Resources Committee said they were open to considering reform.

"There's been agreement for a long time that the 1872 Mining Law should be updated to include a royalty" and reduce paperwork, said Senator Lisa Murkowski, the panel's top Republican.

[…]

State and local governments often catch a windfall from mining revenue, and Udall said Republican lawmakers from the West might be persuaded to increase the federal take.

"Everyone agrees we need a balanced package to find new revenue," he said, "and this seems like the right time for reform."

So the "production regulation and taxation" of the mines as FOA put it, or "Control with a capital 'C'" as Another said, will effectively transfer the vote for "what gold is after the revaluation" from the mine owners to the sovereign or the collective (i.e., the governments of the world). Will the governments of the world view gold as an investment or a lottery ticket? Or will they view it as a wealth reserve/monetary reserve asset? This is the question that you need to answer for yourself. I know my answer.

From FOA above:

"The currency equivalents remain as a trading medium, even as real things are held in the background for value proof."

Currency issuing governments like the USG can simply spend money into existence. The credibility of this common government system is generally maintained by three government abilities—the ability to tax, the ability to borrow and the ability to sell off or rent out public assets. To such an entity, the differences between windfall profits taxing gold miners and selling off public gold that is already in the vault are minimal. So if you believe that they will let all that newly mined gold hit the market for just a little extra revenue, you should also believe that they will simply sell their existing gold reserves outright in exchange for the same cash that they can print.

You see, a functioning printing press is infinitely more valuable than gold. Gold, as FOA said, is simply "held in the background for value proof." I can, however, imagine that a country like the US would want to keep its mining companies well-oiled and properly maintained. But that can be achieved by simply transferring in-ground reserves to the vault at some regulated pace.

A country like Canada which has more than 13,000 tonnes of in-ground reserves (the most of any country) and yet only has 3.4 tonnes in the vault would likely transfer at a higher pace than the USG which has a better balance between above- and below-ground reserves. But this transfer of gold from the ground to the vault would not pass through the gold market, even though the government would pay the mine owner the market price and then tax back most of the profit.

Similar principles apply to governments that are not currency issuers, like those in the Eurosystem, in that there is little difference between selling gold in the vault and selling gold in the ground via windfall profits taxes on the miners. One difference could be that, because of their membership in the Eurosystem, they cannot unilaterally choose to sell gold in the vault. But remember from the illustration above that Europe only has 2% of those global in-ground deposits. So even if half of those countries used their in-ground gold as a lottery ticket, that would only represent an additional flow of about 26 tonnes per year hitting the market. An amount that small could, and most likely would, be directly absorbed by the ECB.

I hope I've shown you that it doesn't matter what the rate of extraction will be in Freegold. It could be the same, higher or lower than today. All that matters is how much of that newly-mined gold is dumped onto the market like a winning lottery ticket, relative to the demand.

So let's take a poll. What is gold? Is it money, currency, an investment or wealth? What will your vote be when the time comes? And will you even have a vote?

Sincerely,
FOFOA