Does gold's value decrease over time due to the fact that it is being continuously mined?

Question

As one can see here ( How fast does the available amount of gold in the world increase due to mining? ), available amount of gold is increasing.

That sounds similar to printing more money. I suppose demand is growing even more right now, but is it in fact correct to view gold as basically a currency that's expensive to print (at least for now)? If so, what is the significance of the fact that there is no central bank for this "currency"? I.e. if everyone with a mine and a shovel can "print" gold, does it mean uncontrolled severe deflation/inflation is more likely to occur compared to "normal" currencies such as USD, EUR etc?

Answer 1

does it mean uncontrolled severe deflation/inflation is more likely to occur compared to "normal" currencies such as USD, EUR etc?

Look at the chart referenced in the link in your question. It took approximately 50 years for annual production of gold to double from 500 tons to 1000 tons. It took approximately 40 years for annual production to double from 1000 tons to 2000 tons.

Compare that to the production of US dollars by the Federal Reserve (see chart below obtained from here). US dollar production doubled in DAYS. Which one do you think will lead to uncontrolled inflation/deflation?

Update: Why did I include a chart of the FED's balance sheet? Because this is the way newly printed money is introduced - the FED will purchase something from banks (mortgage-backed securities, US treasuries, etc.) with newly printed money. The banks can then loan this money to people who then deposit the money into other banks who loan those deposits to other people and so on. This is how the fractional reserve process expands the money supply. This is why I did not include a chart of the money supply since that is counting the same money multiple times. If I deposited 100 newly minted coins into a bank and that bank proceeded to loan out 80 of my coins where 80 are deposited into another bank who then proceeds to loan out 60 of the coins, and so on....the production of coins only changed by the initial 100 that I minted - not by the fractional reserve multiple.

There are historical examples of inflation with gold and silver as duff has pointed out. None of them come close in magnitude to the inflation experienced with government fiat money.

Answer 2

As one can see here, the world population is growing. Assuming worldwide demand for gold is a function of population, the question you have to ask is whether gold mining outpaces population growth. Just eyeballing it, I'd say they're about even although annual production is far noisier. Keep in mind that gold extraction is not an easy process though.

At the end of the day, gold is only worth what you can trade it for, just like any other store of value.

Answer 3

Mining/discovery of gold can be inflationary -- the Spanish looting of Central America for a few hundred years or the gold rush in the 19th century US are examples of that phenomenon.

The difference between printing currency and mining is that you have to ability to print money on demand, while mining is limited to whatever is available to extract at a given time. The rising price of gold may be contributing to increased production, as low-grade ore that wasn't economically viable to work with in the 1980's are now affordable.

Answer 4

The relative value of Gold (or any other commodity) as measured against any given currency (such as the USD), is not a constant function either. If you have inflationary pressure, the "value" of an ounce of gold (or barrel of oil, etc) may "double", but it's really because the underlying comparator has lost "half" its value.

Answer 5

Contrary to Muro's answer which strangely shows a graph of the Fed's balance sheet and not the money supply, the supply of US dollars has never doubled in a few days. This graph from Wikipedia shows M2, which is the wider measure of money supply, to have doubled over approximately 10 years, http://en.wikipedia.org/wiki/File:Components_of_US_Money_supply.svg

The answer to whether gold has a higher chance of experiencing big devaluation has to do with forces outside anyone's control, if a big new mine of gold is discovered that could affect prices, but also if the economy turns around it could lead investors to pull out of gold and back into the stock markets.

The USD, on the other hand, is under control of the policy makers at the Fed who have a dual mandate to keep inflation and unemployment low. The Fed seems to have gotten better over the last 30 years at controlling inflation and the dollar has not experienced big inflation since the 70s. Inflation, as measured by Core CPI, has been maintained at less than 4% for the last 20 years and is currently coming off record low levels below 1%.

Answer 6

The previous answers have raised very good points, but I believe one facet of this has been neglected. While it's true that the total accessible supply of gold keeps growing(although rather slowly as was mentioned earlier) the fact remains that gold, like oil, is a non-renewable natural resource. So, at some point, we are going to run out of gold to mine. Due to this fact, I believe gold will always be highly valued. Of course it can certainly always fluctuate in value. In fact, I expect in the reasonably near future to see a decline in the price of gold due to investors selling it en masse to re-enter the stock market when the economy has recovered more substantially.

Answer 7

Does gold's value decrease over time due to the fact that it is being continuously mined?

Remember that demand increases and decreases - we've had seven years or so of strong demand increase and the corresponding price increase suggests there is a lack of gold coming into the market rather than too much.

Also, bear in mind that mining the stuff on any scale is hazardous and requires massive investment in infrastructure and time. Large mines frequently take seven to ten years to come on-stream - hardly an elastic enterprise.

Answer 8

There is another aspect too for the high prices of GOLD. After the current economical crisis people are no more investing in property and a big chunk of investment has been diverted to GOLD.

Answer 9

Like anything else, the price/value of gold is driven by supply and demand. Mining adds about 2% a year to the supply. Then the question is, will the demand in a given year rise by more or less than 2%.

ON AVERAGE, the answer is "more." That may not be true in any given year, and was untrue for whole DECADES of the 1980s and 1990s, when the price of gold fell steadily.

On the other hand, demand for gold has risen MUCH more than 2% a year in the 2000s, for reasons discussed by others. That is seen in the six-fold rise in price, from about $300 an ounce to $1800 an ounce over the past ten years.