In a Gold system with convertible currencies into Gold, assuming we have a monometallic system, the value of Gold is a Max of maxima, with each country where the currency is tied to gold having a Max between Circulation value and Commodity / Jewelry value since during a crisis with steep deflation, people would melt their jewelry and ornaments to get coined into money . This is well documented.
When the currency tied to gold would be too weak, too diluted, people would do the opposite, that is, they would redeem their currency for Gold and either use it as jewelry locally or send it overseas where they would have a better circulation valuation . (that is, the currency tied to it would not be loose and there would not be an external drain)
Evidently #BTC can not be used as an input into the production of any tangible or intangible good or service, so its commodity value is zero and inferior to paper money which can be burnt or used as toilet paper let alone fiat base metal coins.
Gold has two sources of demand:
- Monetary demand (coinage, reserves, circulation).
- Non-monetary demand (jewelry, ornamentation, industrial uses).
Under a gold standard, gold will tend to flow toward its highest-valued use.
Country-Level Gold Value
For country i, define:
- Mi = monetary value of one ounce of gold in circulation.
- Ji = jewelry/commodity value of one ounce of gold.
Then the local equilibrium value of gold is approximately:
Gi=max(Mi,Ji)
because:
- If Mi>Ji, nobody melts coins into jewelry.
- If Ji>Mi, people melt coins and sell the metal.
The arbitrage process forces gold to be valued at the higher use.
Monetary Value Component
Let:
- Pi = purchasing power of gold in domestic circulation.
- Ci = legal conversion value of currency into gold.
Then:
Mi=max(Pi,Ci)
If currency becomes over-issued relative to gold reserves, holders redeem notes for gold.
If gold becomes undervalued monetarily relative to goods, gold enters circulation.
International Gold Value
Suppose there are N gold-standard countries.
Gold can move across borders.
Let:
Gi=max(Mi,Ji)
Then the world value of gold tends toward:
GWorld=max(G1,G2,…,GN)
or substituting:
GWorld=max[max(M1,J1),max(M2,J2),…,max(MN,JN)]
which simplifies to:
GWorld=max(M1,J1,M2,J2,…,MN,JN)
This is essentially the "Max of Maxes."
Gold migrates toward the location and use where it commands the highest value.
Example
Suppose:
Country
Monetary Value
Jewelry Value
UK
100
90
France
95
105
USA
98
92
Then:
GUK=max(100,90)=100
GFR=max(95,105)=105
GUS=max(98,92)=98
and:
GWorld=max(100,105,98)=105
Gold would tend to flow toward France until arbitrage compresses the gap.
Gold Standard Drain Mechanism
The second point can be written as:
If a currency becomes over-issued,
Mi<GWorld
then holders redeem notes for gold and export it.
Gold reserves fall:
ΔRi<0
which contracts the money supply:
ΔMoneyi<0
raising the purchasing power of the remaining currency until:
Mi > GWorld
This is the classical specie-flow adjustment described by David Hume and Henry Thornton (in greater detail)
Comparison with Bitcoin
This framework of course has gold with a valuation floor:
Gi≥Ji
because jewelry and industrial users exist even if monetary demand collapses.
For Bitcoin:
B=MB+NB
where:
- MB = monetary/network demand.
- NB = non-monetary utility demand.
Critics argue:
NB≈0 (because it can’t be used as input to make anything either tangible or intangible)
so:
B≈MB
meaning its value depends almost entirely on monetary demand.
Gold, by contrast, has:
G=MG+JG
with:
JG>0
which creates a non-monetary valuation floor.
Finally the, flow of Gold is going to continue to China for as long as an ounce of Gold can command so much more goods and services in China.
And it does not require to boost the USD in the process, since the Gold can be bought in Local currency.
This also explains why the US policy makers try to stuff an ersatz which is a dollar circularity (BITCOIN) since BTC requires Stablecoins to be bought, which in turn stimulate demand for UST since they are created against UST.
We discussed that previously.
This explains why China bans it and why the EU is frowning and putting barriers against it.
This means that the USD will have the usual FX as reserve rug pull which happened in 1927 with Rist asking Montagu Norman for gold and in 1965 when De Gaulle advised by Rueff to ask the US to send the Gold.
As Thornton explained when goods are cheap in relation to Gold what is cheap (goods and services) flow out (China), while what is expensive (Gold in China) stays, and when the Goods are expensive in relation to Gold, what is cheap (Gold in the US) flows out and what is expensive (goods) stays.
So in a way the flow of Gold in China is basically the same thing as an increased ability of producing more and more goods cheaply with gains of productivity.
That goes for all of Asia, their increased ability to produce more and more goods and services, meant that this production capacity creates acquisitive power for Gold, and that's another way to look at the price of Gold. MV=PQ applies to circulating medium for the monetarists I know by the PQ has a lot of impact on the ability to acquire the Gold;
Interestingly if Gold was used more and more in settlement would that mean that its velocity would increase and hence instead of being hoarded, the minimum Gold Reserve ratio was estimated to be minimum 30%. Which would mean a price double of today. It is likely that we have a combination of increased velocity (Gold Settlement) progressively to prevent the catastrophe of the double counting of reserves that is FX as reserves and typically ends with instability both in 1927 onwards and in 1965 onwards.