Source: (the economic times, n.d.).
As soon as demand begins to overwhelm supply, then the price of gold will begin to rise. Mainly, one can attribute this to the fact that increase in the demand for gold would shift the aggregate demand curve upwards. More specifically, the demand curve will shift from D1 to D2. Given that the supply of the physical gold is relatively rigid, the change in quantity demanded of gold from Q1 to Q2 will create an upwards push in the price of the product. Thus, the price of gold will rise from Pinitial to Pnew, as illustrated in the diagram above (Amadeo, 2017). For this reason, Rickards (2017) is right to say that as soon as the demand for gold begins to overwhelm the available supply, then its prices are expected to skyrocket in the gold market.
According to Rickards, gold is a form of money. Remarkably, this notion is true, especially when one considers the principle functions of money. According to economic theory, money is good that is widely accepted in the exchange of services and goods, and payment of debts. Fundamentally, money has four main functions. It is imperative to note that gold can serve these functions as well. For this reason, Rickards is right in his view that gold is a form of money.
Store of value
It is noteworthy that the value of money can be retained over a long period of time. Thus, it is used as a convenient means to store wealth. In the same way, gold is used to store wealth over long periods of time. Predominantly, this function is possible as it can help people store surplus purchasing power and use it whenever they want. It is a secure way of saving, and the possibility of it being destroyed is minimal. It can also be used whenever the need arises. Thus, one may argue that just like money, gold is a good store of value. In this regard, it is a form of money.
Medium of exchange
Money facilitates transactions of services and goods through its function as a medium of exchange. All sections of society sell their products in exchange for money and buy the commodities they need using the money. Likewise, gold functions as a medium of exchange in which producers and wholesalers sell their services and goods to consumers in exchange for gold. Thus, one can say that gold is a form of money.
Unit of account
Money also functions as a unit of value. More precisely, it measures the value of various commodities that are produced within an economy. In the same manner, gold performs this function by acting as a standard of value. Today, it performs the function of a common measure of value and individuals can express the exchange of all commodities in terms of gold in the exchange market. Consequently, Rickards is correct to say that gold is a form of money.
Standard of deferred payment
Money also functions as a standard of deferred payment. Modern economics is founded on the basis of credit and credit is paid in terms of money. Thus, individuals can purchase a commodity now and promise to pay in the future in terms of money. Similarly, gold can be used as a standard of future payments whereby debtors promise to pay their creditors at a future point in time in the form of gold. In this regard, it is rightful to say that gold is a form of money.
A decrease in global production of gold implies that there would be a decrease in the aggregate supply of the commodity. Thus, one would expect that the aggregate supply curve of gold would shift towards the left. Markedly, a shift in the supply curve towards the left while the demand for the product remains unchanged would lead to an excess demand over supply. In turn, this would create an upward pressure on the price of physical gold, forcing it to rise.
A decrease in production of gold will shift the supply function from S to Snew. In turn, this reduces the quantity demanded from Q* to Qnew. Given that the demand for physical gold remains unchanged, the price of the commodity will be pushed upwards from P* to Pnew (Ehrbar, n.d.).
Based on the information provided in the article, it is correct to think that the market for gold is not a perfectly competitive market. Characteristically, a perfectly competitive market is made up of many sellers and buyers. Additionally, there free exit and entry into the market for sellers and buyers (Beggs, 2011). The product offered in this market is largely homogenous and identical. In addition, the producers are price takers, and the price of the commodity is determined by the forces of supply and demand (“Perfect Competition,” n.d.). Thus, when the supply of the commodity reduces, then there is an upward pressure on the price, thereby leading to a rise in the price charged for gold. Likewise, when demand outstrips supply in this market, the price of the product also rises. In addition, in a perfectly competitive market, there is perfect information between sellers and buyers. Hence, judging from the characteristics of the international gold market as described by Rickards (2017), the market for gold is not a perfectly competitive market. In the article, the trade for gold is mainly made through the futures exchange. Additionally, there is imperfect information between buyers and sellers, given that most Chinese and Saudi traders are not transparent in their dealings. In addition, there are few sellers of the commodity, and entry into the gold production and trading market is not easy. In this regard, it is worth pointing out that the market for gold is not a perfectly competitive market.
Amadeo, K. (2017). Law of Demand: Definition, Explained, Examples. The Balance Retrieved 27 May 2017, from https://www.thebalance.com/law-of-demand-definition-explained-examples-3305707.
Beggs, J. (2011). Introduction to Competitive Markets. ThoughtCo. Retrieved 27 May 2017, from https://www.thoughtco.com/introduction-to-competitive-markets-1147828.
Definition of 'Law of Demand'. (2017). The Economic Times. Retrieved 25 May 2017, from https://economictimes.indiatimes.com/definition/law-of-demand
Ehrbar, A. Supply. Library of Economics Liberty. Retrieved 27 May 2017, from https://www.econlib.org/library/Enc/Supply.html.
Perfect competition. (2017). Economics Online. Retrieved 25 May 2017, from https://www.economicsonline.co.uk/Business_economics/Perfect_competition.html
Rickards, J. (2011). Rising Demand, Falling Supplies Equals Higher Gold Prices. Daily Reckoning. Retrieved 27 May 2017, from https://dailyreckoning.com/rising-demand-falling-supplies-equals-higher-gold-prices/