Economics

According to Brown, if natural resource use declines while capital and labor grow, the marginal productivity of natural resources will rise and the marginal productivity of capital and labor will fall. Increasing natural resource scarcity would imply that natural resource prices rise relative to wages and return to capital. Now, if the quantity of nonrenewable resources is assumed to be fixed, then the consumption of the resource today limits the quantity available for future consumption. Suppose that the expected return to conserving a natural resource is less than the market interest rate. Suppliers of the good will allocate less of the resource for future consumption. This lowers prevailing market price for the good, raises expected long-run prices, and increases expected return to savings.

These conditions will determine the difference between the price and marginal cost of producing a nonrenewable good. Production is affected by the cost of source depletion. According to Brown, rising real prices for nonrenewable natural resources would provide evidence that technological advance has not offset increased geophysical scarcity constant real prices would indicate that technological advance has just offset increased scarcity and falling prices would signify that technological advance has more than offset increased scarcity. The results of the study are as follows 1) prices for five of the commodities (anthracite coal, coal, natural gas, and tin) show significant positive growth, 2) prices for iron and crude oil show no significant trend, and 3) prices of other commodities show negative trends.

Gold seems to be an exception. For more than 10 years, the demand for gold increased dramatically, from 33 to 61 (1988-1998). During that period, the world supply of gold was declining while demand was significantly increasing. However, with the global recession of 2009, the number of physical buyers has diminished by more than 10. There is a significant decline in total demand of all gold-based commodities.

The stock average though remains overpriced in relation to potential earnings. This ratio is overtly high compared to the historical average of 15 to 20 times earnings. In short, a declining stock market is potentially bearable for gold.

Now, the decline in the real price of gold does not indicate that technological advance has more than offset increased scarcity. Indeed, the production of gold-based commodities does not require extensive technological research. The rise in the real price of gold does not indicate that technological has not offset geophysical scarcity. The same principle holds in this case (gold-based commodities do not require extensive technological innovation).

The real price of gold seemed to be more sensitive to the fluctuations of aggregate prices in the stock market. When average price falls, the demand for gold declines. When average price increases, the demand for gold also increases (hence, price also increases). This may be due to the historical value of gold as a medium of exchange. Gold has both intrinsic and extrinsic properties which denote common value. Geophysical scarcity is not a factor of production volatility. Indeed, the behavior of gold in the world market has been close to being unpredictable.