Foreign Trade in Precious Commodities

This chapter describes the mechanism that enables foreign trade in precious commodities. The mechanism contains both natural and tariff-based safeguards to ensure that such trade is conducted in a balanced manner.

Overview

This section gives an overview of everything that is involved in the design of the mechanism for foreign trade in precious commodities.

The section "Defining Precious Commodities" defines exactly what we mean by the term "precious commodities".

The section "The Core Idea" mentions that all precious commodities are traded in a currency that is equivalently precious. This is the necessary natural safeguard for ensuring a balanced foreign trade in precious commodities.

The section "Choosing the Currency" designates gold as the currency for foreign trade in precious commodities, and explains why it is suitable.

The section "Choosing the Unit for the Currency" selects a weight of gold that represents one unit of the gold currency. This unit is referred to as the "gold dollar". From the perspective of trade, the price of the precious commodity is quoted in terms of gold dollars.

The section "Example of a Transaction" provides an illustrative example of a foreign trade in crude oil being conducted in gold dollars. It demonstrates the conceptual mechanics of pricing and payment of precious commodities in gold dollars.

The section "The Effectiveness of the Natural Safeguard" discusses the topic embedded in the title. The mechanism ensures that precious commodities going in and out of a society are balanced in aggregate. However, this mechanism has one problem, and that can be solved by tariffs.

The section "Tariff-Based Safeguard" describes the mechanism of tariffs on import of precious commodities. Tariffs must be paid on imports when there is a deficit of imports as compared to exports. Note that the mechanism of tariffs is in addition to using gold as currency for foreign trade in precious commodities.

The section "Effectiveness of Safeguards" discusses the combined effectiveness of the natural and tariff-based safeguards. It shows that all aspects of foreign trade in precious commodities can be balanced using this mechanism.

All the above sections together conclude the description of the mechanism.

The section "Factors influencing Prices of Precious Commodities" discusses the topic embedded in the title. In short, they are: abundance, demand and supply, and purity.

The section "Additional Comments" contains a discussion of the implications and nuances associated with the mechanism for foreign trade in precious commodities.

Defining Precious Commodities

What are precious commodities?

Intuitively, any non-renewable natural resource may qualify as a precious commodity. For example, metals, their ores, crude oil, natural gas, and coal qualify as candidates.

For a non-renewable natural resource to be designated as a precious commodity, it must not be excessively abundant, must be standardizable, and must not be manufacturable.

Water and nitrogen are examples of abundantly available natural resources. Although both water and nitrogen are valuable, they cannot be designated as precious commodities.

An example of non-standardizable natural resources is large natural diamonds. While they may be priceless, they cannot be standardized; hence, they are not a commodity.

Diamond is a natural resource, but diamonds can also be manufactured. Therefore, small natural diamonds, even if they can be standardized, cannot be considered a precious commodity.

Utopian societies collaborate and apply the criteria, and designate many non-renewable natural resources as precious commodities.

The Core Idea

The mechanism of buying and selling precious commodities across societal boundaries is based on the idea outlined in the following paragraphs.

When a precious commodity is sold outside of the society, there is an importer who needs the commodity, there is an exporter who has the commodity, and there are the UFIs of the exporting and importing societies.

In this scenario, conceptually, the exporting society should ask for compensation for the precious commodity in something that is equivalently precious, and the importing society should pay for the imports in that demanded precious commodity.

Here are the various actions undertaken by the various parties to the transaction:

The importer buys that precious thing in the local market by paying for it using the local currency, and then hands over the precious thing to the importing society's UFI.
The importing society's UFI is responsible for transporting the precious thing to the exporting society's UFI and handing it over.
The exporting society's UFI is responsible for delivering the precious thing to the exporter of the precious commodity, which the exporter sells in the local market and obtains the local currency.
Once the exporter receives the payment in the precious thing, they transport the exported precious commodity to its importer in the other society.

This completes the export, its payment, and delivery.

On the whole, every export-import trade in precious commodities is balanced. Every exported precious commodity is paid for with another precious commodity of equivalent value. This ensures that societies do not lose precious natural resources. They do not gain them either.

Of course, for this to work, we need to choose a single precious commodity, and designate it as the currency for conducting foreign trade in precious commodities. This is discussed in the next section.

Choosing the Currency

To implement the mechanism described in "The Core Idea" section, we must choose a single precious commodity as the currency for all foreign trade transactions involving precious commodities.

So, what precious thing should be acceptable as a payment for exporting another precious commodity? It should be a specific and well-chosen precious commodity. Which precious commodity would be universally accepted by all Utopian societies?

The answer is "gold". Precious commodities are priced in gold. Gold is the currency for foreign trade in precious commodities.

Gold possesses several desirable characteristics that make it suitable as a currency.

Gold is a relatively rare element. Most other elements are far more abundant in nature. For example, silver is about 18 times more abundant than gold, and iron is about 14 million times more abundant than gold. The "Expected Prices of Precious Commodities" section provides estimates of the relative abundances of several other elements. Gold's relative rarity makes it valuable.
Gold is chemically stable. Most other elements are chemically more reactive than gold. For example, silver tarnishes, copper corrodes, and iron rusts; but gold does not. Hence, gold can be stored for a long time without changing form.
Gold is non-radioactive and does not decay into other elements. Gold does not degrade when stored, even over long periods.
Gold's chemical stability and non-radioactivity make it an excellent store of value.
The supply of gold is fixed. Gold can only be mined from the earth's crust, and its supply is finite. Industry estimates indicate that about 20% of gold remains to be mined, while approximately 80% has already been extracted.
Gold cannot be artificially produced; that is, we cannot convert something that is not gold into gold; we cannot manufacture gold. The only things that we can do are: mine ores that are rich in gold, extract gold from that ore, and refine the extracted gold to a high degree of purity.
Gold's fixed supply and inability to be manufactured ensure that no one can create gold and use it as payment.
Gold's purity can be easily tested, helping to prevent counterfeiting. In the past, when technology was underdeveloped and knowledge was limited, other materials could be mistaken for gold. Today, such deception is no longer possible.

For a long time, gold has been universally accepted as precious. Historically, gold was used as currency. We are reintroducing gold as a currency, but only for precious commodities - not for everyday transactions.

Although gold serves as the currency for foreign trade in precious commodities, importers and exporters do not physically handle it. This will be clarified by the end of the description of this mechanism.

Choosing the Unit for the Currency

What unit of gold should be used to price the precious commodities? Whichever unit we choose, we will call it the "gold dollar". From foreign trade perspective, the price of the precious commodities is quoted in gold dollars.

We want to choose some amount of weight as the "weight that represents a single unit of gold".

Here are some criteria to help us make the choice:

The unit should not be so large that a poor person would not be able to afford a single unit.
The unit should not be so small that buying food for one time, in terms of these units of gold, would cost hundreds or thousands of units.
A person of average wealth should be able to afford hundreds or thousands of these units, similar to ownership shares in a business or ETF.

We will consider various options that we can choose from. Let's use crude oil to illustrate these options based on its current price data. We will illustrate by representing the price of crude oil in terms of gold dollars. For illustration purposes, we will assume that crude oil is considered a precious commodity. At the time of writing, the price of crude oil is 60 USD per barrel. A single lot of crude oil consists of 1,000 barrels; therefore, it would be worth 60,000 USD. Furthermore, the price of gold is 3,400 USD per ounce, and an ounce contains 28.34 grams.

If we choose 1 gram as the unit of gold, then its price is \(3400 \div 28.3 = 120.14\), approximately 120 USD. We will use this approximate value as the actual value in these illustrative calculations. That makes 1 gold dollar worth 120 USD. Hence, the price of crude oil is \(60 \div 120 = 0.5\) gold dollars per barrel. A single lot of crude oil will cost 500 gold dollars.

If we had chosen one-hundredth of a gram (0.01 gram) as the unit of gold, then a single gold dollar is worth 1.2 USD. The price of one barrel of crude oil would have been 50 gold dollars. Purchasing a single lot of crude oil will cost 50,000 gold dollars.

If we had chosen one-thousandth of a gram (0.001 gram) as the unit of gold, then a single gold dollar is worth 0.12 USD. The price of one barrel of crude oil would have been 500 gold dollars. Purchasing a single lot of crude oil will cost 500,000 gold dollars.

After evaluating the three options for the unit of gold for a gold dollar, and our selection criteria, in present times, we should be inclined to pick one-hundredth of a gram as the unit of gold. With that choice for the unit of gold, the prices as quoted in USD and gold dollars are nearly the same. If the current price of gold were 2,834 USD per ounce, then the prices quoted in USD and gold dollars would have been exactly the same.

Thus, we will choose one-hundredth of a gram (0.01 gram) as the unit for gold dollar. That is, 0.01 gram of gold is 1 gold dollar.

Example of a Transaction

Let's illustrate foreign trade in precious commodities with an example transaction.

The seller of a precious commodity can ask for a certain number of gold dollars for a single lot of the precious commodity that the seller wishes to sell. The buyer can see the price in gold dollars, and if the price is agreeable, buy the commodity.

Let us say that a single lot of the precious commodity costs 50,000 gold dollars. So the buyer needs to pay 50,000 gold dollars to the seller.

Remember that we discussed that the UFI maintains a gold ETF. A single unit of that gold ETF is also worth one gold dollar. This is not a coincidence.

So, the buyer buys 50,000 units of the gold ETF (using the local currency of course) and hands those units over to the UFI to make the international payment.

Conceptually, the importer's UFI transports the 50,000 units worth of gold to the exporter's UFI. We will not discuss the implementation of this transport mechanism. The topic itself is fascinating and would require pages to describe. Moreover, the transport mechanism is of lesser importance to our current discussion.

The exporter's UFI upon receiving the 50,000 units worth of gold will credit the exporter's account with 50,000 units of the gold ETF in their country.

Thus, the buyer pays the seller for the single lot of the precious commodity.

The seller can then ship the precious commodity that the buyer has purchased.

The seller can sell 50,000 units of the gold ETF, and obtain the equivalent in local currency.

That completes the description of a transaction involving foreign trade in a precious commodity. Note that in this description, tariffs are not involved.

This illustration may appear to suggest that gold is being used as a universal medium for payment, but that is not the case. We will address it in the next four chapters.

The Effectiveness of the Natural Safeguard

So far, in the context of foreign trade, we have described the mechanism of pricing precious commodities in terms of gold dollars, and paying for them with gold dollars. Does this ensure a balanced foreign trade in precious commodities? The answer is not straightforward. Let's discuss.

Since the payment for importing a precious commodity was in gold, the exporting society does not, in aggregate, gain or lose precious natural resources. If exporting a precious commodity can be considered a loss, then payment for it in gold, of equivalent value, is a gain. Gold being a precious natural resource, such an export-import trade is neither a gain nor a loss.

Similarly, the importing society does not, in aggregate, gain or lose any precious natural resources.

This ensures that societies do not lose their precious natural resources through foreign trade.

This does not imply the absence of unbalanced trade in precious commodities.

In any Utopian society, there will be exporters and importers of precious commodities. These parties will be selling and buying units of the gold ETF in order to conclude their exports and imports. This creates a natural market for units of gold ETF in any society. As a result, in any society, the price of gold ETF fluctuates according to the demand and supply.

When import of precious commodities is paid using gold, the importing society is left with a lower quantity of gold and the exporting society has an additional quantity of gold. This changes the supply of gold in their respective societies, and that makes the price of gold fluctuate in their societies.

If a society were to import precious commodities without exporting any amount of precious commodities, then that society would, over time, deplete all its gold supply. From an initial starting point, as the one-way import of precious commodities progresses, the gold stock within that society decreases. This, in turn, causes the price of gold ETF in local currency to rise, making import of precious commodities more expensive in local currency terms.

This is a natural nudge to reduce import of precious commodities or increase export of precious commodities or do both.

This nudge is "natural" because there is no direct control to explicitly dissuade imports and incentivize exports. The nudge is a result of pricing precious commodities in gold, paying for them in gold, and the resulting demand and supply changes. It is systemic.

The natural nudge will eventually dissuade imports and incentivize exports. However, the amount of time taken by this natural nudge may be longer than citizens' expectations. It is desirable to have a mechanism in which the amount of time is deterministic. We need a mechanism that citizens can control. The next section discusses that mechanism.

Tariff-Based Safeguard

In the previous section, when discussing export-import of precious commodities, we discussed the concept of a "natural nudge" to reduce imports and increase exports.

We will strengthen this natural nudge by imposing import tariffs on the import of precious commodities when the net of imports exceeds the net of exports in the preceding few years.

The import tariffs are also charged in terms of gold. These tariffs are paid to the society; that is to the UFI of the society.

The import tariffs are paid by the importers. This makes those imports more expensive, suggesting to the importers that they should attempt to find suitable substitutes.

Tariffs are charged as a percentage of the value of the imported precious commodity. The rate of tariff is set such that the entire deficit of exports over the imports over the preceding few years can be collected as import tariffs in the next few years as long as the rate of deficit remains unchanged.

Both the number of preceding years and the number of next few years are policy parameters. By controlling these policy parameters, citizens determine how quickly the deficit should be wiped out. Leaders may influence citizens' views on the matter, but the decision remains with the citizens.

Note that the rate of import tariff is not explicitly set. This is intentional. The reason is that we do not need to provide our best estimate of the rate. It can be computed. We only have to express our desire that the accumulated deficit from the past be wiped out, by penalizing imports, in some number of years.

Here is an example: Suppose that in the last five years, exports were 20% less than the imports. Suppose we assume that the rate of exports and imports, without any additional nudge, will remain the same over the next five years. Further suppose that we desire the deficit of the last five years be wiped out in the next five years. Then, to fulfill this desire, we must collect tariffs at a rate of 20% on every import today.

The tariff rate is automatically recalculated daily; it changes at the end of each day. There is no need for any other human intervention beyond citizens adjusting the policy parameters.

In reality, the deficit initially shows up in small amount, and commensurately the tariff rate will be small. As the deficit keeps growing, the tariff rate will grow. As the deficit keeps shrinking, the tariff rate will keep shrinking. Eventually when the accumulated deficit reaches zero, the tariff rate will also drop to zero. If after this, we export more than we import, the tariff rate will remain zero; because there is no deficit.

What does the society do with the import tariffs collected in gold ETF units? The UFI sells those units in the local market to obtain local dollars, and distributes that money equally to all its citizens. However, this sale and distribution is carried out gradually and equally over a time span specified by the number of next few years parameter.

Effectiveness of Safeguards

Let's discuss the effectiveness of both natural and tariff-based safeguards. We will discuss the reasons why the mechanism described in all prior sections restores the balance in the export-import of precious commodities. In seeking balanced trade, we are primarily interested in not having deficits. If there are deficits, we want to wipe them out.

What does the phrase "wipe out the deficit" mean?

Exports cause an inflow of gold; imports cause an outflow of gold. When there is a deficit, the amount of gold that has flowed in is less than the amount of gold that has flowed out. The deficit is measured in gold.

In order to wipe out the deficit, more gold needs to flow in, and less gold needs to flow out, and this needs to continue for an amount of time that is sufficient to negate the accumulated deficit.

Eliminating the accumulated deficit would restore the supply of gold to the same level as it was just prior to when the deficit started accumulating.

A deficit decreases the supply of gold in the local market, causing gold prices to rise in the local market. A surplus increases the gold supply and lowers its price. Balanced trade has neither surplus nor deficit; therefore, gold prices remain stable.

Now, let's see how collecting tariffs makes the natural nudge stronger.

In a society experiencing an export deficit of precious commodities, the rising gold price in local currency is a natural nudge to increase the export of precious commodities, and decrease the import of precious commodities.

With tariffs, this natural nudge is made stronger, thus giving organizations an added incentive to increase exports of precious commodities and decrease import of precious commodities.

When a society collects tariff, the gold collected as tariff does not leave the society but it stays with the UFI. Instead of selling it immediately, the UFI sells the gold gradually over the next few years. This is because the tariffs are intended to reduce the supply of gold in the local gold market.

The presence of tariffs allows the price of gold to increase in response to the increased demand due to tariffs. Moreover, delaying the sale of this gold keeps the supply out of the local market for the next few years, thereby reducing the supply further, thereby causing the price of gold to be commensurately higher.

This changes the profitability of exporting and importing various commodities. The change in profitability is much larger as compared to when the society has just the "natural nudge". Thus, collecting tariffs in gold ETF units and gradually selling them back in the local market creates a "stronger nudge".

Now, let's consider how the stronger nudge causes the deficit to get wiped out.

Organizations are seeking better profit opportunities. The stronger nudge causes a bigger change in profitability of importers and exporters. Organizations routinely monitor their profitability and make necessary adjustments. A bigger change in profitability increases the urgency for them to address their altered situation. Increased urgency leads to quicker action.

The changed profitability encourages importers and manufacturers to reconsider their options. They are likely to seek alternatives to importing those precious commodities.

Around the same time, exporters realize that they will get more local dollars for the gold that they receive for their exports. This encourages them to export more.

Seeking better profitability, importers are likely to reduce imports, and exporters are likely to increase exports.

Gradually the gold-value of imports will decrease while that of exports will increase. At some point in time, this will reverse the "current imbalance" from deficit to surplus; that is, more gold flows in, than out.

As more gold starts flowing in, the rate of tariff starts reducing. Eventually, the deficit of the preceding few years will be erased, while the import tariff rate will gradually decrease until it reaches zero.

Thus, the natural nudge and the tariff-based nudge combine to wipe out the deficit.

Imbalances do not resolve immediately when they arise. With just the natural nudge, a deficit would eventually get wiped out. With the stronger nudge of import tariff, it gets wiped out faster.

The mechanism to restore an imbalance in foreign trade in precious commodities as described above can be effective only in a society that has sufficient amounts of precious natural resources that can be mined, refined and exported.

The mechanism will not be as effective in a society that is chronically poor in precious natural resources. The Utopian solution to that problem is explored in the "Additional Comments" section.

Why is the money collected from sale of gold collected as import tariff distributed to citizens? The answer is in the "Additional Comments" section.

Factors influencing Prices of Precious Commodities

For the same level of purity as gold, the price of any commodity will be inversely proportional to its abundance relative to the abundance of gold. The more abundant a commodity is compared to gold, the lower its price will be.

Wikipedia has an article about "Abundance of elements in Earth's crust". The following table presents data extracted from that article, for a few elements, to give us an idea of the relative abundance of those elements as compared to gold. The "Abundance (ppm)" column gives the estimated abundance in parts per million by mass, for elements in the continental crust.

Metal	Abundance (ppm)	Relative Abundance vs. Gold
Gold (Au)	0.004	1 times
Platinum (Pt)	0.005	~1.25 times
Palladium (Pd)	0.015	~3.75 times
Silver (Ag)	0.075	~18.75 times
Cadmium (Cd)	0.15	~37.5 times
Tungsten (W)	1.25	~312.5 times
Tin (Sn)	2.3	~575 times
Uranium (U)	2.7	~675 times
Beryllium (Be)	2.8	~700 times
Lead (Pb)	14	~3,500 times
Lithium (Li)	20	~5,000 times
Cobalt (Co)	25	~6,250 times
Copper (Cu)	60	~15,000 times
Zinc (Zn)	70	~17,500 times
Nickel (Ni)	84	~21,000 times
Chromium (Cr)	102	~25,500 times
Vanadium (V)	120	~30,000 times
Carbon (C)	200	~50,000 times
Sulfur (S)	350	~87,500 times
Manganese (Mn)	950	~237,500 times
Phosphorus (P)	1,050	~262,500 times
Titanium (Ti)	5,650	~1,412,500 times
Potassium (K)	20,900	~5,225,000 times
Magnesium (Mg)	23,300	~5,825,000 times
Sodium (Na)	23,600	~5,900,000 times
Iron (Fe)	56,300	~14,100,000 times
Aluminum (Al)	82,300	~20,575,000 times
Silicon (Si)	282,300	~70,575,000 times

The above data represents estimates of the relative abundances; it is not expected to be completely accurate. However, we are not aiming for complete accuracy; rather, we are attempting to understand the relative abundances of various metals as compared to gold in approximate terms.

The price of any commodity is also dependent on the demand for those commodities and the available supply of those commodities.

Societies can influence the supply of specific natural resource by restricting the amount mined per year. This kind of restriction aims to preserve the supply for longer period. It is a prudent measure. Such restrictions can be implemented by assigning a distinct policy parameter to each mined resource.

The ore of a well-refined precious commodity is also considered a precious commodity. However, the price of the ore will be lower than that of the refined commodity.

Additional Comments

From the foreign trade perspective, gold is not a tradable commodity. Since gold is used as the currency for pricing and paying for precious commodities, it cannot be bought or sold across societal boundaries.

How can gold miners and refiners sell their gold? Miners sell unrefined gold to refiners within their society for local dollars. The selling price is based on the quality and weight of the unrefined gold that they have mined. Gold refiners purify the mined gold to more than 99.9999 percent purity and deliver it to the society's UFI. In return, they receive gold ETF units that are equivalent to the weight of the pure gold. Gold refiners can sell these ETF units in the local market and obtain local dollars.

In a society where gold is mined, its primary use is to acquire other precious commodities and utilize them in various beneficial ways. Societies that lack gold but are rich in other precious commodities can export those commodities and obtain payment in gold dollars.

How do jewelers acquire fresh gold to make new gold jewelry? They obtain it from authorized gold wholesalers. Authorized gold wholesalers purchase gold ETF units in sufficient quantities from the local market, and request that the UFI redeem those units for physical gold.

Individuals are not allowed to buy commodities. Unlike individuals, certain organizations are authorized to buy commodities. Generally, organizations that trade in commodities or use them in manufacturing are eligible to obtain authorization to buy commodities.

Buying "commodities" is quite different from going to a retail store and purchasing what we consider "household commodities" such as sugar and coffee. When we refer to a "commodity", we mean something of a standard quality and quantity. In this case, the standard quantity is so large that it would be financially challenging for a significant majority of the population to purchase even a single lot of the commodity. Moreover, the purpose of standardizing commodities is to enable organizations to purchase them in bulk while ensuring consistency in their specifications. Furthermore, taking delivery of most commodities requires proper handling, and those involved need appropriate training. An individual is not expected to have the need for commodities, the means to purchase them, and the training to handle them properly.

Individuals who have a strong reason to purchase certain commodities could create an organization, obtain approval to purchase that commodity by meeting all necessary requirements, and then proceed to purchase on behalf of the organization.

What does the society do with the import tariffs collected in gold ETF units?

The UFI sells those units in the local market to obtain local dollars, and distributes that money equally to all its citizens. However, this sale and distribution is carried out gradually and equally over a time span specified by the number of next few years parameter.

Why distribute the money? Because tariffs are not taxes. Tariffs are a way of dissuading some people from doing something that is deemed undesirable. Taxes are the responsibility of every citizen, and this responsibility is proportional to their wealth. Reducing taxes by the amount of collected tariffs benefits only the wealthy, and does not benefit those who lack wealth. Distributing the collected tariffs equally to all citizens, benefits all citizens equally.

Societies that are rich in precious natural resources can easily earn gold dollars. How can a society that is chronically poor in precious natural resources earn gold dollars?

This can be achieved by setting up refineries and refining ores of precious commodities. The refined ore is a precious commodity valued more highly than the original ore.

Of course, rather than ruthlessly competing, other societies should care about the well-being of that society, allowing it to refine ores in sufficient quantities, and thereby enable it to earn gold dollars.