Why is Gold Worth Anything!?

Masomnia

jon3001 wrote: »

I guess my point is that it's somewhat a circular argument. Money is valuable because it's valuable (like gold you could say). People value it because they believe they can exchange it for other stuff that they think is valueable.

Ultimately it's value is based on supply and demand. It's the government (and authorised banking system) that control that supply. And it's the government that grant it legal status. Legal tender means that you can use it to pay you taxes and it must be accepted to pay debts.

What is money? Basically it's a debt that society owe you (or at least people participating the economy upon which the money is based). It doesn't have intrinsic value but is basically an IOU.

When you give your employer your labour they give you some IOUs. You can go and do your shopping and society has 'settled up' with you. They shopkeeper then has to offload those IOUs to someone else... maybe their own staff, goverment taxes, suppliers...

Essentially it's a belief system that society will 'make good' on the debt it owes. It's also government controlled. And the government is the biggest debtor around. So they have a big incentive to devalue the money (via inflation).

We've witnessed what happend to money during hyperinflation and suddenly people don't think money is valuable. I'm not suggesting that's going to happen in Britain although we have had a banking crisis, ballooning government debt and quantitive easing. But you have to be aware that someone else is pulling the strings with the value of your money.

That's why gold still has a monetary role for many people since it's a hard asset and not subject to being created 'out of thin air' by a government (other hard assets might include land, property, art and antiques). Yes - you can argue it's value is psychological - but it's the same with money.

I do get the money as debt thing, and take your point about hyperinflation, but surely if all we held was gold we'd be saying the same thing after the early 80s when the gold price fell dramatically. Inflation can be a good thing, if it encourages people to invest their 'money' in business and create wealth, jobs, prosperity, rather than hoard gold in vaults - much more likely if prices are static.

The government can create it out of nothing, but don't do it frequently because worldwide investor confidence in the pound is also important. They are incentivized to keep it stable. The same goes for gold too, the US could flood the market with gold and force the price down, it's not too different to printing money in effect.

I agree that gold has a role though, like any commodity, I just don't think it's the answer to all our problems.

jon3001

Masomnia wrote: »

The government can create it out of nothing, but don't do it frequently because worldwide investor confidence in the pound is also important. They are incentivized to keep it stable. The same goes for gold too, the US could flood the market with gold and force the price down, it's not too different to printing money in effect.

Sure. This basically happened when the Spanish brought ship-loads of gold and silver back to Europe from the Americas. Suddenly precious metals were less precious and the price of goods and services were forced up.

Masomnia wrote: »

I agree that gold has a role though, like any commodity, I just don't think it's the answer to all our problems.

I agree. We're all participating in economies based on fiat money (debt) and need to earn and save some for our financial stability. And we hope that we have a prudent government that will work to ensure the value of this money.

I'm just saying that people should recognise the limitation of what has replaced gold. As GucciMane says, it can be a hedge against currency instability. I think if you're cautious you'd have some of both.

One can question the intrinsic value of gold but the fact is that billions of people out there do think it valuable. If your national government/economy failed (and along with it the money collapsed) you'd be able to transport yourself and your metal elsewhere and use this as the foundation for re-establishing yourself financially.

At a less extreme level you could hedge yourself from less severe currency set-backs. Reserve currencies have also been used for this.

donshale

I can see that gold has a value as a hedge against currency, but it still makes me think that it's only real value is in it's perceived value.

Now - I understand that by this measure cash (i.e. the paper notes and coins) literally have no real value either. But that's true - which is why most of us convert our money into something useful.

So why is gold valuable? It isn't even that useful - it's only value seems to be that people say it is valuable. Maybe one day people will not see gold as special any more. The obsession with this metal has gone on for a few thousand years, but maybe one day people will laugh as we may now about the time tulip bulbs were in demand?

musehead

Is the demand for gold in jewelry, electronics etc small compared to the actual amount of gold?

If I was to convert my cash into something considered intrinsically valuable i'd probably buy land, because the reason for the value of gold does not seem that obvious. People are always going to want land.

musehead

donshale wrote: »

The obsession with this metal has gone on for a few thousand years, but maybe one day people will laugh as we may now about the time tulip bulbs were in demand?

I wouldn't be at all surprised. I doubt it would happen in our lifetimes though.

jon3001

musehead wrote: »

Is the demand for gold in jewelry, electronics etc small compared to the actual amount of gold?

Gold demand in 2008 was 3805 tonnes (including jewellery, retail investments [bars, coins, medals] and industrial applications [electronics, dentistry, etc]) against a net mining supply of 2057 tonnes.
http://www.research.gold.org/supply_demand/

The total above-ground gold is about 120,000 to 140,000 tonnes
http://www.galmarley.com/framesets/fs_commodity_essentials_faqs.htm

Of this, Central banks and official organisations hold about 30,000.

The rest is held by individuals in the form of gold jewellery [approx 70,000 - 80,000 tonnes], coin and privately held bullion [combined at 20,000 tonnes].

movingforward2010

for jewelery silver look much better

jon3001

wxmlad wrote: »

for jewelery silver look much better

Compared to gold, I think it's also the better investment right now too.

J45

musehead wrote: »

Is the demand for gold in jewelry, electronics etc small compared to the actual amount of gold?

If I was to convert my cash into something considered intrinsically valuable i'd probably buy land, because the reason for the value of gold does not seem that obvious. People are always going to want land.

theres a risk in any possession you aquire. if globel warming is true then that land could me underwater in the future but if you invested in gold you'd still have that 'IOU' although i'd be exchanging it for a boat if that did happen.

Grek

donshale wrote: »

Can someone explain why gold is valuable? It is rare, but so is scandium or yttrium, so just ‘being quite rare’ can’t be enough to justify any value.

Gold used to be used as a standard for monetary exchange but this practice has been abandoned long ago.

All forms of investment have flaws – but at least most have a veneer of logic:
Property or land. If it is geographically well located, there is a benefit from living there.
Shares. If companies produce goods and services then there is some tangible benefit in the company’s existence to back up the investment.
But gold? All you can do is make jewellery from it or digest it - in tiny amounts! If you wear gold people may say ‘gosh is that real gold?’ Why. Who cares?

Can anyone explain why – apart from the fact that everyone says it is valuable – a lump of gold actually is worth anything?

Is it just a case of "The Emperors New Clothes"? What happens when people decide it's not really worth anything any more?

Very interesting question and tread. Thank you!!!