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If you try to value gold objectively (its industrial and possibly jewelry use), its price should be significantly lower than what it is today.

I think you might be misunderstanding what gives things value. The $20 bill in my pocket has little objective value by your definition. Sure, I could use it as a building material by papering a small piece of my wall with it or I could make an origami ring out of it, but the object's value is not determined by what can be made out of it.

Value is subjective to people's desires and beliefs about what is worth trading for. Gold has value because (almost) everyone anywhere on the planet will accept it in trade.

Gold is priced in dollars and when dollars are flying off of the printing press, but very little new gold is being produced, it follows that the price of gold would increase in terms of dollars. It is inflation that is mostly responsible for driving the price of gold up, not fear.

I'm not suggesting that everyone should be 100% into gold, I merely think that people looking for real value, would find gold very attractive as a reliable way to preserve it.

Yes you are correct. I use fundamental or intrinsic value in the financial sense. That relies on summing the future income and then discounting it to the present value. As a $20 bill has no future income, it has significantly less value than $20 invested in even a government bond.

What makes gold "real" value and other exchangeable items not "real" value?

You had better stick to talking about exchange value, because once you get into nebulous discussion of "real" value it becomes immediately relevant that gold is nonproductive at best and prone to fluctuations and bubbles in reality.

If you define the discussion of value as being limited to immediate short term exchange, then it's no surprise that you end up concluding that the only things of "real" value are whatever gives you liquidity. That is a part of the story, after all Berkshire keeps $20-$30 billion liquid as a matter of policy.

But that doesn't tell you anything about future returns or opportunity costs, and it is not the whole story. The idea that gold's value is "real" because others think it is real (or better, have long thought that it is real) is just as viciously circular as saying that currency's value is real because others believe it is real.

"The 170,000 tons of gold will be unchanged in size and still incapable of producing anything. You can fondle the cube, but it will not respond." -- Warren Buffet

He doesn't mince words, does he?

This is a quote from the Q&A at 2011's yearly Berkshire Hathaway annual investor's meeting. Definitely worth going if you can spare the time (and are a BRKA or BRKB investor...)

I wonder what 170,000 tons of paper can produce. Does paper respond to Buffet's fondling?

No one proposes to use sheets of paper as a currency, let alone as an investment.

Treasury bonds have exchange value, not because they are paper, but because people will accept them, for the right they reliably represent; because the government is good for that debt. Gold, too, has exchange value NOT because of its chemical composition - only because people will accept it, and they accept it because they believe they will be able to trade it in the same way. If it loses half its value due to a bubble popping or the global supply increasing over time, it's no better than a currency which lost half its value due to government policy. There is always something around of value, and if the post-apocalyptic situation is bad enough then gold will be worth only a little at best, if you can even find someone selling whatever you need.

Land is an example of something which can produce, as is stock in a company which sells things that are always in demand. This was the contrast being made against the block of gold, not paper

Heat, which would be a valuable resource in the kind of scenario where it stops being valued as currency.

Dog food would also be quite useful. And of course the wet kind would be better served warm, which would add to the desirability of paper.

You could probably find uses for gold. But you'd have to waste a lot of paper to melt it down, so the most common ones would be things like 'doorstop' and 'blunt weapon'.

You don't have to believe in the fall of civilisation to realise that the US Govt is currently borrowing $1 trillion per year to fund the non negotiable American lifesyle. Things that cannot go on forever won't, and this is one of them. Take $1 trillion out of the US economy (ie: consume only what you produce) and this will be a non linear event.

I'd recommend you read some FOFOA http://fofoa.blogspot.com.au/2010/07/debtors-and-savers.html (and all the rest.) If nothing else it will help you see the money system in a different light.

Gold is priced in dollars. If the dollar loses real value, gold goes up. It's the same reason oil is $100, its baseline price is getting set ever higher, because it's priced in dollars. Price oil in silver or gold and you'll see that oil hasn't gone up in price, the dollar has gone down.

It's not paranoia or speculation primarily driving the price increase, but the objective destruction of value represented in what a dollar can buy today versus, say, 12 years ago.

I know you're heavily invested in gold, but what you say is simply not true. The Gold-Oil ratio has fluctuated from upwards of 36:1 to 1:8 over the past 40 years.

Further, if it were true then in 2009 when oil plunged from $140 to $50 a barrel, the value of the dollar should have shot up significantly. When gold dropped 20% last year, there wasn't a corresponding increase in the purchasing power of my dollar.

You only have to look as far as the sleazy companies selling gold to old people on tv and charging 20-30% markups to know that speculation is driving this market.

I own zero gold. I'm being objective about what it does, and does not do. It's a store of value, that's it.

I'm heavily invested in my self. I own a business.

Which is also why in one of my posts, I said the best investment you can ever make is: you.

Tracking lines on oil and gold requires that you do so over an actual duration, not on select spot prices. Over time, oil and gold have tracked each other extraordinarily well.

Ultimately the point is really simple: check out a graph on oil and gold prices since 1970. To the moon. Why? They're priced in junk dollars.

If you open up a graph of the ratio between gold oz and barrels of oil over the last 40 years, you will not see anything resembling a straight line. They don't track each other. At all. Not even a little bit.

There are literally thousands of charts and graphs that you could find a reasonable correlation with gold, but oil is not one of them.

I don't know where you got the idea that they tracked each other, but it is simply wrong. Gold does not track oil, CPI-U does include food and energy and inflation is not anywhere near where you think it is.

>> Over time, oil and gold have tracked each other extraordinarily well.

you're just wrong. here's prices over the last 6 years: http://imgur.com/a2mMZ (CLH is crude oil)

>> They're priced in junk dollars.

you're confusing real and nominal prices. if your point is that inflation exists, i don't think you will find anyone that disagrees with you. if your point is that real prices of oil and gold are driven primarily by inflation, you're absolutely wrong.

If you bought 1 lb of gold in 1970 and sold it today after taxes you would not have kept up with inflation. Also, the S&P 500 does not include dividends. If you actually buy it's stocks or a fund that tracks the S&P 500 you do much better than the graphs suggest.

Right, because the price of gold in US$ has tripled in the last five years not because of speculation but because the dollar is one third as valuable as before.

That's why the average US wage and minimum wage has also tripled over the same time period, right? Or have we become less efficient and our hour of labour is "worth" a third less?

The price of labor eclipses the price of commodities in most of the economy, which is the true value of your dollar.

That's exactly right, it's because the dollar is collapsing in real value.

I dare you to spec out the price of a basket of 10 to 15 commodities from a decade ago compared to where they're at now.

I don't have prices at hand. But a look at my Quicken database revealed that my total food-related expenses (groceries, school lunches, dining out, etc) were:

2001 $12K (family of three)

2011 $17K (family of five)

I was surprised when I compared these two numbers first time. Gut feeling was that food prices went up a lot.

Housing costs:

2001 $10800 (aparment, rent)

2011 $14800 (house, PITI)

Edit: formatting

doesn't the size of the family almost completely account for the difference in price?

say you do a simple, stupid analysis - 12k / 3 = $4k/person/year, which is greater than 17k/5 =$3.4k/person/year

of course, that's not entirely fair, since children eat less than adults, right?

if you ballpark daily caloric intake, the family of 3 eats (2500+2000+1000)365 calories a year, for 4.4 cents/Cal.

The family of 5 maybe eats (2200 + 1800 + 1800+1600+1000) 365, for 5.5 cents a Cal (I'm assuming the aging adults moderate their diet for their decreased metabolism)

yes, that's a 20% increase, but given other factors (possibly more dining out, errors in the ballparking, etc.), it's really not a huge jump in food prices.

And I dare you to compare the cost of a big mac from 3 years ago vs today in comparison to gold.

McDonald's won't take my gold flakes, and anyway I don't think a 3-year-old big mac will be edible...

But what about labour prices? Why have they not shot up?

actually if you adjust oil prices for inflation, you'll see that oil prices (in real terms) has gone up.

http://inflationdata.com/inflation/inflation_rate/historical...

> It's not paranoia or speculation primarily driving the price increase

the price of oil is driven by supply and demand. the useful of oil has gone up, but the amount of oil we extract has not kept up. that's why the price has moved.

I fear this might be too much a tangent...

The price for oil is affected by supply and demand but also by speculation. People invest in oil, and people speculate in oil. More so, the price for oil includes a substantial degree of risk assessment. If buyers and sellers both agree that the future of oil production (due to geopolitical instability, for example) is at risk and could lead to oil shortages tomorrow then they will settle on higher oil prices today.

The same sort of effects don't enter into the price of, say, Aluminum which is much less entertwined in complex geopolitical situations.