Why do we value gold?
bbc.co.uk
bbc.co.uk
>The demand for gold can vary wildly - and with a fixed supply, that can lead to equally wild swings in its price. Most recently for example, the price has gone from $260 per troy ounce in 2001, to peak at $1,921.15 in September 2011, before falling back to $1,230 currently. That is hardly the behaviour of a stable store of value.
Basically describes what are and are not the problems with Bitcoin.
For some reason, many people believe that this is true. I believe that it is not.
Technically, yes, if people all decide the currency has value, then it will have value. But this is a ridiculous argument! How much is this currency supposed to be worth? According to this argument, any number is potentially valid! This means that there is absolutely nothing that should hold the value of the currency fixed, and with a few "no free lunch" arguments (anyone can claim any random thing has value and try to trade with it), we see that things with no intrinsic value should NOT have value.
So why does the US Dollar have value? It's just paper (cotton), right? Not true! If the exchange rate of the dollar decreases, you'll see the Federal Reserve will start trading some of its goodies from Fort Knox (gold, etc.) for US Dollars, in order to maintain the dollar's exchange rate/value.
So in reality, the US Dollar is backed by holdings that have intrinsic value.
EDIT: As pointed out, I should mention that another important backing of the USD is taxation.
Also, what I said about the Federal Reserve isn't technically true. What's important is that they have a mission to moderate the rate of inflation of the USD (i.e., maintain its value), and their asset holdings are critical in allowing them to do this.
Currency has a value because the goods we trade it for have value. Inertia?
Right now, you can turn in a $20 for food and booze and whatever. I'll believe that's money. And if people don't have a reason to stop believing, it'll continue to be money.
The term "has value" is used loosely when it comes to currency. It's true that the currency itself is valueless outside the context of trade, but most modern economic theory is predicated on the axiom that this is OK.
Think of it in math terms. Arabic numerals are a means of specifying quantity.
* * * * *
How many asterisks are there? There are 5. The numeral 5 describes the quantity. The number 5 is not literally five asterisks. It only describes the quantity. The same is true of modern currency. $3.50 is not literally a gallon of milk, it merely represents the economic quantity of milk. If I agree to sell you milk for dollars, I'm adding value to the dollar.
When viewed in this way, something else becomes clear. One of the basic values of currency is trust, not "intrinsic value" (which is a euphemism for intrinsic utility). When I add value to the dollar by exchaning valuable goods or services for dollars, I trust that everyone will play by the rules. Specifically, I'm trusting that the value of my trade will be preserved over the term that I hold the dollars.
Our currency has not been pinned to gold for 40 years (when the Bretton Woods system collapse), but the Federal Reserve still maintains the holdings.
Before the Bretton Woods system collapsed, the US government was required to allow large entities to exchange their USDs for gold. Now, it isn't required to. But the fact that the Federal Reserve holds the gold, and that it is well known that they would use it to support the value of the USD, helps maintain the value of the USD.
The (exchange) value of anything depends on supply and demand. Demand for USD comes from many places, but most of those are based on circular reasoning: Employees want to be paid in USD because they need USD for their shopping, the shops want to be paid in USD because they need USD to pay their employees.
Taxations is the only entirely non-circular source of demand.
(Bank loans are a secondary somewhat non-circular source of demand for USD, and that explains why bank loans can increase the amount of money in circulation without increasing inflation.)
If taxation were the only form of backing, things would be a little more strange. The currency could work, but taxes would have to be defined differently. Somewhere in the tax rules, there would have to be some statement that pins the value of the USD.
It is a fascinating problem though, because the price level is really just an arbitrary number when you look at it from a global perspective: If all price tags were removed from everything, an alien observer would have no way of telling it.
This makes a lot of people very uncomfortable, and I suspect that is what underlies a lot of the ultimately romantic desire to tie currency to something "real".
Presumably you'd control the value of currency through the same channels as under the existing system: indirectly by influencing interest rates, and instead of doing it by the Fed buying and selling bonds, you'd do it by imposing a new variable tax on leverage created by the banking system. It would be painful to adjust to (the base interest rate would be a direct cost rather than an opportunity cost, making banks' margins thinner) but ultimately work in a similar manner to the existing system.
Sure, but if you cannot (or simply do not) pay your creditors with dollars, the courts can give them a (figurative) piece of your house/car/computer/etc.:
Siezing property happens as a last resort, but doesn't undermine the fact that a debtor can ALWAYS choose to settle a debt in dollars, and can NEVER compel the lender to accept payback in gold or BTC or potatoes.
Well, I guess the number is whatever supply-and-demand should happen to say that day. Mostly that'll mean asking "how much do people want gold today?" because the supply is relatively inelastic.
That said, fluctuations in the supply of gold and the price of gold would in fact be catastrophic if the price of gold radically changed. See also: the impact of gold rushes on the US economy (tip: it was inflationary). See also: Bimetallism, William Jennings Bryant, "you shall not crucify mankind upon a cross of gold!"
> If the exchange rate of the dollar decreases, you'll see the Federal Reserve will start trading some of its goodies from Fort Knox (gold, etc.) for US Dollars, in order to maintain the dollar's exchange rate/value.
... No? Wrong? Lies? What the Federal Reserve does is buy and sell federal debt, creating and destroying dollars such that the supply of dollars matches the demand for dollars and prices are consistent. You could say the dollar is loosely pegged to the value of the consumer bundle, maybe. (See also: http://bls.gov for CPI information.)
> How much is this currency supposed to be worth?
Whatever we agree it to be worth.
> According to this argument, any number is potentially valid!
Yep. And the value of US dollars, for example, has changed hugely.
> This means that there is absolutely nothing that should hold the value of the currency fixed
Accurate. Note the demise of fixed exchange rate regimes.
> Not true! If the exchange rate of the dollar decreases, you'll see the Federal Reserve will start trading some of its goodies from Fort Knox (gold, etc.) for US Dollars, in order to maintain the dollar's exchange rate/value.
That's not how the Federal Reserve works. Nor exchange rates. Nor US dollars. There's so many errors packed into that sentence, I'm not sure where to begin. There was a time when US dollars were backed by gold, including the gold in Fort Knox; this is no longer the case. And while the Fed does intervene in the markets from time to time, that's not how they do it. Further, the mere fact that interventions are necessary underscores just how arbitrary the valuation is. If, as you argue, USD were backed by gold, the aggregate value of all USD would be US gold reserves; no intervention would be possible, and selling gold reserves would actually lower the value of the dollar. Think about the implications of your argument.
The USD is not literally backed by gold, but part of the Federal Reserve's mission is to moderate the rate of inflation; that means holding the value of the USD steady. And the way they do it is beyond the scope of this discussion, but it certainly depends on the Federal Reserve trading its holdings on the market (which, as you point out, is mainly debt (in terms of USD), not gold).
The Federal Reserve is a privately owned entity, it has its stash of gold in New York and the actual government has its smaller stash of gold in Fort Knox.
Let's say that Apple sees the price of its stock drop to something that it thinks is unreasonably low. They may choose to spend some of their cash on hand to buy back some of their stock. This is a wise investment that shareholders would applaud - Apple is getting a good deal.
Same deal with the Federal Reserve. Federal Reserve notes are nominally liabilities for the Fed, and are much like the concept of Apple stock. If the Fed notices the price of the dollar drops, it's in their best interest to trade some of their holdings to buy back some dollars.
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If anything's propping up the American Dollar, I suspect a far more likely culprit would be that OPEC primarily uses dollars - creating a demand for dollars in the international exchange markets.
Is it gold, or the dollar that's exhibiting that behavior?
Gold had a huge ramp-up in value after the housing bubble burst, due to people panicking that the dollar would lose value. There were a lot of people with a vested interest in hyping the idea to sell gold, as well.
The dollar's been very stable compared to other currencies or compared to baskets of dollar-denominated goods other than gold.
What a bad start, this is chemically very interesting... :)
The whole article comes across this way to me, it starts from a bad hypothesis and then continues to make baseless assumptions until it reaches its desired conclusion. :/
It explains a load of reasons exactly why gold has value, then claims that this is not intrinsic?
Interesting read though... I do enjoy that we have abandoned gold and silver standards, although knowing this does make me wonder why our leaders are so terrible at managing the economy. We made it easy for ourselves, and now we have politicians selling us the idea that its complicated to fix...
the prices of many things are driven by supply and demand, and i'm not going to disagree with that, but the article gives far too much weight to that side of it imo and poisons me against it with sloppy wording.
without the intrinsic value there would be no demand...
its not like, e.g. bank notes, EPNS or copper coins, whose value is almost entirely due to trading and very nearly completely disconnected from their intrinsic value. even then they inherit some of their value from their durability and utility in that arena...
tbh, i've only ever bought gold for cosmetic reasons... i know very well that gold contacts and radiators are generally a sales gimmick rather than beneficial.
There are many who believe gold is somewhat of a proxy to the probability that at some point there will be complete lack of faith in fiat currencies (combined with the belief that it will be an acceptable substitute in such an eventuality). If that is the case, the price volatility of gold has in fact a lot to say about the viability of fiat currencies as a stable store of value.
I like the word 'value' as a signifier of what a person or people desire and ascribe worth to; both gold and fiat currencies attempt to measure this, and neither is perfect. I wish people would be more dilligent at keeping these concepts seperate, but y'know, rhetoric.
(See also the idea that GDP - which of course exists completely in fiat currency terms as a gross numerical figure - has its flaws as a measure of what humans actually value: http://www.globalexchange.org/resources/econ101/gdp )
Gold was cross-culturally "evolved" (due to ancient trade and customs) to be recognized as a precious metal suitable for garments, wealth storage and, consequently, payments for no other reasons but being good enough.
A currency only has value because we, as a society, decide that it does. As we've seen, it also needs to be stable, portable and non-toxic. The second sentence contradicts the first. Portability is very important to the effectiveness of a currency, especially in times past when our modern communication methods did not exist. Currency represents an agreement as well as a quantitative value. The ten pound note currently in my wallet is a liability that the Bank of England owes to me when demanded. This is far more convenient than having to call up the Bank of England and demand a portion of their liability every time I go and buy a pack of ciggies (another viable currency, if you are presently incarcerated).
A similar argument applies to another whole class of elements, the radioactive ones: you don't want your cash to give you cancer. Regarding Uranium 238, this has a very long half life (roughly the same as the age of the Earth) and it is an alpha-emitter. Radioactive effects of alpha-emitters are usually only toxic if ingested or inhaled, whereas a strong beta-emitter can burn your skin in sufficient amounts. The chemical toxicity of Uranium is a far more serious issue. If the potential radio-currency is highly radioactive, it would lose its value very quickly. Of the four main decay series, three result in lead.
It is? How can you make that demand, and what will they give you in return?
Bank of England
I promise to pay the bearer on demand the sum of TEN Pounds
Whatever I buy with the ten pounds is what I get in return from the seller. When I pass the ten pound note over, the Bank of England now has liability towards the seller, not myself.
Most likely, the only thing you can get from the Bank of England is a TEN Pound credit on your next tax bill.
Who says that you would?
Sure, Bitcoins are similar to gold in being relatively, rare, but so are tulip bulbs. What matters isn't the restriction in the supply, but the sustainability of the demand.
Gold sustained its demand over millenia not just because it was rare, but because people needed gold to meet future tax and debt-repayment obligations, or to purchase things from foreign lands. The number of people needing to receive BTC-denominated income in future, on the other hand, is negligible; virtually anyone [considering] providing real goods or services in BTC can cease to transact in BTC at any point they have doubts about its future value or liquidity.
That's the whole problem right there. The ~~counterfeiting~~ quantitive easing is simply too attractive to the congresscritters to allow a little honesty to get in the way.
Look, the most important point of money is to facilitate economic exchange. Yes, rentiers want to store their savings somehow, but there's a reason that the word rentier has negative connotations.
Facilitating economic exchange requires that the amount of money correlates with the size of the economy. Fiat currency can do that (thanks to bank loans, which can shrink and expand based on endogenous demand from the economy), and gold-based currency cannot do that. It's really as simple as that.
Most people's sense of distributive justice has some aspects of desert theory, i.e. people tend to believe the economic distribution should align with what people deserve, where the latter is typically defined via what their contribution to the economy is.
From that perspective, rentiers have undeserved income, hence the negative connotations.
The particular argument in the article kindly submitted here (well worth a read, even if you have read all the comments here) takes a good look at the properties of gold as contrasted with other chemical elements, and points out what features gold (and silver) have that most other elements do not share.
Could it be that gold makes a good currency, and a good currency makes trading easier, and people value the ability to trade with one another, and therefore, gold has value?
Someone suggested me that gold doesn't rust and that stability was interesting as a long time token. But I don't find any usage beside the social status gem.
Anyway the point wasn't the merits of gold over currencies, just pointing out the fact that it has a real status as a useful commodity, in a way that purpose-built currency doesn't. That means, among other things, that demand for jwelery in India for example, or changes in electronics manufacturing processes are bound to affect its price.
That makes it quite different from other currencies.
Some people do trade knowledge of energy sources for stuff, using money as an intermediate store of value, but most people cannot, and it wouldn't be desirable either otherwise we wouldn't have a varied and healthy economy.
Nearly 20,000 years ago a man said said, "we have to stop trading seashells, they are to plentiful, people just go get more of them, and they break"
"Fine what do you propose we use?"
"Have you seen this shiny yellow stuff? You can form it with heat and it stays shiny forever."
"That Gold stuff? yeah It is pretty. I like Pretty things. But there isn't that much of it, and it is hard to find."
"Yes, that way we can control how much of it there is, so it will have value. No one will be able to just wander down to the ocean and pick up more. And we'll make different sizes of it so that we know how much each is worth"
This is why we use Gold. Because it was the first metal we could work with, it is scarce enough, and requires enough skill that only certain people (usually a government) can issue coins of it. You can still trade the raw stuff, but to fewer people and with out the trust of the minter you get a lower price for it.
Nonsense. The Japanese one yen coin is aluminum, and it holds up just fine.
We still value gold because we always have.