
Why do we value gold? - marcopolis
http://www.bbc.co.uk/news/magazine-25255957
======
jere
> _So what does this process of elemental elimination tell us about what makes
> a good currency?_ First off, it doesn't have to have any intrinsic value. 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. And it needs
> to be fairly rare - you might be surprised just how little gold there is in
> the world.

>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.

~~~
thetwiceler
_> A currency only has value because we, as a society, decide that it does._

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.

~~~
JoeAltmaier
There is no gold in Ft Knox, right? Our currency hasn't been back in 40 years.

Currency has a value because the goods we trade it for have value. Inertia?

~~~
fennecfoxen
Money is money because people believe it is money.

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.

~~~
bradleyland
The whole "money has value because people believe in it" thing isn't exactly
correct. Money has value because somewhere along the line, someone accepted US
dollars for something valueable to them. If you're hungry, you value food.
When you produce food and allow someone to pay you in US dollars, you've
injected value in to the US dollar. The dollars you hold are an abstract
representation of the value you provided that you can then exchange for
something else of value in the future. The US dollar is a means of accounting.

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.

~~~
judk
...that's what "believing in it" means.

~~~
bradleyland
Belief and trust are completely different things.

~~~
JoeAltmaier
I guess I'm not clear on that.

------
jheriko
"Chemically, it is uninteresting - it barely reacts with any other element."

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...

~~~
olalonde
Gold's market price is completely disconnected from its simple "intrinsic"
value. How much gold would you buy if you were never allowed to sell or trade
it? Maybe a pair of earrings? If you own more gold then the amount you
answered, you effectively believe that gold is worth more then its "intrinsic"
value (for example, you could believe it has value as a medium of exchange or
a store of value).

~~~
jheriko
maybe i just don't know what i'm talking about, but i feel there is a
disconnect, but its not clean - its because of the intrinsic value that it is
such a 'tradeable' thing.

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.

------
math
"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."

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.

~~~
nhaehnle
Correction: The price volatility of gold has a lot to say about _contemporary
belief_ in the stability of fiat currencies.

------
dschiptsov
In evolutionary biology and anthropology " _Everything is the way it is
because it got that way_ ".)

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.

------
NAFV_P
Currently I'm studying accountancy, so the concept of monetary value has
suddenly become important to me. I had pondered it in the past, but not to a
great extent.

 _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.

~~~
icebraining
_The ten pound note currently in my wallet is a liability that the Bank of
England owes to me when demanded_

It is? How can you make that demand, and what will they give you in return?

~~~
NAFV_P
I'm reading that very same ten pound note. On the side which bears the image
of Queen Elizabeth II, it says:

    
    
      Bank of England
      I promise to pay the bearer on demand the sum of TEN Pounds
    

Regarding what is returned...

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.

~~~
judk
But if you give the note to the Bank of England, what will they give you?
Gold! How much?

Most likely, the only thing you can get from the Bank of England is a TEN
Pound credit on your next tax bill.

~~~
NAFV_P
_But if you give the note to the Bank of England, what will they give you?
Gold! How much?_

Who says that you would?

~~~
judk
Oops, that was supposed to be a question mark, not an exclamation point!

------
Heliosmaster
I like to think that Bitcoins are much more similar to gold than dollars, and
yet everyone makes comparisons with modern currencies.

~~~
notahacker
Sure, because people don't buy and sell things with gold, they buy and sell
things with modern currencies. They do so because well-established legal
frameworks ensure future demand for the currency to pay taxes and meet debt
obligations, and also keep the supply in line with demand.

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.

------
akallio
> Nixon made his decision for the simple reason that the US was running out of
> the necessary gold to back all the dollars it had printed.

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.

~~~
nhaehnle
Economics is not a morality play, and connecting money to gold has nothing
whatsoever to do with honesty.

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.

~~~
jes
With respect, may I ask what the reason actually is, that the word rentier has
negative connotations?

~~~
nhaehnle
Being a rentier means having income without working. Traditionally, this was
because you inherited wealth, e.g. in the form of land.

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.

~~~
jes
I appreciate your helpful reply. Thank you.

------
phreeza
An interesting, mildly related tidbit is that certain types of seashells were
used as currency in large parts of the world until about 150 years ago. [0]
Probably occupying a similar sweet-spot: rare but not too rare and robust. An
additional feature (or bug) would have been the inherent quantization.

[0]
[http://en.wikipedia.org/wiki/Shell_money](http://en.wikipedia.org/wiki/Shell_money)

------
Notre1
NPR 's Planet Money did a good episode (<20 minutes) on this topic:
[http://www.npr.org/blogs/money/2011/02/07/131363098/the-
tues...](http://www.npr.org/blogs/money/2011/02/07/131363098/the-tuesday-
podcast-why-gold)

------
tokenadult
The argument for why a medium of exchange (a currency) needs to be
transportable and relatively nondestructible goes all the way back to
Aristotle, in the West. (Similar arguments about silver surely must have
appeared in Chinese culture, long ago.) I'm sorry not to follow my usual
practice of providing references here, but I guess I think it is drop-dead
obvious that not all features that give something value necessarily make that
thing a convenient medium of exchange for trade.

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.

------
jes
Interesting article. The article claims that gold has no intrinsic value. I
may be wrong, but I can't think of any entity that has intrinsic value, or,
"value in and of itself." On the other hand, I can think of countless things
that have value in relation to other things, such as, a loaf of bread and a
hungry man.

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?

------
rodrigocoelho
I value gold because you value gold.

------
JoeAltmaier
I imagine some day we will have 'currency' backed in real things - Terabytes
maybe, or Petahertz. Something fungible you could use and trade.

~~~
s0rce
Joules (or kWH). An energy backed currency.

------
agumonkey
If I'm too off-topic feel free to ignore this question. Isn't it more valuable
to have knowledge and energy sources ?

~~~
seanhandley
Yes, but they don't operate well as exchange mediums.

~~~
achamayou
How so ? Gold isn't just a currency/exchange medium, it's a valuable material
on its own in many ways. Neither bitcoins nor dollars are, they're not
commodities turned currencies, they were always meant to be currencies and
nothing else.

~~~
agumonkey
By own material value do you mean for electronics, and thus for us now ? But
what about centuries ago ?

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.

~~~
achamayou
It works particularly well as a social status gem, because it's at the same
time malleable (ie. easy to work with), shiny-looking, and not easily
corroded. It's relatively easy to authenticate (compared to a bitcoin for
example), and seriously hard to fake (unlike, say, a dollar).

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.

------
drakaal
The real history. A Play By Brandon Wirtz:

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.

------
mistercow
>Aluminium is ... just too flimsy for coinage.

Nonsense. The Japanese one yen coin is aluminum, and it holds up just fine.

------
notdrunkatall
We began valuing gold because it's shiny, doesn't degrade over time, and it's
rare.

We still value gold because we always have.

