Historically, gold is money; the most standardly-accepted proxy for the direct exchange of goods themselves, which is clumsy.
Gold production costs a few hundred dollars an ounce (depending on the mine, certainly under $4-500 dollars/oz. So any price higher than that is an artificial one, driven by demand.
The principal driver for demand is psychological, since industry does not use all 80+ million ounces produced per year. This psychological drive is partly historical (as mentioned above, gold has been a standard money proxy for many years) and partly quite current. The current proxy for money is the US dollar and the Euro. These are arguably (in many minds) softer proxies than gold, and not linked to any cost of production at all…
Do you want a proxy that has a defined cost floor (for gold that’s probably about $500/oz) or do you want a Dollar with no theoretical floor (if the US economy collapses from its debt load, e.g.)? If you trust the US government and its citizens to pay their debts, bet on the dollar, but…
Shiny doesn’t seem so important now, because we’ve got a glut of shiny stuff. We can imitate even the most precious jewels with materials that are so common we throw them away.
But think back for a moment. Think of a world without plastic. A world where glass is a precious commodity that comes from afar. A world where metal is so rare and precious that things like nails are carefully kept track of. A place where a piece of cloth dyed in all but the drabbest colors is a rare and expensive thing. In this place, most things would be some variation of plants, soil, water and fire.
A jewel must have seemed like magic. The colors of a ruby would only be seen in the rarest of time- blood, brief-lived flowers, and the occasional sunset. Nothing could compare to the iridescence of a pearl or the sparkle of a diamond. These rare objects could hold forever the fleeting beauty of nature. The most beautiful colors made crystal clear and concentrated in an object you can hold in your hand. It must have been such an amazing contrast to the dusty shades of brown that would be most of the things you owned.
This is the world where gold became valuable. We’ll never fully know this feeling- the feeling of a material being so exquisitely beautiful and rare that it surpasses anything in our everyday experience.
how about, “by government fiat”? E.g. a major reason why dollars are valuable is because the government collects taxes in them. So even if everybody were to switch to another currency, there would still be a market for dollars, for tax payments. Likewise, if in the past governments were willing to accept taxes in gold and actually issued their own gold fiat money, so to speak, that increased its value. If you can use the gold to pay taxes, clearly gold is not a useless thing.
But it’s still essentially as valuable as it ever was, so it clearly isn’t just created by the existence of taxation.
The reason gold is as valuable as it is is that its value lies at the intersection of the supply and demand functions. What the OP is trying to ask is why the demand function is what it is, and MEBucker answered that question very clearly.
Do you have a fifty dollar bill/pound note/euro in you pocket? That’s made out of one of the most ubiqitous and cheapest substances on earth. And most of the money we have isn’t even physical, it’s just a number on a bank computer. The reason we value it so much is because human societies have decided that it is valuable. You seem to think anything that is not vital to day to day life doesn’t have true value. In non fourth world countries, how much of what we own is vital to our everyday life? The whole point of economics is how the supply of an item matches with its demand, and very little of demand is based on the need to keep yourself alive.
A $50 bill only has value because it’s a promise from the government. No such promise exists for gold or gemstones. For some reason, they still have value, not because one group says it’s valuable, but because we as a species have agreed that it is. It’s not the same thing.
Of course there are a lot of things we don’t really need. But it does seem odd that human nature values them more than stuff we do actually need. You can keep saying is psychologically built in to us, but why should we be slaves to our psychology? Psychology makes people depressed anxious, but we don’t tell people they have to live with it.
The answer is of course that the people who profit from it have a vested interest in keeping it valuable. Sure, you don’t want a diamond to have so much value when you don’t have one. But if you do, you want it to have enough value that you can sell it and get money which can be trade it for goods you do actually need.
Right now, the price of gold has been pushed up by “gold bugs” and extensive marketeering. Someday, farily soon, the artificial price bubble will collapse. Right now, betting on gold is a crazy suckers bet.
No, it doesn’t make sense. Sure diamonds are pretty, but CZ is as pretty and it’s hard for a layman to tell them apart. There are also other diamond substitutes.
Diamond’s high price has almost NOTHING to do with it’s “pretty”, it is artifical, caused by the DeBeers cartel and it’s excellent advertising campaigns. Engagement rings used to be a variety of stones, now when you say engagement ring, everyone thinks diamond engagement ring. Women have been conditioned to swoon over what is a nice looking stone- seeped in blood and unscrupulous trade practices.
Kind of OT but did anyone see The Secret History of Gold on Nat Geo last week? Guys in Peru were mining gold. They isolated flakes of gold into a solution of mud, water, etc. that could fit inside a tub that was maybe 50-60 gallons big. Into this tub, they poured pure mercury and a worker began stomping and kicking around the mercury which apparently clings to the gold. They emptied the tub so that just the mercury and gold flakes were left. One guy then used a blow torch to cook off the mercury and all that was left was what I can best describe as a cake of gold dust.
Pretty dangerous stuff but these guys seemed well aware of the dangers and found it worth the money.
Well, the question comes up often enough on this board, and you’ve gotten some useful replies, even if the responses just show up the house of cards that human economy, to at least some extent, is. Let me spin it around for you. What do you value? What do you think should be the medium of exchange? What sort of gifts do you give? Automobiles? Consumer electronics? Poetry? And why are they better than gold or diamonds?
You’ve heard of the “You have two cows” joke, right? It’s an old internet meme. The original belies the problem, we must have something as a currency, because we can’t just barter for everything. So we just picked something once, and it’s kinda stuck.
Signing on with MEBruckner. The peculiar physical/chemical characteristics of gold led our distant ancestors some time back in the Bronze Age to give it the status of A Very Special Thing, and it has stuck with it through several thousand years of it being reiterated. By now its attributed value has a huge non-rational component.
Exquisitely put, even sven. Something along these lines I first encountered as one of the themes in Aldous Huxley’s Heaven and Hell.
Not sure if I really understand the question. As far as why people like it, well, it’s a pretty, glittery metal that never tarnishes. Also, and more importantly, women like it and will reward you for giving them some. . .
Aside from that. Gold is always valuable because there is an endless market for it. You can trade it for necessary items or for currency to buy the same. Over time, you can almost inevitably trade it for more currency than you used to purchase it initially. It is like a very good savings account that increases in value regardless of political acts or economic problems. In fact, economic problems tend to increase the value of gold very quickly. The more unstable the economy, the more the value of your gold.
True story. I was in Saudi when the first Gulf War happened. The next morning you couldn’t find a US dollar anywhere in the country. I took a savings account and bought gold bullion with it. Best investment I ever made.
I agree that it’s been pushed up…and of course it is an artificial price anyway beyond its value as a commodity in manufacture. How much of that is a bubble is difficult to tell. There was a real bubble around 1980, but actually since that one burst, the rise has been fairly steady and reasonable.
If the psychology holding the price high is a lack of confidence in currency (including the Euro and the Dollar), I’m not sure I see a big collapse coming anytime soon, though. I find myself as nervous about those two currencies having any “real” value as I do gold, particularly over the long run.
And I’m still not buying the idea that the shiny aspect was very important as all. As was noted in that thread, brass is far shinier than gold, and its production was well known by the time that gold became a wealth standard. Quartz is shiner than diamonds and jet much prettier than pearls, yet those things have never been seen as magical, no matter how much thy contrasted with most of the things you owned.
The fact is that the precious gems and metals were precious mostly because they were rare and durable. They aren’t particularly more attractive than materials such as quartz or brass, which have always been valueless precisely because they are common.
I think there is an misunderstanding concerning how much pretty shiny material was available to people in the pre-industrial age. The world is full of pretty shiny stuff that is there for the taking. It’s not rare or magical. People didn’t bother to collect this stuff and polishing it up as they did for diamonds and gold precisely because it worthless. Which once again indicates that it wasn’t any sense of wonder or magic that gave rise to the value of gems and gold. It was mostly that those things were rare and hence more expensive.
If people wanted wonderful, magical shiny, colouful stuff, they could go out and pick it up almost anyhere they wanted. The idea that such things were only seen in “sunsets and flowers” isn’t even remotely true, as anyone who has spent more than a few seconds looking at the waterpolishedstones in a creek bed would know. Of course none of those stones are worth more than a few cents because they are as common as muck, no matter what colour they are or how pretty they look…
That’s preposterous. Of course it has something to do with its being pretty. If it didn’t, why would De Beers not just market something that was ugly but easier to acquire, like amber or cat turds or something?
And anyway, De Beers no longer holds a monopoly over diamond distribution; there are lots of other companies in the market now. And yet diamonds remain expensive. So, um, how’s the De Beers cartel holding prices up if they no longer hold a cartel? If diamonds should be cheaper why didn’t Rio Tinto or Alrosa start selling them way cheaper?
