Gold, which John Maynard Keynes called the “barbarous relic”, has become so eagerly sought that even Costco has got in on the business. Perhaps this newfound fascination shouldn’t surprise us. For those looking to build nest-eggs, gold is easier to understand than stocks or bonds, since you can literally hold it in your hand. Moreover, of late, this most ancient of assets has been outperforming most other classes. Bonds have been tanking, real estate is sluggish and even the on-fire US stock market, up about 6% since the start of the year, falls short of the double-digit increase gold has managed in that time. Former British Chancellor Gordon Brown must surely regret, 25 years ago this month, selling off more than half the nation’s gold reserves at such a measly price.
And yet, gold’s enduring appeal may be less practical than mystical, something economists struggle to explain. Although in fairness to Keynes he was referring to the gold standard and not gold itself, there’s no shortage of sceptics who are bemused by gold’s popularity, since the metal is worthless as an asset. It produces nothing and unlike other precious metals, such as silver, it has virtually no industrial applications. Instead, its value derives from a tautology: we want gold because we want it, which is to say that because everyone wants it, we know it has value and therefore we want it.
Warren Buffett concluded that a Martian would be left scratching his head: humans will pay an army of people to dig up gold from beneath the earth and, after they resurface with the shiny ore, pay another army to dig a hole in the ground to bury it, whereupon we pay yet another army to stand guard over it and protect it. It’s as if, in a “disenchanted” world meant to have replaced mystery with reason, we still cling to irrational or romantic notions of beauty and value.
Certainly, our love of it has deep roots. Ancient civilisations from Asia to the Americas all held it in awe, a fascination that carried into the early modern age, the search for gold being a motivating factor in the age of exploration that opened the world to Europe’s empires. Equally, the flood of precious metals from the empires helped bring about the end of European feudalism and the rise of capitalism, since the resulting inflation both diminished land values — the basis of the nobility’s power — and drove up demand for industrial manufactures.
So it made sense that when modern monetary regimes emerged alongside the rise in global trade, the states of Europe would often underpin their currencies with precious metals. By holding them in their treasuries, central banks could then issue promissory notes that could be redeemed for the specified weight of gold or silver — the name “pound sterling” betraying its origins as a currency that was originally backed by silver (to be later replaced by gold). The comparative ease of moving paper as opposed to gold or silver facilitated trade on a vast scale and gave governments flexibility in issuing currency, since redemptions in exchange for the metal were relatively rare.
In fact, the more modern the world became, the more gold’s importance grew. It provided the undergirding of the world economy in the post-Second World War period, when the gold-backed dollar system created what amounted to a virtual global currency. In June 1944, as the war entered its final stages and delegates from the allied powers assembled in a small New Hampshire town to map out the post-war system, front of their minds was the way the collapse of international trade in the Thirties had deepened the Great Depression, enabling the rise of Nazism. Determined that it should never happen again, they set out to create a system in which trade would always flow freely. A key element of this would be a universally accepted currency.
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SubscribeExcellent article and a fine economics lesson.
It is, and far too few people know this, especially the effect of the Greenspan Put.
I said much the same in my comment
However little gold might be worth intrinsically, it has greater intrinsic value than Bitcoin.
Forged, along with other precious metals, by the unimaginable forces within supernovae and neutron stars, before being flung into the wider universe… i’d say so.
Exactly. Bitcoin, on the other hand, was forged (and the word is probably a good one) on a computer by a crook (or group of crooks).
And it’s used by crooks. And promoted by crooks.
When I first read about Bitcoin, in about 2012, I thought it was a clever and audacious idea that would make a great in-game currency for something like Second Life, which was popular at the time. I thought I would buy some to fool around with, but it was a bit of a hassle at the time. Hah, hindsight…
All the “early adopters” of Bitcoin I knew bought it to buy drugs on the now defunct website “Silk Road”.
Gold isn’t quite as worthless as a practical asset as the author claims. It is used in electronics as a conductor.
That aside, the question of its intrinsic value is more complex that its practical usefulness.
Beyond a certain point in their development all human societies value ceremony and decoration. These may not be a practical concern in the sense that an iron ploughshare is, but it appears to be universal and intrinsic to our species. Gold’s scarcity. malleability, and resistance to tarnishing make it ideal for these purposes.
So, yes. Gold is valuable because we all believe it is valuable, in contrast to something like iron which is valuable because we can make swords and scythes out of it. But believing that decorative things are valuable does itself appear to be something intrinsic to humanity.
Evolution has promoted some bizarre decorative but otherwise non-practical features and behaviours in many species. The male bowerbird for example builds highly decorative structures simply to woo mates. The male peacock is adorned with a decorative plumage that is conspicuous and quite an impediment to survival.
The value of this apparently unnecessary decorative waste is it is only possible if the individual is fit and healthy to gather the necessary resources to build or grow these decorations. The magnificence (or not) of the decoration is a proxy for the possession of genes that might be useful for survival, and natural selection winnows those less decorative individuals and their genes.
Of course, the “decorative” non-functional test of biological fitness varies by species. Nonetheless, some species value decorative effects that are similar to human sensibilities. Humans are naturally not exempt from biological selective pressure. The command of resources (be they people or material) is one factor humans use to choose a partner, and decorative effect (be it a fancy gold watch or a porsche) is a simple proxy for this.
This doesn’t really explain why gold is more extrinsically valuable than, say, a Lexus.
Yes, but it seems to only be gold that has its value questioned because it is mostly just decorativ. Precious gems, art, clothing beyond pure function, paint from the DIY store for your kitchen…
Gold’s valuable because it looks good against brown skin. That’s where the demand comes from. Industrial applications are negligible.
Gold was used for currency because of its practicalities.
Cultures have used numerous materials for currency but gold proved to be one of the best. It is both rare enough that production could be limited to prevent inflation but no so rare that there would be a scarcity of currency. It’s a very unreactive metal so does not degrade and can be stored safely for long periods of time, it preserves value and is more difficult to destroy than other mediums yet it’s light weight compared to more durable materials and so could be transported easily.
Gold was not money just because it was alluring to human eyes. It was money because it was an excellent material to use for money.
In practice, gold is rather too valuable / rare to be a useful currency. For most day to day purchases, the amount of gold needed is tiny and alloying it sufficently dilutes the gold content so much as to make it essentially not gold. Consequently, silver has been the principal metal for currency and gold more commonly used for storing value.
From the Sumerians in 3000BC to the English in the 16th century, currency was struck in silver. The English penny was roughly 1g of silver. It was only with the emergence of modern Central banks, paper money, and disruptions to silver supplies in the 18th century that Europe – and thus the world – moved to a gold standard currency.
Well I understood the article and learned quite a bit from it
Ummm… BTC at $71k today… Just as all that glisters is not gold so all that is crypto is not bitcoin.
Bitcoin is the most crooked of the cryptos though.
This is not a great article, comments not great either. D minus all round. The old btc is outperforming everything, gold has already failed. Paper money will continue being printed to infinify. Meanwhile the developing world , Turkey, nigeria el salvadore get it . You all better wake up. The revolution will not be televised
BTC is great, as long as the powergrid stays on.
God bless coal!
If you can stand the volaility and sleep at night, which most can’t. BTC is prone to greater than 50% price drops and equally spectacular appreciation. Human nature causes most to buy high and sell low. Gold has traded sideways since 2011 until the recent breakout, so is not a particularly good long term investment. SPY will serve you better over the long haul. I prefer something tangible and though gold has appeal, companies that produce goods and services are a safer investment.
Crypto doesnt fullfill two good properties cash must have: 1.) be scare, 2.) low volatility.
Note: crypto is not really scarce. I can host my own crpyto and everyone can buy it (and drive its price). It only
gains value if people believe in it. Scharlatans everywhere.
Ah, Turkey, Nigeria and El Salvador. Those powerhouse economies that we all envy.
For a long time I never held Gold. That changed in c. 2016 with the possibility of a Corbyn government: while lowish risk it could have led to confiscation and exchange controls (we had them until c. 1976).
I view Gold as a protection against debasement of fiat currency, and a counterweight to stocks & bonds. Buy physical Gold stored in a safe overseas jurisdiction. Set & forget.
The excellent Lyn Alden published a book ‘Broken Money’ which explains the history of money and covers the use of Gold.
“….stored in a safe overseas jurisdiction“. Argentina?
Nigeria?
Maybe people believe in gold because it has tangible value and always has. Fiat currency is a stand-in for value; gold stands all by itself.
As the money supply mushroomed, the allure of gold returned once more.
Well, yes. The increased supply made existing money less valuable on a per-unit basis. Debasing the currency is an odd tactic to support but bank after bank went all-in and the foreseeable consequences are playing out.
I first read the title as “Why we still believe in GOD. The worthless asset has a mystical allure”. I was excited to jump into the fray. But gold, shmold, I had some, sold some, lost the tee shirt.
I don’t understand monetary theory and, sometimes, I wonder if anyone does
They just pretend and befuddle us then we find the money that was in our pocket is in their pocket!!
All experiments with paper money have failed. Gold is still gold after 5000 years in the ground or ocean. Keynes was an idiot who believed that government is god and a few smart Oxbridge men can run the world. What an arrogant idiot. The US dollar will be worthless in 100 years and maybe the state itself will collapse along with its morally bankrupt Marxist culture.
You can’t run a modern economy on a Gold Standard.
I’m living in a modern economy?!!!
That was the early 20th century mindset. Born in late Victorian times and then as young people in the pre WW1 days feeling liberated from their elders dark and cluttered parlours they had a new rational and reasonable outlook on life based on Science and Education.
They hadn’t bargained for the incorrigible intransigence of basic human nature.
From the POV of the financial elite, Gold represents a constraint on debt creation and associated ‘cleverness’. The capitalist sausage machine relies on an endless putrid flow of minced debt. The ‘masters of the universe’ encase this odious paste with their thin prophylactic of respectability and sell it on to hungry suckers. But gold eventually calls time on this nonsense. It always does.
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Keynes wasn’t an economist.
Wasn’t he one of those Bloomsburyites,or on the fringes. And he married a Russian ballerina and was quite boho back then.