Help me understand the Intrinsic Value of Gold

I have posted this elsewhere but interested in opinions here:

This is something I have pondered for several months now and I would like to
have a civil and thoughtful discussion on. What I have for a long time tried to
wrap my head around is why Gold is perceived to have intrinsic value and in
essence why something dug up from the ground is inherently more valuable or
different than something off a printing press. Even at $1,400/oz. in today's
buying power Gold would make an illogical currency since people would literally
be trading dust for the vast majority of purchases. Oil can be used for energy
and power cars, corn can be consumed so I see their intrinsic values but is Gold
irreplaceable in any critical function in the modern world. And if the U.S.
economy collapses and we default on our debt who in the world would be left
standing when the world's largest consumer stops buying and can't pay their
credit card, certainly not the Chinese. So can someone help me understand the
scenario where we have a world where Gold is hyper valuable? It seems to me if
the U.S. were to collapse we would shoot past Gold to barter. This is a sincere
question I really want to understand. Thanks.

 

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Howdy,

I'll start. Gold has some industrial uses where there's not really too many alternatives. It also has value as jewelry. That said, why it has a 'store of value' worth in a lot of humans - WTF knows? I was just at the hard assets show in NYC and one of the presenters put the current supply/demand 'value' at ~950. He did not feel it would drop that low but . . .

Gold has the value that people see in it. It's not unlike the difference between truth and perception. If enough people believe a lie to be true and behave as if it IS true . . . then it might as well BE true. It's what people perceive to be true that matters. Don't confuse the issue with facts. The same thing goes for gold. If enough people in the world perceive it as being valuable then it is.

It's the same with anything in the market place for sale. I think my widget is worth X and you think it is worth Y and we can only exchange it if we come to an agreement. Now multiply this by a sizeable percentage of the world population. I've always referred to as Captain Price. It's the market. Our feelings and our beliefs really don't matter when it comes to the market. That is why as investors we have to keep our emotions out of the decision making process. I think there is a quote that 'the market can remain irrational for longer than you can have any cash left'. Being right doesn't matter if you've already lost all your money.

peace,

rono

 

Good question. Gold does have some industrial uses, the primary one that comes to mind is in the manufacture of electrical contacts that don't tarnish and thus maintain their conductivity with little or no change. Certain catalysts depend on gold, but many more depend on the rare earth metals. Add to this the fact that gold is pretty. Think, all the metals are silver colored with the exception of gold and copper. There are some exceptions to this, but how many people have ever seen metallic cesium (beautiful, but so reactive it has to be kept sealed in glass). I also like the color of copper and all the alloys that come from it but 1) it is common and cheap and 2) it turns your skin green. Now gold is not common and doesn't turn your skin green, and that is somethng that has been known since antiquity. All these things considered explains a little of the value we place on gold, but the recent increase in price - possibly just an abberation that will correct itself.

 

All value is in the eye of the beholder, the collective human consciousness, AKA the market. Without our perceptions there would be no such thing as value.

Gold has no practical utility or critical function from an industrial standpoint (far too expensive to be worthwhile), but it does have one function that is relatively unique which is a barometer for currency strength. All metals share in this to some degree, but since the rest of the metals are practical for industrial usage their fundamentals are muddied which leaves gold as the only metal which is strictly monetarily based.

Since gold alone holds this sole monetary distinction and not dual purpose role it is the most sensitive to monetary policy (when electronic proxy contracts are not superceding it in this role).

So why does gold (and to a lesser extent the other metals) have this role? Because it is money. It was money before paper was money. Paper arose out of the need for a more practical medium of exchange, but gold as money arose out of the need for a reliable medium of exchange to improve upon barter.

Why is gold (and other metals) the most reliable medium of exchange? Because of the 4 rules of a unit of account and a store of wealth: fungibility, divisibility, durability, and portability.
- Fungible: Any oz = Any oz from a value standpoint. Paper also suffices. Other commodities do not.
- Divisible: You can melt or cut up the metal and lose no value (minus collector premiums which are not relevant to money). Paper suffices insomuch as you can break a dollar for change, but you can't cut or burn your dollars and expect them to retain their value. The value in metals literally cannot be destroyed. They are elements!
- Durable: You can leave metals at the bottom of the ocean or in outer space literally forever and still retrieve them and their value. Dollars are somewhat durable but ultimately fail this from both the paper and electronic standpoint, but also fail from a purchasing power standpoint. The durability of their buying power is suspect where as metals cannot be manufactured and thus cannot be depreciated in the same manner. They can be depreciated by deflationary monetary policy however.
- Portable: Throw metals in your backpack and take them with you if you need to. Paper also suffices. A house, not so much.

So as you can see there are many parallels between sound money and our current debt based fiat currency, but ultimately gold and silver arose to fulfill the need because they are the most qualified to do so based on their inherent and unalienable properties.

This is why gold is typically a measure of currency strength, because it is the ultimate currency and cannot be devalued. Dollars only arose as a proxy for gold and silver because they were convenient, but measuring the price of gold or silver in dollars is putting the cart before the horse.

Gold doesn't make a practical currency compared to paper and electronic dollars, but those dollars have no stability without gold. They need to work in tandem in a best case scenario, with gold keeping the dollars honest and the dollars providing practical utility.

Additionally because gold is desirable for aesthetics and thus jewelry all the gold ever mined is still around. Over the course of human history it became accumulated and thus here was this inventory ready for use as money. Same thing with silver until the 1900's when we made technological breakthroughs with it.

If the US defaults on the debt then nobody in the world will be willing to buy our treasury bonds because they know they won't get paid back (the Fed is already buying 90% of it anyway), but all the existing bondholders (China / investment portfolios) would also take a haircut and instantly lose a lot of value. This would likely cause a mass exodus from the huge bond bubble the Fed has created which would ripple throughout leveraged financial markets due to infinite chains of counter party risk and require a new global monetary system as all that leverage unwinds. I doubt the Fed would have the firepower alone to stem this, but maybe global QE could do so assuming other nations are on board.

There are 2 different scenarios where gold and silver could become hyper valuable.

In a hyperinflation the price of everything rises. Since gold and silver can't be produced out of thin air they and all other resources that are not easily reproduceable (as well as services) will rise in price to absorb the currency saturation. Rember that currency as a medium of exchange is simply a representation of goods and services. If you increase currency without increasing goods and services then they will rise in price. If you decrease the currency supply then they will drop in price as there is less money to go around that represents them.

Or we could avoid hyperinflation, and if gold and silver simply returned to fair value based on historic norms they would be quite valuable. For all the money printing we've done gold would need to be $8,000-$10,000 per oz and that's only counting USD, not all the other nations doing the same type of currency devaluation. Current mining ratio of silver to gold is only 7:1, but the available supply is more like 1:7. So maybe silver should be 7 times more valuable than gold, or only 7 times less valuable. We could temper expectations further and look to the historic mining ratio of 15:1 which would put silver at over $500/oz.

If we return to a barter system silver will be far more practical for day to day transactions than gold, but they will both become de facto money because of their inherent properties that serve that purpose better than anything else. Their purpose arose out of the barter system to begin with.

However, both gold and silver are more ideal for wealth preservation as initially in a barter system it will be things with practical utility that are more desirable, but if and when a new monetary system eventually shakes out it will be those with gold and silver who retain and expand their wealth, where as anybody holding paper or electronic assets will get the short end of the stick as everything reverts to its intrinsic value.

 

It cannot be explained. All through history, we have been drawn to gold. It seems we have this hard wire attraction to gold which is complicated by its limited supply.

 

“Gold gets dug out of the ground in Africa, or someplace. Then we melt it down, dig another hole, bury it again and pay people to stand around guarding it. It has no utility. Anyone watching from Mars would be scratching their head” -Warren Buffet

I think gold represents a durable, eye appealing, and monitary premative material which also represents the labor to extract. A paper dollar has a certain amount of labor attached to it, but a $1 note doesn't cost anymore than a $100 note. And paper notes can be created wereas gold can't.

 

+1

 

Because gold is prettier than lead. I don't think there is one real answer.

 

Intrinsic properties:

Gold is relatively common. Compared to say, Platinum or Palladium, gold has been available in sufficient quantities since ancient times to mint into circulating coins.

Gold is easy to mine and refine. Someone with a high school chemistry level of knowledge can easily figure out how to turn gold ore into gold without any kind of advanced equipment.

Gold is durable. It exists in a fairly pure form in nature that does not corrode even after thousands of years. Natural gold alloys may tarnish, but it is only at the surface. Gold is not consumed the way silver is in industrial applications, and recovery is cost effective.

Gold is inert. It does not react with the human body, so it is a safe metal to use for jewelry, completely non-toxic.

Gold is malleable. It can be easily shaped and beaten into very thin sheets. I can be beaten onto the surface of other metals to make the surface corrosion resistant.

Gold has a low melting point. It can be melted and cast with very crude equipment.

None of the other precious metals have all these qualities. Industrial silver is not economical to recover and so is irreversibly consumed by industry in a way that gold is not. Platinum is durable and recoverable, but doesn't exist in sufficient quantities and has a very high melting point.

Because silver is consumed, there may actually be less available silver on earth than gold. It is estimated that more than 95% of all the silver ever mined throughout history has already been consumed by industrial use. That silver is gone forever

 

Where does this come from? When I Google it, I find lots of hits from companies selling bullion, but what is the source of the statement?

 

Not from Science. Silver atoms like all others are not consumed. They can chemically combine with organic or inorganic compounds, form colloids, changed from the free physical metallic mass we love as coin silver to other forms, but the number of silver atoms on/in the earth hasn't changed much, except for the atoms we send into nonreturnable space stuff, or alter by nuclear smashing, which is most likely less than an old VW. It may be "consumed" from free silver to industrial product silver, but it is recoverable of course.

 

Exactly correct. It is estimated that at $50 silver, it would be cost effective to recycle most forms of it. Below that price, it is recycled less frequently (but still recycled). Some silver bugs like to say that silver will be the first element that goes "extinct," but an element can only go extinct if we change its atomic composition. Otherwise, it's still out there in whatever form we left it in when we discarded it. We've simply put it back in the ground as waste, and should the price of silver rise high enough, we'll go back in and get it again. Mining landfills is not a new concept.

 

It ain't rocket science...

You need two estimated numbers, which vary considerably depending on who is doing the estimation.

Known above ground silver today
Total amount of silver ever mined.

Then you plug them into this equation:

(Total amount of silver ever mined-Known above ground silver today)/Total amount of silver ever mined*100

Unless the silver was spirited away by aliens or put back into the mines, the difference between the Total amount of silver ever mined and the Known above ground silver today is the amount of silver consumed.

The link below has 2007 numbers, and they come out closer to 99%:

http://www.silverinsights.com/_pages/_statistics/statistics_1.html

Their estimate is that the total worldwide silver production since 3000 BC is 40 BILLION troy ounces (as of 2007)

As of 2007, the known silver supply was 450 million ounces.

Good luck recovering 39.5 billion ounces of silver from landfills!

 

The dictionaries tend to use the word "consumed" as "destroyed", which is a common usage and the silver used in your example is not destroyed at all. Chemically rearranged perhaps, but still here. Used silver is not put deep into pits like nuclear waste , and can be recovered. The idea that it is consumed or destroyed is incorrect totally. Perhaps some is washed to the sea , sunk deep in the oceans, consumed as health aids by ignorant people, but the silver is still in circulation.

The statement as stands is pure ,none supported, propaganda intended to sell PM to the unsuspecting person.
​

 

Kind of what I thought. BTW, silver (or any other element in question) is normally found in deposits where the concentration of it makes it worth mining. If the concentration were too low, it would not be economiclly profitable to mine it. The way we are disposing of much of silver waste seems to lead to concentrations that are not easily recoverable with current technology. It brings to mind the amount of gold in seawater.

 

I'll say it again:

Good luck recovering 39.5 billion ounces of silver from landfills!

 

Nice rebuttal Yelling is counterproductive.

With the industrial demand going down along with price, why should anyone try? The point is that it is still around, it hasn't been "consumed", it is there if anyone wants to try, and nothing was said about it all being in 'landfills', although I grant some is. That is your shout out.

You are implying by your statement above that you actually believe that the silver quoted by the article has left the earth, and the statement that the silver is gone forever, doesn't recognize any recycling of silver at all. There may be less silver on the earth than gold, but it is because the planet started that way, not that it is due to consumption of the silver.

 

Some "used up" silver is recoverable, though at current prices it's not as cost effective as needed to recover a lot of it, and nano-silver is altogether unrecoverable. The atoms may never disappear, but the feasibility and cost effectiveness of recovering them ensures that we can never get it all. What we can get will be determined by whether it is profitable enough to get it.

 

Nobody heard me the first time...So I'd say yelling worked

I think you are missing the point altogether. The point is that you are not going to recover 39.5 billion ounces of silver, period. Sure some can be recovered, but the amount that can be recovered is minuscule in comparison with the total amount that has been mined through history.

Yes, by and large it is GONE forever.

 

When the question of gold's instrinsic value can be explained, please let me know. I'm still trying to figure out why we have virtually no inflation with record deficits. I thought that it would eventually catch up with us but it's been going on since the 1980's.