You forget that “precious” metals’ trading value is far in excess of their actual value. The actual use value of these metals is pretty low, in that there aren’t many uses for which they are the only option, and the ones that do exist are fairly limited.

Gold is expensive, not because it is gold, but because we have, collectively, decided that it’s valuable. In reality, it’s not. You can’t eat it, or make stuff very many intrinsically valuable things out of it. It’s not even particularly rare, so even if scarcity defined value, which it doesn’t, (there are lots of rare things that are worthless), gold wouldn’t qualify.

Certain metals are valuable because we’ve all decided that they are. Gold is as much a fiat as paper money. It’s an idea that we’ve all agreed to, and in the absence of that agreement, it’s value drops to it’s use value, which isn’t much.

The “value” of precious metals is, like the value of paper money, psychological. If you really wanted to base currency values on something “real”, you should use oil, or wheat, or something else that has some intrinsic value. Gold doesn’t qualify.

–Shannon

I don’t understand this part of the article…
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“For example, an article in the New York Times last week noted that “1 in 5 sub-prime loans will end in foreclosure”…

“About 2.2 million borrowers who took out sub-prime loans from 1998 to 2006 are likely to lose their homes”.

In real terms, that translates into roughly 10 million people!”
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I would calculate that as 440,000 people (20% of 2.2 million). Even if it were 2.2 million per year for the 1998 to 2006 period, that would translate to approximately 4 million people (20% of 19.8 million [2.2M X 9 years]).

Please help!

Shannon:
The “trading value” of gold is it’s value. It’s a store of value and a fairly compact one in comparison to oil, wheat and other consumables. Gold is a univeral store of value and used for trade.

It is:
-indestructible
-divisable
-rare
-easy to determine purity
-so easy to mine and work that the ancients could do it
-doesn’t corrode
-non-poisonous and non-radioactive
-easily formed and handled
-universally recognized
-extremely easy to store
-very valuable so a small amount can be traded
-extremely beautiful, so it has decorative or artistic uses
-useful in industry
-most maleable of all elements
-excellent conductor of heat and electricity

It, like all commodities, is an asset that is not also someone else’s liability like paper money, a stock certificate, a bond, or an insurance policy. It cannot be
defaulted upon by any government or group of people.

It is true that people may refuse your gold in exchange for something, but an ounce of gold is an ounce of gold. It may have different values at different times in different places, but it’s as close to universal money as anything has ever been. Its use as money has spanned thousands of years and many continents.

I’m guessing that by intrinsic value, you mean something that you can eat, drink or sleep in. If you’re off in the jungle by yourself, I would imagine that a good machete or water purifier would be worth its weight in gold to you at that time. But, in a social setting, where there is trade, I think that gold will always have its value unlike the paper promises of governments or corporations today.

The “intrinsic value” of paper money is if you can use it for toilet paper or decoration or starting a fire. It cost the Treasury 4 cents to print a $100 bill, so you could use these things as wall paper if you could get them at cost.

The value of paper money is purely a legal construct. Try spending foreign currency in this country. Will the neighborhood Starbucks take your Euros?

gold_dredger,

Why do you consider “intrinsic value” for paper money but “trading value” for gold? What is the “intrinsic value” of gold?

Gold or paper money, all are used to replace faith/trust that we have to put in a 3rd party (govt) when exchanging goods (barter). You said that paper money is a promise in a bad sense but this is exactly what it is supposed to be. Unless you are trading goods for goods, you need a medium/bank/govt to ensure that they can promise to hold value of traded item (paper receipt of trade) and offer it to you later in exchange of something else that you want to trade. The key is how much trust you can put in the 3rd party. If the govt or 3rd party is corrupt, they will default on that promise and then it doesn’t matter whether they offered you a paper receipt in writing or a shiny metal in return. Abd we have seen historical examples from both sides.

The gold debate is about supply and demand, its about inflation vs deflation as monetary policy and its about trust. Sometimes gold bugs try to make it something different, calulating astronomical values of gold. The main advantage of gold is its limited supply chain and that historically it has been easily tradable. But for that matter, you can own Euros if you think European govt is better/honest than ours and Euros are more easily tradable, exchangable and storable than gold. The percentage of gold or land or food or Euros that you hold should be proportional to the probability you place on the defaulting of US govt. I keep it below 20% generally. However, investment/trading gold is seperate discussion.

All money today is “fiat money” since it’s all paper and no third party (the issuer) will give you a set amount of anything for it, except different denominations of fiat money, (change).

Gold is not fiat money. It’s not something that’s issued by a government that forces people to accept it.

Your argument has too many undefined terms. I’m guessing what you mean by “psychological value” is whatever value beyond a thing’s use as a necessity. There’s a great deal of psychological value in art, but not much “floor value” or intrinsic value.

The “trading value” is the value of the commodity which is just its price on the open market. That’s the value. As long as there is a market for a commodity, there will be a given price or “trading value” set for it on a daily, hourly or minute-by-minute basis.

Yes, it’s confusing. In the absence of a market for something, how do you determine its value?

I don’t want to discuss the value of something without reference to a market for it. That’s not the context here.

tube_ee said “Those properties and uses create a floor for gold’s value …”

There are really no properties of paper money that create a floor for its value.

It’s all about timing.

If I bought gold on Jan 3, 1980 I would have paid about $560/oz.

Two weeks later I could have sold for $875/oz.

That’s $315/oz which is more than 50% gain in two weeks.

Gold purchased later in the year presents a whole different picture.

As far as San Diego real estate in 1980 – ask some apartment owners how much fun they had with their apartments during the 1980s – many of them were cashflow negative and had to provide incentives to attract tenants.

~

The trick with investments is to get on the right side of large secular trends and then wait for them to express themselves fully.

1982 – 2000 was a secular bull market in equities while commodities sucked wind

in 2000 those trends reversed, IMO – we now have equities in a secular downtrend while commodities are in a secular uptrend

during 1995 – 2005 San Diego real estate was in a secular (?) uptrend and is now in a secular downtrend

I believe that gold bugs (and silver bugs even more!) will be swapping out of the precious metals when that secular trend fully expresses itself in the 2012-2016 timeframe. These ‘bugs’ will be buying equities and San Diego real estate at the bottom of their secular trends.