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See Willem Buiter's: Gold - a six thousand year-old bubble (November 8, 2009)
Gold is unlike any other commodity.  It is costly to extract from the earth and to refine to a reasonable degree of purity.  It is costly to store.  It has no remaining uses as a producer good - equivalent or superior alternatives exist for all its industrial uses.  It may have some value as a consumer good - somewhat surprisingly people like to attach it to their earlobes or nostrils or to hang it around their necks.  I have always considered it a rather vulgar metal, made for the Saturday Night Fever crowd, all shiny and in-your-face, as opposed to the much classier silver, but de gustibus... .

...

Because to a reasonable first approximation gold has no intrinsic value as a consumption good or a producer good, it is an example of what I call a fiat (physical) commodity.  You will be familiar with fiat currency.  Unlike what Wikipedia says on the subject, the essence of fiat money is not that it is money declared by a government to be legal tender.  It need not derive its value from the government demanding it in payment of taxes or insisting it should be accepted within the national jurisdiction in settlement of debt. Instead the defining property of fiat money is that it has no intrinsic value and derives any value it has only from the shared belief by a sufficient number of economic actors that it has that value.

...

Gold is very close therefore to the stone money of the Isle of Yap.  This stone money, known as Rai, consists of large doughnut-shaped, carved disks, consisting usually of calcite, that can be up to 4 m (12 ft) in diameter, although most are much smaller. Apparently, the total stock of Rai cannot be augmented any further.  It also depreciates very slowly.  This intrinsically useless form of money in the Isle of Yap is in all essential respects equivalent to gold today in the wider world.  Another example would be pet rocks, as long as the rock in question is rare and costly to get into its final shape.

A followup from a week later reports that Rai is now worthless in the Isle of Yap.
Far be it from me to assert that a fate similar to that suffered by the Yapese Rai will befall gold - another intrinsically worthless fiat commodity.  But the demise of the Rai as a store of value and means of payment, when taken together with the historical experience of pre-columbian native American tribes and nations that attached very little value to the shiny metal, should give the gold bugs some sleepless nights.  More importantly, it ought to discourage investors who are not rich enough to survive a speculative disaster from putting too much of their savings into this frivolous store of value.


En un viejo país ineficiente, algo así como España entre dos guerras civiles, poseer una casa y poca hacienda y memoria ninguna. -- Gil de Biedma
by Migeru (migeru at eurotrib dot com) on Wed Nov 25th, 2009 at 05:33:46 PM EST
And see a view critical of Buiter's views on gold here.

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Thu Nov 26th, 2009 at 01:56:54 AM EST
[ Parent ]
"Nine out of ten cave men prefer super senior tranches...."

The tenth cave man (me) simply says that if it get to the point where gold matters, gold won't matter, and Jesse can try eating his hoard.  Or perhaps he expects his god to make manna rain down.

by rifek on Sat Nov 28th, 2009 at 01:23:34 PM EST
[ Parent ]
In case the above is a paraphrase or parody of Jesse's writing, the context might be of interest. He was responding to an assertion in Buiter's article: (Pre-columbian native American tribes that attached very little value to the shiny metal.) Jessie noted the exceptions of the Aztec and Maya and could have included the Inca. He then continued:

Oh, perhaps your understanding of early American economic history pivots on the sale of Manhattan island to the Dutch by a tribe of Indians for some beads? A bit selective perhaps, and a narrow experience for a pivotal historical thesis. It may be like basing a general history of European Banking on Wall Street's recent selling worthless CDO "wampum" to the continent's commercial banks. But this does bring to mind a possible advert campaign about early cavemen preferring beads and dollars and euros to gold, a la GEICO. - Jesse)  [Then there was this:]

   Comment 5 from Jesse
    "Perhaps if I phrase it this way it might be more clear.

    In one philosophic sense, gold is indeed a fiat valuation, if all valuations are fiat,
    nothing being essential but air to breathe, food to eat, shelter and clothing in
    roughly that order. All else is discretion.

    Gold, however, may be less fiat, less arbitrary a a money, a medium of exchange
    and a store of value, rather than the essential itself,
    in an other than barter economy. Just as the Aussie dollar or the euro may be less ephemeral than the US dollar,

    This is what is happening. The Bank of England made an error in selling its nation's
    gold 'at the bottom' and will pay a price for this; live with it.

    Oh, and try to move on please, else you may begin to resemble King Canute, sitting
    on his throne at ocean's edge, ordering the incoming tide to stop its inundation.


My own view is that all values are social constructs and are therefore subject to social deconstruction, both in point of analysis and in point of actuality. But it has also been my sad observation that the older the value and the more deeply and widely embedded it is, the more it resists eradication. So, in a worst case of depression combined with monetary inflation, one is likely to be able to find some who will accept gold in exchange for some important good or service, perhaps not at what ever "spot price", if any, might prevail, but likely for well more than the value of the fiat currency that was used to purchase the gold in better times. In less dire circumstances the gold would be likely to have served as a vehicle for preservation of wealth through a period of monetary chaos. Jesse has accused Wm. Buiter of "talking his book" specifically on gold and made a case as to why central bankers hate gold:

Quite a few options are coming due on the US Comex next week, and the bankers may be once more 'staring into an abyss.' Or setting up for a big push lower to 'save the banks.' That would be traditional central banking stewardship of late days.

   "We looked into the abyss if the gold price rose further. A further rise would have taken down one or several trading houses, which might have taken down all the rest in their wake..." Eddie George, Governor Bank of England, in a conversation with CEO of Lonmin, September 1999

"W. Buiter, CBE, Member Monetary Policy Committee of the Bank of England (1997-2000)" Shoulder to shoulder on the brink, eh? That must have been rather intense and worthy for peers of the realm, skinning the specs. Oh, bravo.

People can remain rational and place their trust in the timeless longer than central bankers and politicos can feed them arbitrary illusions and promissories for wealth on the bankers' terms. At least while they retain free market choice.

So having SOME gold or silver, as opposed to having ALL of one's assets in gold or silver, might be  reasonable. Having a house free and clear with some solar and wind power capability and some spot of land on which one can grow a garden might also be a reasonable idea. If one has a well on the property and the ability to operate it with one's own power, that is another plus, as is living in an area of relatively low population density and of above average rainfall.


"It is not necessary to have hope in order to persevere."

by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Mon Nov 30th, 2009 at 01:38:18 PM EST
[ Parent ]
Oh, I have some shinies because I know people will trade for them.  My remarks were directed at the GEICO parody on the linked site.  I do not consider gold and securities to be a useful contrast.  My point, and I do have one, is that gold only muscles currency aside in a collapse scenario, and in such a scenario, there are more basic items that are far better investments than gold.
by rifek on Mon Nov 30th, 2009 at 11:07:35 PM EST
[ Parent ]
BTW, Jesse recommends having some of your assets in gold, 10-20% at most.  The rest in the currency of your country.  He advises against trying to "get out in front" of a market collapse via shorts or puts, etc.

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Wed Dec 2nd, 2009 at 04:12:03 PM EST
[ Parent ]
Buiter:
Instead the defining property of fiat money is that it has no intrinsic value and derives any value it has only from the shared belief by a sufficient number of economic actors that it has that value.

And like any good bubble, devotees and manipulators can easily massage the apparent value.

Buiter is missing the point that the real value of all fiat currencies is the bubble process itself.

Hence gold, tulip bulbs, securities, and empires - value comes from hard military dominance, soft marketing and persuasion, and social proof and consensus.

by ThatBritGuy (thatbritguy (at) googlemail.com) on Thu Nov 26th, 2009 at 07:55:39 AM EST
[ Parent ]
We can use anything to make a bubble... the reason gold is better than others at bubbles is because is yellow.

I say.

A pleasure

I therefore claim to show, not how men think in myths, but how myths operate in men's minds without their being aware of the fact. Levi-Strauss, Claude

by kcurie on Thu Nov 26th, 2009 at 09:16:41 AM EST
[ Parent ]

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