Does anyone need gold?

Here's a dumb question on gold: Does anyone really need gold?

I mean, is it valuable simply because it's rare and somewhat popular as bling-bling? What happens if the world loses all its gold? Do I lose my electric power? I can imagine the frowns on pimps and pirates. Would there be another problem?

The price of gold has gone up from $256 an ounce in 2001 to $980 an ounce today. Does gold have any more price stability these days than Dutch tulips did in 1637? Why does gold cost anything?

Can other metals do gold's job just about as well as gold? If so, then why pay a lot for gold, why hoard it, why look at it as a safe investment? Can't we do without gold?

Frank Warner

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Afterthought: I just noticed that copper, a useful metal, sells for 1.33 cents an ounce. That's $0.0133 per ounce.

Here's a proposal: Ban the sale of gold in the United States for 10 years, just to test its real value. If it really is valuable, we'd suddenly have a black market on gold. People would be desperate for it, for all its unique qualities. If the black market is fairly lame, it would say something about gold's true value. Perhaps closer to 1.33 cents an ounce than $980.00 an ounce.

Comments

[David Holliday]

Gold has inherent value not only because of its rarity and desirability in jewelry and art, but because of its uses in industry. Tulips are pretty flowers. I grow them every year in my garden. But there is no value in them other than they look good for a couple of weeks.

[Frank Warner]

I've got tulips, too.

I have no gold. I have no use for it.

[Kevin]

I bet you do have gold, Frank, though you might not know it. It has a very special property. It doesn't oxidize. That's kind of like saying that it won't rust, and that gives it some truly awe-inspiring abilities.

In the past, it was only valued because of its malleability and beauty. Not so anymore. Without gold, our computers would stop working the first time that there was a humid day. Flat screen monitors would last about a month. Heck, even food processors would die a quick death without the stuff.

You own gold. Probably around 1/4 oz of it. It's just making your life better, not prettier. It's harder to see when it's working for you.

[Kevin]

Also, we have no tulips :(

[jj mollo]

You may be interested to know that tulips were at the center of a financial meltdown in the Netherlands a few hundred years ago. Fancy new tulips were being imported from all over the world and people were willing to pay more for them. Investors noticed this and started buying up more and more exotic varieties. The prices kept going up, the investor pool kept growing. It was like the stock market in 1928, or the housing market in 2006. People had to know that tulip prices couldn't keep rising forever, but they just kept pouring their savings into a silly little flower until the price collapsed.

Where did the money go? It went into the effort of sending ships all over the world in a desperate but misguided search for that special bulb. They could have been bringing home timber or fish or iron ore. Instead, the tulip mania, a blatant market error, absorbed a significant portion of their GDP for very little benefit. The same logic applies to our gold-plated McMansion frenzy.

[Frank Warner]

As I pointed out in another comment, copper is pretty damn useful, too, but an ounce of gold costs 74,000 times an ounce of copper.

Looks at least a little irrational to me. Is gold 74,000 times more useful or more attractive than copper?

It's probably best to invest in copper. Trouble is, you'd have to warehouse 74,000 times as much of it as gold.

[Kevin]

Thanks for the history tip, JJ! I was aware of the tulip boom/bust of the 1600s, but for some reason believed that they were all grown in the Netherlands themselves. It makes much more sense that it went bust because they were also importing them. That's a recipe for disaster when dealing with non-essential commodities. And if I remember my history right, disaster it was.

Also, your explanation of "Where did the money go?" is a good one, but there's another explanation of where our money has been going that is equally plausible.

If I own a share of Costco that I bought for $50 and wish to sell it, and JJ is only willing to pay $20 for it... and I agree to the sale...POOF! Thirty bucks just disappeared off the planet's face. (I'm snapping my fingers) Just like that.

I don't have any data to back my claim up, but I firmly believe that most of our money is not being wasted on misguided efforts like wasting a ship-ride around the world to find more tulip bulbs. It's simply disappearing as described above.

In fini, I'm not saying that we should all buy gold (as I've said before, I lost 56% of our family's wealth in a mere two months, and have so far only recapped 14% of it... I'm NOT a go to guy for financial advice). I'm just saying that gold is not like tulip bulbs. It has intrinsic value.

In fact, the world as it is could not function without it. And since we're touting metals, let me say that we can't live without platinum or palladium either. While gold is necessary for oxideless computing and anything electronic, palladium and platinum are necessities because they allow us to make plastics. We pretty much can't make them in bulk without those special and super cool metals.

I'm just saying don't doubt metals. Every single one of them has a special purpose. So special that they may even make you believe in a God.

[jj mollo]

If you're right Kevin, then a boom and bust is basically irrelevant to the economy. Somebody sold the tulip to an idiot for $10,000, and made out like a bandit. The greater fool was only able to sell it for $50. So the one who was rich is now poor and vice versa.

I don't think it's so simple though. The growing market for a commodity in high demand has to crowd something out. Just the transactional effort has to cost something. Think about this. Every household buys pots and potting soil to raise tulips year round. They want to get in on the easy money. They buy a wheelbarrow to transport thousands of bulbs from place to place. They buy a special tulip planter and a variety of tulip tending tools.

They could have spent the winter knitting sweaters for sale instead of forcing bulbs, or building greenhouses and reading botany texts. And they could have spent the money on a new plow and a horse instead of the pots and the wheelbarrow, not to mention thousands of useless bulbs. When the market collapses, they're going to feel awfully stupid and awfully poor. Maybe they've learned a lesson which is worth more than the amount of the loss, but they've also lost their seed money. They've spent money and time on things they don't need, and they've neglected things they do need.

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Gold is probably a more reliable commodity than tulip bulbs. But if you buy at the top and wait for it to come back you will have lost the opportunity value of your money. If otoh you bought tulips at the bottom and sold at the top, then it was better than gold by far. Changing circumstances, changing technology, changing preferences, changing weather, all make commodity purchases risky. If you were holding corn futures when Congress passed ethanol requirements, then I suspect you did all right. If you were holding uranium futures on the day before TMI, then you probably didn't do so well.

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I'm not sure every substance is particularly blessed with its special holy mission. How about radon for instance? People used to take it medicinally at the spas. That is no longer advised, by the way. ... The myriad uses of all these various materials is more a miracle of human ingenuity and market capitalism.