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Gold: a 6000-year-old bubble

On November 30th, 2014, Switzerland held three referenda.

Spoilers alert: all of the results were "No".

It's funny I told you the results before I explained what the questions were. One of the proposals demanded the Swiss National Bank to hold at least 20% of its assets in gold, and demand Swiss gold to be returned from New York. 77% were against the proposal; a "yes" result was capable of increasing the gold price by 5%.

The Swiss gold repatriation may have been a reply to similar imminent plans to repatriate the Dutch gold.

The current gold price is about $1,200 per [troy] ounce (0.0311 kg), about 1/3 below the peak above $1,900 per ounce in August 2011. The drop of savings by 1/3 may be unfortunate but the quadrupling of some people's wealth was even more fortunate.

Because of these events, provoking comments by Citi's chief economist Willem Buiter have induced some discussions and responses.

On November 26th, 2014, Buiter would release the Citi research paper

Gold: a six thousand year-old bubble revisited
which is pretty much nothing else than a reiteration of his 2009 Financial Times blog post
Gold – a six thousand year-old bubble
Your humble correspondent agrees with all the interpretations over there.

I personally find it bizarre for the Libertarians to be obsessed with gold because – as Buiter correctly says – gold is the ultimate fiat currency, something whose value is derived purely from the objectively unsupported belief of others that it has some value. In this sense, its value has the same logic as the value of the fiat currencies ("fiat" means "let there be" or something like that) except that there are no central banks whose task is to stabilize the gold-to-products price ratios. Because gold has no mechanisms to protect its value, its only stable justifiable price is (close to) zero.

Note that iron ore costs $0.0025 per ounce, well below $1,200 for one ounce of gold LOL.

Some basic numbers. There are 160,000 tons of gold "above the ground". About 50% of it is held as pure reserves, usually in basements in order to discourage thieves, and the other 50% is jewelry. Almost no gold that has ever been obtained (people need to use mercury or cyanide to obtain gold) has decomposed or been lost or gotten rotten ;-) or faded away in similar ways. It's a stable element. But Buiter says that it is a precious metal for the stupid people who watch Saturday Night Fever – kitschy, shiny, in-your-face material for the superficial ones.

It has some technological applications but in (almost?) every single one of them, gold has a competitor that is both (much?) cheaper and better in quality. I do agree with Buiter that if people were completely rational and independently thinking, the gold price would be vastly lower, perhaps 1,000 times lower or even cheaper.

Some gold fanatics – even among people who are otherwise Libertarians – are impressed by the idea that the gold on Earth should "back up" the wealth that exists in all other forms. In the past, when people have pretty much bare buttocks – except for some gold jewelry – it was realistic to say that gold represents about 50% of the mankind's wealth. But today, we have so many other things – so many types and so much stuff from each type of wealth – that gold is really a tiny percentage of the mankind's wealth.

Even with the super-inflated gold prices, those 160,000 tons is equal to 5.14 billion troy ounces. Multiply 5.14 billion by $1,205 (per troy ounce of gold, today's price) and you will get $6.2 trillion. That's the price of all gold the mankind possesses.

Because the world's annual GDP is something like $80 trillion these days, you can see that all existing gold (reserves plus jewelry) is enough for 1 month of GDP – not much more than 1 monthly salary for all the working people in the world. However, the savings and other assets, depending on the type and inclusiveness of the "money supply" or debt that you consider, is comparable to 10 years or more.

Gold can in no way "match" the remaining assets in the world. Even the government of China – which is just 1/6 of the world's economy – has dollar reserves about $4 trillion. They could buy all of the gold reserves in the world plus some gold jewelry for that. And what about the other countries and their reserves? And what about the savings of the individual people and companies that are not parts of the governments?

It makes no sense. A major country can't promise anyone to pay the corresponding amount of gold for banknotes today simply because all the gold that the people possess doesn't have the sufficient value. By far. In advance, people would know that the governments will eventually (quickly) run out of gold, so they would try to get the gold before it is too late (run on banks), and the governments would run out of gold and they would have to break all the promises. Someone who is really enthusiastic about gold could think about artificially increasing the price of gold by a factor of 100 or 1,000 so that it would be sufficient to "back up" everything. But how could you reach such a situation? Aren't the relative prices of products and commodities determined by the invisible hand of the free markets, by the free human beings?

I can't believe that a Libertarian – someone who normally opposes the Big Government – would defend the idea that someone (a league of the world's governments) forces the 7 billion people on Earth to think that the gold is 100 or 1,000 times more valuable than it is otherwise, according to their free opinion. Obviously, a hardcore totalitarian system dwarfing the relatively loose and modest arrangements made by Adolf Hitler and Joseph Stalin would be needed to protect this divorce with the reality.

It couldn't work, anyway, not even with a Gestapo cop in every building on the Earth. During socialism, we've tried almost identical things. We had the Czechoslovak crown which was also extremely valuable. Well, officially. It was worth almost one dollar. Except that you couldn't have bought the dollar – or two dollars – for that nice price. There weren't enough dollars for that. If you needed a dollar, you had to pay those correct market-dictated 30 Czechoslovak crowns for a dollar. The Wechselmen (the not-quite-legal predecessors of exchangers) would get these dollars (or deutschmarks) from the Western tourists for CSK 20 (good enough for the tourists because the tourists would only get a few crowns in the official bank) so they had a cool profit margin. But both prices that the Wechselmen have dealt with were vastly higher than the official exchange rate. The exchange rate didn't mean anything tangible. It was just an empty slogan used by communists to boast that they're on par with (or stronger than) the "imperialists". The reality was very different, however.

The situation with the 1,000 times overpriced gold would be totally analogous. Governments could claim that one ounce of gold is worth $1 million or something insanely high. Formally, that would be equivalent to 100 new cars or 10 new houses. Except that no one would give you those cars and houses for this small amount of gold. Everyone would be selling their gold for the price substantially higher than those $1,200 which may be a reasonably agreeable price. There would be so much trading that people would be very aware of the actual price of gold. The government could try to execute anyone who would only suggest that the price of gold is much lower than $1 million per ounce. But even that would fail to be enough to impose this drastic distortion because the executed people were not special in any way: they just saw what everyone else may see, too.

You just can't establish a sustainable arrangement in which the value of gold is comparable to the value of everything else combined. Gold is a very small percentage of the mankind's wealth. And that's true even though the price of gold is hugely inflated – in the state of a bubble that has lasted for thousands of years.

Another myth that the gold fanatics love to believe is that precious metals such as gold and silver – which can't be too bad; they understand that if gold is such a wonderful measure of assets, silver can't be much less accurate because it's also kind of precious – have prices that are not being distorted by the government, and their price ratio must therefore be constant.

It is of course bullšit. The graph above shows that the gold-to-silver price ratio went above 100 in the 1940s – but by 1970 or so, it returned to 15, the same level where it spent several centuries up to 1870 or so (gold and silver were used as coins during those centuries which is why the price was so constant). The point is that the fluctuating price of gold isn't a consequence of government interventions. The prices fluctuate mostly for natural reasons. No one knows what the right price of a pretty useless metal should be. The price may be changed by some good or bad publicity, theft, new ways to mine gold, fear, and for many other causes.

In a 30-year period, the gold-to-silver price ratio may easily change by a factor of 6 – up or down. The metals are in no way more stable than other things. Modern fiat currencies guarantee the promised inflation rate plus minus one percent in a year. So in 30 years, your predictions about the price of a "basket" of products will deviate at most by 30 percent – not by 500 percent which is the error you would get if you estimated the price of gold in terms of ounces of silver between 1940 and 1970.

Buiter has been saying similar things for years. But there are new memes in his 2014 report, especially the comparison between gold and Bitcoin. He says that gold and Bitcoin are extremely similar when it comes to the logic that determines their prices. Meritocratically, the prices of both things would be near zero. But the real value is much higher because people see other people who say that it's much higher and it should cover a substantial fraction of the human wealth. In both cases, one has to spend extreme resources to "produce" new gold (mining and chemical processes involving mercury or cyanide) or new Bitcoins (CPU power needed to perform otherwise useless calculations). In both cases, the resources could be used to produce something much more valuable when it comes to the intrinsic value.

If you want a practical payment system, you want the prices of average things expressed in this currency unit to be predictable (essentially stable, or with a pre-declared inflation rate). This predictability is the reason why people aren't afraid of storing their wealth in this form; or of creating debt by borrowing; and that's why the stable money is being used for economically beneficial transactions at various time scales. No particular commodity or product such as gold has this property – the relative prices fluctuate greatly.

(If you tried to make coins [a small percentage of money supply] of gold or silver again, people would know whether the coins are more valuable or less valuable than the declared value. If or when they were more valuable, they would melt them and sell the material. If they were less valuable, then the metals wouldn't really "back" the fiat currency, anyway. A tail can't wag the dog.)

The modern fiat money are the best devices for a predictable preservation of wealth and debt. And there should be some policies that preserve some stability or equilibrium – that the people never feel the urge to horde or, on the contrary, to hysterically get rid of the currency. The existing inflation targets and similar things are imperfect and I can tell you more conceptual ways to improve them – but they are essentially right to optimize the economy, much more right than a new gold standard could be. The more accurately and explicitly the rules for the "price of money" are written down and automatically enforced, the smaller role the central banks or governments play. A central bank that just does what is needed to keep an inflation (or nominal GDP...) figure at the right value is de facto exerting no power at all, and it is the ideal that Libertarians should logically embrace. A government that needs to distort the gold-to-car price ratio for it to swing to vastly different values than what the people would normally determine via the market is something that the Libertarians should hate. And a system without a widely used currency that is stable enough and that people are willing to use in both directions is totally impractical because it forces the people to barter if they want to be safe, and the economic activity logically suffers.

In the long run, if the mankind gets wealthier and/or more rational, it is obvious that the price of gold will decrease – gold is going to be a vastly worse investment than stocks, as e.g. Warren Buffett has repeatedly explained.

Dow Jones index divided by gold price, in $ per troy ounce. There was a drop from 40 in 2000 to 10 a few years ago but now it's back to 15 (not shown). The increasing oscillations are weird. But one can arguably see some long-term growth, anyway: stocks are a better investment. My understanding is that the DJIA index is defined so that it drops when a stock goes off-dividend, so the graph above (just like the Dow Jones graph in dollars) doesn't contain the dividend profits and hugely understates how good an investment stocks are.

Some critics of Buiter's have argued that the drop in the gold price (by 35 percent) has been much less severe than e.g. the drop in the price of the Citibank stocks (by 95+ percent). That's a cute form of criticism (Buiter is from Citi) but an unfair one, too. No one has ever claimed that the Citibank stocks are safer, more stable, or more practical "banknotes" to use to store wealth and debt. It's just one volatile company so the fluctuations may be and have been intense. But a portfolio of many stocks does better than gold in almost every decade and in every century. And modern fiat currencies are more stable in the short and medium run.

By the way, the Swiss referendum proposal wanted to restrict the Swiss National Bank's ability to sell gold. In effect, some of its gold could never been sold. It's funny to ask whether such a regulation increases or decreases the price of gold. When it comes to the world markets, the price would surely go up because the traders would know about an institution that has switched to the mode of "mindlessly hording" gold. This decision of course increases the global demand. On the other hand, if one owns gold (or anything) that he can't ever sell, it's totally useless. It's just like splashing the gold into the toilet or sending it outside the Solar Systems with a spaceship. Normally, the savings are being saved because they may be used at some point in the future! So from the Swiss national viewpoint, the price of that gold should really be counted as zero as long as the laws (resulting from the – fortunately rejected – referendum) are respected. ;-)

The different results for the "price of gold" that we got by these two methods represent a classic example of the government-led distortion of the prices and markets. When someone is barred from buying or selling certain things, different prices – official ones and the true, black-market ones – are always created and start to diverge. And it's a bad thing.

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snail feedback (105) :

reader Tom Weidig said...

My understanding is that the value of gold is its properties to be the natural choice to move from a barter economy to a money economy.

If you take the Periodic table, and cross out all elements that are unstable, commonly found, too rare, not easily manipulated and dividable, not chemically stable against oxidation, you are left with gold and silver.

reader JollyJoker said...

As a leftie, it's pretty unusual that I agree with everything in a somewhat political post of your like this.

One problem you didn't mention (unless I missed it) is the cost of secure storage and transactions for gold. Some idiot in the Finnish parliament (can't remember who) suggested moving all gold held by the central bank to Finland. The costs would have been enormous and they only hold something like 50 tonnes.

reader Luboš Motl said...

"The natural choice"? Could you please be more specific about the reasons why you put gold and silver above:


I could continue for quite some time. All these things have comparable prices to gold and silver. Are we looking at the same table of elements?

reader JollyJoker said...

Well, copper and gold are the only metals with non-grey color.

reader Luboš Motl said...

Right, but can't you replace it by these paints


that cost 10,000 times less and look the same? I personally can't see the difference.

reader Luboš Motl said...

LOL, a good take.

reader JollyJoker said...

Lol, that table was the first one I checked before responding to the same comment :)

reader Tom Weidig said...

>> Could you please be more specific about the reasons why you put gold and silver above:

The question is rather why did the ancient civilisations choose them as opposed to the others?

1) Rhodium and palladium were not discovered until recently.

2) Osmium is even rare than gold.

3) Gold shines and could be used for jewellery.

reader Dream Chaser said...

"Even with the super-inflated gold prices, those 160,000 tons is equal to
5.14 billion troy ounces. Multiply 5.14 billion by $1,205 (per troy
ounce of gold, today's price) and you will get $6.2 trillion. That's the
price of all gold the mankind possesses."

I dont support gold standard, but this argument against it makes no sense (and I see it often repeated on the internet).

Anything that is of finite amount and sufficiently divisible and stable etc.. can be used to back a currency with no problems, no matter its current price or usefulness.

Your number is the price of gold in fiat NOW, because we use unbacked government currencies for almost all transactions. But if some bigger governments (not even necessarily the whole world) decided to switch to gold-backed currency, the price of gold (in fiat) would multiply.

You cant just multiply the CURRENT price of gold in fiat by its amount and say that its not enough to back a currency, because the number is low. Its analogous to your previous article - price in fiat is a dimensional constant. The number is arbitrary.

If there are x units of currency, and y kg of backing material, then after a government announces that it wants to back its currency with the material, the cost would jump to at least x/y of currency per kg (assuming 100% backing ratio). Previous price or usefulness is irrelevant, the sole fact that a government considers the material equivalent to its currency will give it the same value (expressed in the currency itself) - thats tautologically true, unless the government is not powerful or trusted enough to do fiat currency at all.

If US government said tomorrow that it considers 160,000 tons of gold equivalent to all dollars in existence (thats what backing essentially means), then gold price will necessarily jump to all dollars in existence/160 000 per ton, because thats what someone on the market (the US government) is willing to pay for it!

reader Tom Weidig said...

actually that makes gold much safer to trade as the buyer is more sure that it's gold and not something else!

reader JollyJoker said...

About Bitcoin vs. gold; bitcoins can be stored cheaply and transactions cost little, which makes Bitcoin as a system have value. (Can also be made internationally without going through banks, making it useful for illegal transactions.)

The problem, of course is that while being able to buy something costing $50 without transaction fees does have value to me, nothing says that $50 should be a millionth of a bitcoin or one million bitcoin.

One interesting idea I've been thinking about would be having a proof of work algorithm that requires doing actual useful work. If mining coins would mean doing protein folding simulations or rendering 3D graphics, someone would be willing to pay for what the network does. In that case, having the coins exchangable for using the (future) resources of the network would set a minimum value for them and get around the problem of wasting energy calculating intrinsically worthless hashes.

reader Luboš Motl said...

No, Dream Chaser, you are making a kindergarten logical mistake. If you don't have enough gold, you simply can't use it to "back the money up".

To "back up" a banknote means to promise that everyone who possesses a banknote may take the banknote, go to a prescribed bank, and obtain the "corresponding" amount of gold.

However, because we know that the bank doesn't have enough gold to give the gold for the banknote to everyone, it's very clear in advance that if people start to take their gold, the gold reserves will shrink, increasing the probability that they will be depleted soon, which further accelerates the people's efforts to pick their gold in time.

In effect, it's inevitable that sooner rather than later, the bank will run out of it gold, and then it has to break the promises because the banknotes are demonstrably no longer backed by gold because there's none. Whether someone continues to say that such banknotes are "backed by gold" is competely irrelevant - by that time, everyone who is not a *complete* idiot will know that it is just a government lie. But it's inevitable to go in that direction from the beginning.

reader JollyJoker said...

Well, if you think about it, this would mean that people with gold reserves would sell them off to the US at prices a thousand times what they previously were. The US would spend an amount of money comparable to all the USD in existence buying gold and no one would use gold for anything else again. You'd still have the fiat money in practice because the value of the dollar would set the value of gold.

reader Peter F. said...

Yes, money is just an in us (not in other animals) firmly genetically rooted, carved or eventually printed tangible symbol (except these days it can also be an electronically printable token) for/of our trust in, and trust in that others, too, trust in, its tradeability. ;-)

reader JollyJoker said...

Ah, but the limit for which sources of gold are worth exploiting would also go up, so a huge amount of resources worldwide would be wasted on digging up a useless metal. Nice!

reader HelianUnbound said...

I knew it! Lubos is getting wobbly on us. Now he's channeling left wing populist William Jennings Bryan: "You shall not press down upon the brow of labor this crown of thorns. You shall not crucify mankind upon a cross of gold."

reader Wm Sears said...

I'm surprised that you have missed the main difference between gold and paper. The government can, and does, run the printing presses when they want more money. This legal counterfeiting is just as damaging as the illegal kind and periodically leads to the horrors of hyperinflation. This can't be done with gold and represents its main attraction. Your comparison between the current value of paper money and the gold market is irrelevant since gold does not currently serve as money. The best solution is to get the state out of the money making business altogether and let the private sphere compete for this business as they currently do in other areas. Inflation is not a stabilizing influence as you present it but is a direct consequence of the printing press.

Rather than tell libertarians what they believe, I suggest that you read and quote their own words. This is a good website for that:


reader JollyJoker said...

I was thinking of Krugman ;)

reader Peter F. said...

"Money is like shit. Pile it up and it stinks. Spread it around and you can grow things."

reader Maznak said...

When it comes to gold price, I share your reasoning virtually 1:1 (and always have). I have yet to read the Citi paper and I will. So gold is "intrinsically" or "fundamentally" close to worthless. Now here comes the interesting part: how fragile is the price of gold, meaning resistant to some sharp collapse? There must be some kind of collective self-reaffirming mass psychology, propelling the bubble for the last 6 millennia. What would it take for the whole mankind to open its collective eyes and start getting rid of gold? I suspect that the critical mass of gold "believers" is quite small, say 20% - 30% (wild speculation) of population, to keep the bubble substantially afloat. And since it is not very easy to make 70 - 80% of the population "gold skeptics", I suspect that the bubble is here to stay for a while.

reader Luboš Motl said...

No, I didn't miss anything. The point - and it is already Buiter's point - is that this "difference" you quoted is a complete illusion.

The reason is that the intrinsic value of the gold is, much like the intrinsic value of the banknotes such as U.S. $100 dollar banknotes, pretty much zero - relatively to the wealth of the mankind.

In both cases, the much higher value - remotely comparable to the mankind's wealth - is only generated as "fiat". People believe that it has a value because the society imposes this belief on them. Children are led to think that gold bijouterie is 100,000 times more expensive than other, virtually indistinguishable bijouterie because everyone else says so.

A government that actively wants to support gold as currency depends on hyping the value of gold in this way. It has to force the people to sell their house or hard work - and get just a kilo of gold in exchange.

The government doesn't physically create the gold but if the government wants to rely on the commodity as a unit of payment, it has to create and sustain the illusion that it is very valuable. And it can only stabilize the value of gold - or inflation expressed in gold - if it actually owns a significant portion of the gold. And it is indeed the case now.

Buiter has mentioned the numbers. About 50% is actually owned as reserves by banks - that are "de facto" governments because the gold would be directly controlled by government if it decided that gold should be important enough. The remaining 50% is jewelry and only a small portion of that would be realistically recycled. So of course that coins would be just a small part of the government gold reserves, and so on, and the government would be forced to manipulate the people's opinions about what the value of the (otherwise nearly worthless) gold actually is.

To back most of the current economy, as I mentioned, the government would have to create the illusion that the gold is 100-1,000 times more valuable than it is according to the current market rate. Whatever promises would create this distortion would be 99%-99.9% equivalent to printing money with no value at all. Most of the declared value of the gold would be bullšit, and because the government would still have most of the gold, it could still "print" its wealth (as expressed in some more useful units of wealth, like houses and cars) just like it prints the U.S. dollars.


reader Gordon said...

I have my hundred trillion dollar Zimbabwe bill to remind me why your gold argument is flawed. Paper money is vaporware.

reader Luboš Motl said...

Dear Gordon, the point of this argument by Buiter, and me, isn't that banknotes aren't vaporware. The point is that gold is the same kind of vaporware, too.

reader Karel Strašný said...

The value of any currency is always determined by the trust of its users in the fact that it will be exchengable for other goods in the future.
It has applied to gold for thousands of years, it currently applies to US dollars.

But what is backing up this believe is that it is hard to fake. It doesn't matter whether this is accomplished by the nature or by "clever" bankers...

These day it is definitely more practical to carry a credit card rather than grams of gold that would have to be splitable to micrograms at current prices.
On the other hand how clever the central bankers are was recently demonstrated by Fed, ECB, BoJ and even our CNB...

reader Swine flu said...

Some libertarians seem to associate the modern welfare state with what they see as excessive inflation rates by historical standards. Hence their desire for more stable currency. I don't understand enough of these matters to judge their proposed solutions.

reader Luboš Motl said...

Thanks for the synergy, Mažňáku, and an excellent direction for further research. ;-)

As you know, one has to know about the elasticity of the demand and things like that.

A certain size of the difference between the supply and demand induces some change of the price, and along with the rate of trading gold in the real world, it must lead to the oscillations of the magnitude we observe. So much so good, general clichés.

Some traders are momentum traders, some are fundamentalist ones with various psychological ideas about the fair price.

But now, if all the demand and all the supply is speculatively driven – no real "consumption" is here to talk about – it must imply some special features of the price dynamics.

My guess is that this special condition means that the evolution of the price - more precisely of ln(price), the logarithm - is much closer to a Markov process, a random walk.

For other things, there are some regulating things, so the evolution will resemble oscillations around a slowly changing function. If something goes up or down terribly in a decade, it's likely to revert in the following decade.

But for gold, I think that this anchoring doesn't exist. So if the prices double, they may double again. If they quadruple, they quadruple again.

At each moment of time, the distribution of gold owners' opinions about the fair gold price and fair motion must adapt, and because there's no natural "finite scale" to anchor the prize, the situation must be pretty much Markovian.

The Markovian character may be trusted to arbitrarily low prices, I think. At high prices, however, there is a cap because average people won't be willing to pay most of the things they pay for gold. At some level, not too much higher than today's price, further increases of the price would be discouraged.

So I think that the evolution of the price will resemble a random walk bounded from above, which is effectively the same thing as a random walk guaranteed to be down, ultimately. At each point of time, the owners of gold will adjust their opinions about the fair price, but their ratio will keep on dropping.

reader gadfly said...

Motl, you get almost everything in this post correct, except your claims that gold is or should be worthless and that a central bank mindlessly hording gold woul increase demand for it. Gold has intrinsic value, obviously, aesthetically and the fact that it's used in some electronics products indicates it sometimes is the best metal for a certain purpose. But, seashells have intrinsic value too, as many people find them pretty and they are sometimes used in making certain types of building materials. But, no one's calling for a seashell standard.

On central banks hording gold, yes the price of gold would increase, ceteris paribus, but that means demand would go down somewhat in response, depending on the price elasticity of demand.

You deserve particular credit for mentioning NGDP targeting as one possible superior non-discretionary monetary policy approach, which would be more suitable than simple inflation targeting for sufficiently diversified economies.

reader Luboš Motl said...

Right, I hate when high inflation is tolerated, too.

But inflation expressed in gold was demonstrably hugely fluctuating, and therefore ill-defined, and there is no way to tame these oscillations without a risk of a complete collapse of the system.

The people-believed price of gold, if expressed in a "basket of products", may simply drop to 1/2 of the current value, or it may double, if people find some extra applications for gold, or some other reasons. If the relative price of gold and products (i.e. the inflation rate expressed in gold) were artificially held constant by some law, there would be a clear looming instability - sooner rather than later, the government would either run of gold if it were offering it for things too cheaply; or people would get rid of all their gold because they would get too much for that, and they would stop buying it (selling products for gold). In either case, the exchange involving this currency would come to a halt.

All promises that "something X is backed by something else Y" if it clearly can't be backed because there is not enough Y are silly government lies of the kind that we would know during communism. It is extremely bizarre that some Libertarians are those who don't understand the emptiness and invalidity of similar lies. One simply can't build an economic system on lies.

reader davideisenstadt said...

some thoughts...the value of anything is only that which someone will pay to possess it. gold's value is determined by the (irrational perhaps) feelings and desires of billions of people, and the experiences and prejudices accumulated over thousands of years.I think that ts important to remember when looking at the statistics associated with gold for the 20th century that the price of gold was fixed by the bretton woods agreement until the early 70's.
I also believe, that if you look at what an ounce of gold would buy, from the early 20th century to now, that its been relatively constant...a good suit, ten barrels of crude oil, and so on....
the main difference between gold and a paper fiat currency is who determines the supply of the two, and how the value is determined. Im not sure which of the two is better.
I always say...any tout who is selling yo gold, usually accepts fiat currency as payment-I think we know what that means.

reader Maznak said...

Indeed people's expectation about other people's psychology is an incalculable exercise... especially when there is no anchor. When it comes to company shares, at least you have some kind of anchor: you can run some models and scenarios and decide about "fair" value, at least in your opinion. Therefore I strongly believe that diversified portfolio of common stocks (that were picked up with some common sense, but even random pick is ok) is the best strategy to increase and preserve wealth. You at least own a piece of "something" productive, people working, research and development going on etc. It seems to me that human efforts is nearly the only thing of "real and lasting" value.

reader Maznak said...

Define "pile it up" and define "spread it around" please.

reader davideisenstadt said...

eh...the theory of value...something is worth only that which another will pay for it.
real estate....antiques...art...gold... Zimbabwean dollars....beanie babies.
worth is determined by the buyer lobos. what you or I think isn't really germane, unless we want to purchase the item in question. gold derives its value from pan cultural tastes...not necessarily rational thoughts.

reader Tony said...

Why don't all the central banks sell all of their gold?

reader Luboš Motl said...

Dear gadfly, thanks for your feedback and right, when a price goes up, the demand goes down. I am pretty sure that I have written nothing that would contradict this observation. ;-) When the demand goes down, however, it doesn't mean that the price will return to the original value. The gold on the market is still more scarce than before, so some of the price increases has been justified and won't be reverted.

True, some value as jewelry, but not too different from bijouterie or gold-coated iron or anything else of the sort - which is 10,000+ times cheaper than full gold. He didn't mean that the intrinsic, usage-based value is strictly zero. It's just negligible relatively to the current market price.

NGDP targeting looked clever to me when I read about it in the context of Sweden a few years ago. It would be great to impose it totally automatically, so that the central banks don't have any freedom and they don't screw anything. I am confident it would work well even during crises etc. A 4-percent nominal GDP growth in Czechia would be a great target.

reader LB said...

One odd thing is to consider Greece. What's Greece got to do with gold backed currency?

Well, you can't print Gold, and the Greeks couldn't print Euros. It's exactly the same set up. So if you were a Gold bug, you would think that Gold prevents governments getting into a mess. Except that's exactly what the Greeks did.

The reason is debt. The Greeks took in money for pensions, spent it, leaving no assets by massive debts. Then they couldn't print to get their way out, and went tits up. In fact printing doesn't get your way out, because you can't print your way out of inflation linked debt unlike fixed rate debts.

It's crap government that's the issue.

reader Karel Strašný said...

well, the EU butter case is idiotic, I agree with you on that since it is (or rather was) called "Pomozánkové máslo" and not "Máslo".

The way I see it the net neutrality is actually a plan to define the "Internet connection" as I have described it above (and the definition should end there).
That means that the internet is just a transport service blind to content.

It just means that if I buy 1Mbps it depends on me how I use it (assuming I am not violating other laws).

reader tybur said...

The very notion of "intrinsic value" is wrong. There is no such thing. You cannot say that gold is "intrinsically worthless" while something else isn't because there is no way you can "objectively" assign value to any object. People are the sole source of value of any goods. Different people value different things, be it entertainment, alcohol, shelter, fame, company and admiration of others, knowledge, sleep, solitude, asceticism and so on. Contrary to what the author of the linked blog post states, there is nothing "intrinsically valuable" about industrial metals as well - or of anything at all, for that matter. The author argues that e.g. copper is intrinsically valuable, while gold is not, because it is used heavily in industry, electronics etc., but that does not prove anything - the only reason the industry exists is because there are people who have certain needs that can be satisfied by its products. Following this reasoning, copper wouldn't have any "intrinsic value" 10000 years ago when there was no knowledge to utilize it (so the "intrinsic value" of an object is not an objective feature of it), neither it would if people didn't prefer a comfortable modern life to living in the wild without technology (can you say that the sets of "intrinsically valuable" goods are identical between "our" society and e.g. the Amish?). The value of a good cannot be established without the context of the surroundings, economy, society and agents participating in it - because that is what shapes and drives the needs. Mining gold in order to obtain a resource which can be stored for future exchange of desirable goods/services or aesthetic purposes is not, by any objective measures (since there are no such), "less rational" than engaging gigantic industrial processes and workpower to obtain and transform natural resources with the purpose of producing cars, TVs, computers, video games, books etc. Neither of these are necessary for survival, they serve the sole purpose of satisfying people's wants, which are subjective by nature.
Ultimately, the only reasonable way of defining "intrinsic value" of a good would be to average the demand for it across all agents in a given economy. But guess what - you end up with the market price, concluding that gold is "intrinsically valuable" as well. It's simply a wrong concept.

reader Karel Strašný said...

100Mbps was meant as my personal maximum allowed by the contract.
The rest are just insults...

Yes the ISPs are working with expected loads, but they actually have to have necessary capacity to cover at least guaranteed capacity, simply because they might end up paying huge fines+damages in case they are not able to deliver.
And sometimes they even have to have multiple backups if customer are requiring high-availability...

There is simply no way around that - you can have whatever statistics you want - and that is why guarateed connectivity is usualy quite expensive.

As for the electricity analogy:
The big consumers actually have contracts when and how much they want to consume. There are fines if you go above or below the negotiated value.

And for the last paragraph I find narrow minded people equally dangerous... Not everybody who disagrees with you is a communist ;-)

reader Swine flu said...

I don't recall just how close the subject is to this particular post, but I finally remembered the name of a 45-minute youtube video that a libertarian acquaintance of mine was big on a few years ago. It was "Money as debt", and there are parts 2 and 3 as well that were made later. Here is part 1:


reader Tony said...

Right. Since then UNB Governor supposedly said that there is very small amount of gold left and was criticized/sued for that and some currency trades.

In the period 2010-2013, (table at the link below), Ukraine has been consistently selling (transferring?) gold. Its gold reserves dropped for about the same amount that Czech Republic reserves increased :-0


reader emmaliza said...

Please read a book on the history of money. The best I have found is Steil & Hinds "Money, Markets & Sovereignty". You will then have a grasp of the push to return to a silver/gold monetary standard, which prevailed until 1972.

reader lukelea said...

Dear Lubos, Can't one use the same principle of induction upon which science is based to infer that because gold has had exchange value in so many places for so much of the past six thousand years, it is reasonable to expect that it will continue to have exchange value in the future? One cannot that to the same degree with paper currencies due to past experience.

Which is not to say that I favor a gold standard by any means.

reader Tony said...

I once read a story about a guy from Bosnia during war in then Yugoslavia. He claimed that you could easily buy a weapon for a pack of cigarettes or a bottle of booze.

reader Tony said...

Damn, for me it has become impossible to read this blog from a mobile device in the US. I have both Chrome and Chrome Beta on my Android device, with AdBlock installed. I get redirected to:
x.vindicosuite.com/imp/?l=numeric gibberish
as soon as this page loads.

No such issues on desktop. Anybody else? Suggestions?

reader RAF III said...

There is also an amusing analogy here. The Austrian school views the notion of 'intrinsic value' in much the same way as Lubos views the notion of 'hidden variables'.

reader David said...

A useful proof of work for Bitcoin is probably impossible because Bitcoin is decentralized, so there cannot be a central authority issuing problems for the miners to work on. More importantly, blocks must be strictly ordered such that a new block cannot be mined, not even partially, without knowledge of the previous block. Protein folding or any other known useful calculations do not have these essential properties, but random hashes do.

reader Luboš Motl said...

No, you are completely misrepresenting the goals of your movement.

The goal isn't that you may buy this product, a blind Mbps. Your actual goal is to *ban* all other products. That's why you are a warrior against freedom and capitalism.

reader Luboš Motl said...

No, you are detached from reality. All such considerations must always be evaluated using statistics.

Fines may be high but they are much smaller than the price of extending the Internet lines to the "worst scenario" and the inverse probability of the "worst scenario" is even larger than the fines which is why certain unlikely possibilities are and must always be neglected.

reader Werdna said...

Ha, yes, I will use this analogy when I write my book on economics for physical scientists.

reader RAF III said...

The argumentation on both sides of these two issues is also similar, as shown in this comment and reply: http://motls.blogspot.co.uk/2014/12/gold-6000-year-old-bubble.html#comment-1734037934 (just above).

reader Karel Strašný said...

Well the statistics are quite clear in this case.

Simplified example: I have 10 customer each with guaranteed 100Mbps connections (SLA 99,999) that implyes at least two independent 1 Gbps lines to the datacenter...

It does not matter whether they are using it all or not, the capacity must be there at all time.

I would love to see how you would explain an outage to a customer if they are paying huge money to avoid it.

reader Karel Strašný said...

Well those are 2 sides of the same coin.

I hope you agree that monopolies are not good for free markets.

Any kind of FB-only, Google-only and similar products are actually supporting creation of monopolies.

Just look at the "Internet lunch menu" below. What would it take to get on one of those item?
You really think that small companies will be able to get there?

reader Karel Strašný said...

And as I said before I would not go as far as actually banning these product... Just please don't call them "Internet connection".

reader OneGiantDickToRuleThemAll said...


reader NikFromNYC said...

There's more chance that gold will find greater use in catalysis and nanotech than any big new source of gold extraction will appear in the next century. As a chemist I'm quite fond of gold staying as cheap as possible, not locked away in vaults but being used in devices and reactions. It's one of the best coatings for self-assembled monolayers with great potential for continuing advances in synthetic surface chemistry. Cheap gold will benefit economies greatly by allowing inventive chemists to indulge in its unique properties to create device advances. It helped allow surface chemistry to rapidly advance by convenient sputter coating of cheap silicon wafers outside an expensive clean room, and now electron microscopes are $70K instead of $700K and the gold can be surface patterned with mere microscopically detailed rubber stamps, with most any chemical groups in the stamped area followed by any other group filled into the unstamped area. Such microcontact printing of perfectly flat surface chemistry on any exposed benchtop allows creative tinkering by thousands of creative people who now have catalogs to buy the long chain sulfur organic chemicals to custom design surfaces. There simply are very few readily sputter coatable cleanly noble metals to replace it.

-=NikFromNYC=, former Whitesides postdoc @Harvard

reader Luboš Motl said...

No Internet service used by a large number of consumers in the real world does any planning with these worst case scenarios that you describe in your another idiotic comment.

You clearly *are* a spoiled brat who thinks that he is entitled to have anything, for the same cheap price, and you just don't care how they do it for you.

reader Luboš Motl said...

I surely disagree - and have made it absolutely clear very many times - that the things that *you* and similar commies call "monopolies" are almost always beneficial for the markets and for the consumers.

There is nothing wrong about a service that connects one to Facebook only, or Google services only, and if you call the existence of these products "a monopoly", then the freedom to create such monopolies is an essential condition for free markets to operate.

reader Marcel van Velzen said...

“Otherwise people will either horde it and never spend it;” people don’t live forever and have to spend the bitcoins at some point and also Bitcoins are ONLY useful when being spent.

“or, on the contrary, they will get rid of it and never get it again” if you get rid of bitcoins someone else gets them in possession so that’s not a problem.

“It's very important that the unit used for payments has a constant - or predictably, mildly changing - value.” If you believe that, start your own crypto currency: luboscoin. Contrary to fiat that are issued (as debt) by a centralized entity (remember: central banks) Crypto currencies represent free market money, and you as a defender of the free market should embrace them. Bitcoin will save capitalism.

Have you read the white paper on bitcoin (where the byzantine generals problem is solved) by Satoshi Nakamoto?

reader Luboš Motl said...

They clearly are Internet connections which is why I will call them Internet connections.

reader Luboš Motl said...

Exactly because people don't live forever, it's important for the medium in which they store their wealth to have a largely predictable value in the future (relatively to things that people need in their finite lives).

Of course that I have summarized the basic technology behind a Lubošcoin. It's vastly superior relatively to various Bitcoins. But I am not sufficiently excited by the project.

The concept "free market money" is an oxymoron. Something may only serve as money if its value is given externally and is unaffected by events that occur on the free markets. If someone "privately owns" the system of payments he wants to call the money and if he can manipulate its value, then this system lacks the objectivity and impartiality that is needed for consensual sides to make transactions.

reader Karel Strašný said...

Well, you have just demonstrated that you don't know anything about high-availability systems...

Also none of the 1 million small users is guaranteed to get the maximum capacity on their contract. And that is what I was talking about all along.

On the other hand there are users who have these guarantees simply because it is cheaper for them to overpay on capacity then face highly unlikely outage.

reader Luboš Motl said...

Right. That's exactly why it's important not to restrict these entities connected to the Internet by "net neutrality".

reader Karel Strašný said...

It seems that you have trouble with reading the text...
I said that the products would support creation of monopolies...

I personally don't care whether FB is monopoly or not. And I would actually say that at this time it is not a monopoly.

I just can see the point that if ISPs start offering FB-only products it will be more difficult for any competition to enter (in this case) the social network market.
Or it may actually be more difficult to create a new market.

Of course all this depends on how popular these products would be.

But I would very much not want to end-up with the offers that look like a lunch menu.

That is my point of view and no amount of empty insults from you is going to change that.

And one more thing:

free market is not anarchy...

reader Marcel van Velzen said...

Lubos, you do understand that the bitcoin protocol is COMPLETELY open source and at the same time safe and DECENTRALIZED because of that same protocol? I get the impression that you think someone or some company owns bitcoins and determines the value of bitcoin. The value of bitcoin is determined by the free market. Anyone is free to make changes to the software but you have to convince the majority of the miners (normal people like me) to accept your changes.

reader davideisenstadt said...

pile it up means that you have it...spread it around means that I have it....

reader Karel Strašný said...

Traffic shaping is imho not the same thing or part of net neutrality idea.
The way I understand net neutrality is that I get an IP address from my ISP
and that is the level at which traffic shaping is done.

It does not matter whether I put TCP on top of the IP header, UDP, or my own protocol that I invented and decided to test.
That is my business to decide what traffic has higher priority.

reader Dream Chaser said...

I dont think such unconventional connections should be banned. So if that is what some net neutrality advocates want, then I am certainly against that. Heck, I would probably welcome a service where real-time applications (skype, gaming) get higher priority at ISP level.
What I want is to ensure that there as at least one neutral connection available for the end user. What other arrangements are possible does not matter.
And maybe the regulation is premature in EU, contrary to the US we dont have any blatant violations of net neutrality yet.
But if we ever come close to what is depicted in that picture then I would not have any problems with regulating it away.

reader Luboš Motl said...

Dear Marcel, something's being "open source" or "decentralized" doesn't make it fair, it doesn't make it usable, it doesn't make it stable, and it doesn't give it any intrinsic value.

You may say that the value of the Bitcoin is determined by the free markets but every value of a Bitcoin different from zero only measures the amount of mass hysteria and brainwashing because the intrinsic value is zero.

As the graphs of the value of the Bitcoin show, the value is indeed oscillating by a factor of more than 4 within a year as various fads and good news come and go. Needless to say, all the people - and especially those "working" on the Bitcoin - can influence all these things.

When a Bitcoin champion founds a new forex exchange for Bitcoins, or convinces a friend in a shop to accept payments in Bitcoins, the value of the Bitcoin goes up. When someone tells a government to ban the Bitcoins or reduce its legal status, the price of one Bitcoin goes down.

These are not speculative scenarios - these are actual descriptions of events that are happening around the Bitcoin all the time and that are responsible for almost 100% of the frantic changes of the price of one Bitcoin.

Virtually all of these changes are artifacts of bureaucratic and special-interests interventions. Unlike the price of oil etc. that measures the actual supply and demand of something that is used, 100% of the numbers describing the value of the Bitcoin is socially engineered hot air. Everything about the value of the Bitcoin is bogus - depending on governments' and Bitcoin champions' and their friends' interventions and no sensible person would switch to this unit for the main payments in the real economy.

You are completely insane if you compare the irrelevant piece of software with the model of of leptons. It's just one generic computer program among thousands of similarly important programs that were written down.

reader Marcel van Velzen said...

Man, stop talking about the price and go and read the goddamn paper!

reader Luboš Motl said...

I have seen the paper but I won't look at it again because I don't give a damn about this stupidity.

The Bitcoin, as the name indicates, is supposed to be a "coin", a unit of a new currency, and the *price* and its evolution in time is the only thing I really care when it comes to any currency! This is the only rational approach.

I used to play Mafia Wars, and other computer games, and there are also "game money" in these games. What's the value of this money in real-world dollars? I think that I enjoyed the game for a few years but when I stopped clicking a year ago, nothing changed at all. The price of the Mafia Wars money was zero even for me who would play it for years. It's much clearer zero for the people who don't play it.

Your idea that the Bitcoin has a big value - and the paper describing it is very important as well - is just in your head. The Bitcoin movement is a religious cult and you should understand that new religious cults are extremely unlikely to absorb a majority of civilized nations.

So I won't read the crap again, OK?

reader Luboš Motl said...

One more comment about your claim that it is "decentralized" and "no one owns it".

The current number of Bitcoiins in circulation is about 13.5 million:


Multiply it by $351


the current market price of the Bitcoin

reader Marcel van Velzen said...

Lubos, just one example and then I'll just give up: "something's being "open source" or "decentralized" doesn't make it fair, it doesn't make it usable, it doesn't make it stable, and it doesn't give it any intrinsic value." I said that bitcoin is open source and decentralized AND SAFE. That's the big thing! It is completely open AND double spend safe, that is the HUGE thing and the invention in the paper.

reader Marcel van Velzen said...


reader Gordon said...

I think your view of the support of the dollar is not rational---whether or not gold has value intrinsically, it is a commodity. You can't eat it, like food, but it can't simply be conjured up as a bunch of electrons on the internet. Central banks believe that they can simply keep printing $$ and injecting it into the system without collateral, and, if they get in trouble now, they have lobbied govts to pass laws that they can confiscate depositors' accounts. Investment banks like Goldman/Morgan have floated infinite junk derivatives and flagrantly and fraudulently worked both sides of the trade and colluded with ratings agencies to rate junk as AAA. Read some of Matt Taibbi in Rolling Stone--yes, he is left wing, but he is right (:) ).
Zimbabwe was just a more crude cartoon of the present economic situation---it happened in Germany as well (Weimar Repub).

reader Gordon said...

Lubos---the intrinsic value of the dollar is also zero. At least Bitcoin is limited to a max of 20 million to be issued (I do not have bitcoin and think it too risky). Russia and China have been loading up with gold, as btw have Central Banks recently. I am not by any means a goldbug, so I am not going to argue this further.

reader Luboš Motl said...

Dear Gordon, to say that the dollar's intrinsic value is zero may be true from some totally abstract viewpoint.

But from any real viewpoint, it is the opposite of a tautology, a self-evidently wrong claim. One U.S. dollar is the most accurate unit to measure value in the world of 2014 and everything whose value is measurable may be expressed in U.S. dollar, so saying that the intrinsic value of the U.S. dollar is zero involves saying that the value of everything is zero.

I am not interested in similar meaningless interpretations of the phrase "intrinsic value".

What's more important is that within the next 20 years or 50 years or any other future that makes sense for a human being's planning, I can predict what may be bought for N U.S. dollars with a good accuracy because there exist well-known mechanisms that stabilize the value of the dollar relatively to other things - i.e. the inflation rate.

Nothing like that exists for the gold.

You also seem to implicitly embrace the misconception that the physical printing of the U.S. dollars automatically creates inflation. Trillions of dollars were printed in recent years like mad but there's no inflation because inflation can't be calculated by simply counting the number of coins or banknotes in circulation, in striking contrast with the opinions of crackpot economists obsessed with gold or Bitcoin standards. If one only prints 10 trillion dollars and keeps them in the basement, it doesn't change anything whatsoever about the prices of things - about inflation. Things may only be changed if the new money is forced into circulation - if they're borrowed - and whether they're borrowed depends on the interest rates and other conditions, not on the number of printed banknotes!

You may repeat 100 times that gold is a commodity and can't be printed. But no one questions that. The material in 1 ounce of gold which is worth $0.05 like some better iron isn't the source of the controversy; the remaining $1199.95 which is added by the collective human stupidity is the problem we are talking about here! And this value-added-by-hype is printed in analogy with the printed U.S. dollars.

reader Luboš Motl said...

By the way, I want to say that I found this introduction to the Bitcoin


extremely informative and well presented. It not only explains why the Bitcoin is nonsense - and unusable for loans or payments. It also explains all the positive things, how the mining works and how the transactions are completed and what the logs contain, and so on. And it spends quite some time with the 51% problem of the Bitcoin. Most of the valuation of the world's Bitcoins isn't backed by any real inflow of capital. When people run for the exits, it will be ugly.

The Bitcoin dropped by 40% since the video was shot.

reader Gene Day said...

Gold has many vital uses already. Radar systems, for instance, have seen performance/cost improvements of at least three orders of magnitude through the use of gallium arsenide, which requires gold alloys for electrical contacts. Soon, all automobiles will have collision avoidance systems, which require gold both for radar system and for reliable circuit connectors. Without gold, our lives would be considerably poorer already.
Fortunately, most of the applications that you envision require only small amounts of the metal. Platinum, which is rarer than gold, has led (via exhaust catalysts) to essentially clean air in our cities. And catalysts can be recycled!
Needless to say, I am as excited about the upcoming benefits of gold as are you.
Incidentally, if you look up the phase diagram for gold-nickel alloys, you will see the diagram taken from my 1959 MS thesis.

reader Luboš Motl said...

Cute, Gene. Have you tried to calculate how much gold is actually needed for the contacts in the radars and other applications you can think of (in the whole world) and how it is compared with the 160,000 tons that have been mined? ;-)

160,000 tons is 160 billion grams which is 20 grams per every human on Earth. I guess that everyone could safely afford a radar system.

Gold is not *that* precious.

reader cynholt said...

I wonder if the people against gold are also against health insurance and fire insurance.

reader cynholt said...

The Swiss have CERN. They can assemble particles into any sort of configuration at will.

Of course, doing it one-atom-at-a-time is a really slow way to make gold.

reader cynholt said...

Gold has always been, and will probably always be, the canary in the mine of fiat currency production. The fiat masters cannot allow that canary to sing too loudly, even if it means killing the damn canary to keep it quiet.

reader cynholt said...

Don't forget, history is full of debased currencies. They can't help but debase as they grew too big for their britches with war, usually. Conquest is expensive, occupation more so.

Want to end the gold farce? Line up the war profiteers, banksters, and shoot them dead like they used to do? There, all fixed.

reader Gene Day said...

It’s been many years since I was actively involved in GaAs technology but I am certain that a tiny fraction of the available supply will be needed. An electrical contact one micron thick and one millimeter square would require one kilo of gold for 50 million devices and the actual geometries are apt to be even smaller, especially thinner.
These are not logic devices needing billions of transistors; they are discrete amplifiers and oscillators. Phased-array radars are probably the most demanding but it is a certainty that we will run out of gold about the same time that we run out of silicon.

reader Fer137 said...

A bubble without exchange of information among its participants? It makes no sense.
Think in cultures disconnected for millennia as the pre-Columbian America etc. They did not consider it as painted iron.

Moreover gold is one among other precious metals. The most famous. But for example in 2010 rhodium almost triple the price of gold. http://www.infomine.com/investment/metal-prices/
'Paradoxically' are a relatively high percentage of so-called nuclear "waste":

And of course they have many uses for their outstanding physical and chemical properties. For example the most ductile metal is platinum and the most malleable metal is gold, among many other things.
Despite its high price 12% of the gold is used in industry, electronics, etc. If they were cheaper have very many common applications. In high energy physics they can afford ..counted in atoms: https://www.google.es/search?q=RHIC+gold&espv=2&biw=1309&bih=652&source=lnms&tbm=isch

reader anony said...

Lol! Homo-sapien bubble

reader Marcel van Velzen said...


reader Rafal Smigrodzki said...

Luboš, you may want to read some of the discussions of money theory on Unqualified Reservations, including the notion of anomalous demand, the explanation for the demonetization of silver, the possible price of gold if it was re-monetized. Also, read Milton Friedman's work on gold, with assessment of the economic costs of remonetization. You seem to dismiss gold without referring to available publications that already addressed your objections.

reader Luboš Motl said...

Sorry, I don't need to see publications and I don't recognize "Holy Scriptures". Issues like that may be settled pretty much by pure thought, and if Milton Friedman ended with wrong results, well, then he was wrong.

reader Coldish said...

Hi Lubos, for a long time I couldn't comment on your site from my home computer, but seems OK now. I have read recently that Russia has been converting its income from hydrocarbon exports into gold. This sort of makes sense as the price of hydrocarbons in dollars has been falling, the ruble has been losing its value against the dollar, and the price of gold in dollars has dropped about 30% from its high point . If this process continues will Russia end up with almost all the gold? Apart that is from the gold held by China.

reader TomVonk said...

Well there is a reason why gold is special and why it had and has a rather large ("large" being relative here) intrinsic value since some 6 000 years.
Gold was arguably the first metal mankind found and used.
The engine behind its use is the mankind's love of enhancing our physical looks by beautiful external supplements - bones in the ears, disks in the lips, shells in the hair, paint on the face - which I am pretty sure has been in our genes for dozens of thousands years.
The biggest disadvantage of the above implements is that they didn't last for a very long time - they oxydate, break, loose color.
So as archeology shows us, long before gold was used as currency, it was used to enhance our physical looks in a way that lasted forever and could be easily changed in new and creative ways (because of the ductility).
In addition one must be honest - be it 4 000 BC or 2014, no other metal beats the shining, warm yellow glow of a massive golden necklace.
That's why the biggest part of the produced gold goes to jewelery production where its price is perfectly given by the demand for golden jewelery (60% of the world's market in India and China alone).
The part of the so called investment gold is just superposing from time to time a very large volatility over a rather well balanced trend coming from the jewelry market and industry (10% of the demand).
Regardless whether banks want to hoard gold or not, the intrinsic price of gold is given by what a woman (yes the crushing majority of the jewelery market is female) is ready to pay for an authentical golden necklace or an earring.
This was a pretty high price 6 000 years ago (I guess they were paying in barter back then), is still a high price today and given the global increase of the female population, I expect it to stay "high" (e.g similar to today) for the very far future too.
The same could of course be said about diamonds and rare gems - their price is largely dictated by our wish to improve our looks by beautifully worked enhancements and here too it is the jewelry market dictating prices.
I have some gold, made quite a large profit on these markets and am 99,999% sure that its price will not be zero during my life neither many centuries beyond.

reader Luboš Motl said...

Dear Tom, copper has been known for 6,000 years, too, wasn't it?


Is there some evidence that actually justifies your claim that gold was the first metal mankind knew and used, or do you agree it is just a legend?

reader Vangel said...

I find it remarkable that such an intelligent individual as Mr. Motl can be so illogical and so ignorant of monetary history.

Let us begin at the beginning, which in this case is the definition of fiat money. Unlike commodity money, which is based on a fixed AMOUNT of a metal like gold or silver, fiat money is a currency that is not backed by anything and can be created via a printing press or computer key stroke. The VALUE of that currency depends entirely on faith in the government that issues it.

Did we get that? Fiat money is a currency by decree. It comes about because of government regulation that creates it and makes it legal tender. Commodity money is not a currency and does not have to be created by government or backed by government decree. Once the metal content of a coin is known people that exchange that coin for goods or services are able to attach a value that is primarily based on past purchasing power. They can even use a substitute such as a note as long as the note is issued by an institution that can back it up with commodity reserves as used to be the case in the US prior to 1913.

What Luboš does not say is that people freely chose to use monetary commodities rather than fiat money throughout history because they want to protect their purchasing power from confiscatory governments. And savers do matter. Unless they are protected by a sound monetary system they become prey for governments and institutions like Mr. Buiter's employers as they get rich from the benefits of access to newly created money first. Now I do realize that a physicist may not be knowledgeable of the Cantillon effect but I expect anyone who comments on a topic like monetary theory to have some understanding of it.

Luboš seems to have trouble with the idea that value is subjective. But that is as much of a given as the laws of gravitation. We all value different things differently not just from other people but from the way that we used to at different points in our lives. A young teenage boy attaches a different value to a night with a supermodel than a gay 60 year old man. A middle aged woman may not give it a second thought when she forks over $500 for a ticket to see Michael Buble but her husband may not want to attend even if the same tickets were $50 a pop. My kids love rap. I do not have the same attraction to it. A fisherman values a loaf of bread more than he does one of his fist and exchanges it with a baker who values the fish more than he does the loaf. That is how exchange works; both sides value what they give up less than what they get. We use money as an intermediary so that we do not have to find someone who has exactly the same good that s/he wants to exchange for what we are offering.

Sorry Luboš but you are barking up the wrong tree. You see nothing wrong with using the force of government to rob savers of purchasing power and providing a small group of institutions absolute control over the creation of money and credit. When that happens all you get is a system that transfers a great deal of wealth from the many to the few without the need for those few to provide real goods or services in a free market environment. Libertarians, who actually value both social and financial freedom and who believe that government should not be able to intervene in voluntary exchanges, take a moral as well as a practical stance against fiat. The fact that you can't understand is puzzling.

reader Vangel said...

Gold was not used to make implements. Its highest value is as money so that trade can take place more efficiently. You may want to look up Karl Menger or Murray Rothbard for an explanation. If you wish I can provide you with a link to free PDF and ePub format books on the topic.

reader Vangel said...

You are not understanding the issue my friend. The highest value for gold and silver is their use as money so that is why they have had such a long history of acceptance. Fiat currencies do not meet all of the requirements that a sound money needs, which is why they lose purchasing power and destroy savers and workers.

reader Vangel said...

I would hardly consider Friedman as a credible source for this discussion. Like Luboš he thought of gold as just a commodity and predicted that when its link to the USD was severed its price would fall to around $16, which was the VALUE of it as a dental material. Instead the average price at the 1980 peak reached $650, which was more than 10 times higher than the time Friedman predicted that it would fall by 50%.

Friedman is a monetarist. He saw nothing wrong with a central bank having a monopoly on the creation of money and did not like the idea of commodity money imposing discipline on the banking system as it did during the Classical Gold Standard period.

reader Russell Byrd said...

Just saying hello as I don't post here, as I am not a troll like you, but I just happened to find this article with your stench rising from it. So, . . .

reader Luboš Motl said...

Dear Vangel,

governments - more precisely central banks - may print money and they are indeed doing so all the time. As both experience and a correct analysis shows, however, that doesn't mean that the value of this money goes down. The value of this money only goes down if it is cheaply pumped into the circulating system - not at the moment when it's being printed.

By lowering the interest rates - giving loans cheaply - the central banks may ignite inflation and reduce the price of money. But what's important is that such a loss of value is equally likely - as everyone who understands the policies and logic of the central bank - than the manipulation of the price of a commodity by someone who controls it and enforces its official status.

What Luboš does not say is that people freely chose to use monetary commodities rather than fiat money throughout history because they want to protect their purchasing power from confiscatory governments.

This is exactly as stupid as saying that people were using smoke signals to communicate throughout the history because they were afraid that their wireless telephone calls could be eavesdropped by the CIA.

People weren't using modern fiat money before the 20th century or so because they hadn't developed the concept and infrastructure, they didn't even know that it was possible, just like they didn't have cell phones in the 18th century.


reader Luboš Motl said...

I am sorry, Russell, whether I agree or disagree with you can't change the fact that your comment is surely the by far more troll-like one.

reader Russell Byrd said...

I can say the same thing about you, and can offer the proof. You own reply. It has no probative or intellectual value, and is certainly off-topic. I only dropped by to say hello to one of the most offensive trolls on the internet. He is a overtly capitalist bully that will trade posts based on falsehood until a blog falls apart completely. He claims to be an anarchist, which makes his love of money seem rather bizarre.

So, you should be happy that you won't hear from me again, but I can guarantee, if you don't agree with your dear Vangel, you are in for a rough ride.

reader davideisenstadt said...

weh...easy for you to say milton friedman was wrong....

reader Marcel van Velzen said...

It's extremely funny that the day after you post these crap videos your
favorite company Microsoft, the second largest in the world, starts to
except bitcoin. Go read the bitcoin white paper!

reader Coldish said...

Here is a link to an article about recent Russian gold purchases:

reader Gordon said...

Well, Cynthia, there was that huge Maple syrup heist afew years ago in Quebec...

Re: McDonald's and sawdust---correct, they add sugar, salt, bread, and, if in China, melamine.

reader Gordon said...

Actually when copper oxidizes, it is prettier---the teal green sheen is prized.
Re: gold and currencies---We can talk again when the currency crashes or gold is $16/oz.--til then trying to present valid arguments to the other side results in "talk to the hand".