H.J. Huneycutt

Gold Loses Its Shine

Gold is a commodity and just like all other commodities, it's price is subject to broader supply and demand trends. Using gold as a currency is, in a sense, similar to using any other commodity. There's no reason you couldn't use pork-bellies or corn as a currency. Of course, there would be some big problems with using either of those in modern American society and there are actually reasons why gold is the best commodity to use as currency.

You speak of the fact that gold has no practical use. Well, technically it does have a few uses and it's popular for jewelry applications. That's why it has value --- there is demand. In this sense, it's no different than any other good out there --- if you offer me a cow for $10, that cow may have a useful value of $0 to me as I'm not a farmer and wouldn't even begin to know what to do with it. However, someone out there does want the cow --- hence even if it has zero worth to me, it has worth to someone else, hence creating an objective value. If that cow is worth $100 to most farmers, I might jump at the opportunity to buy it at $10 even if I have no real use for it personally since I can make a $90 profit selling it to someone else.

Now that we've established why gold would have objective value, the next question is why is gold better suited to serve as currency than other commodities. The answer, ironically enough, is its limited applications. If we used palladium as a currency, for example, our currency's value would radically fluctuate based on demand from a variety of sources --- particularly right now, it's value would be crushed by the auto manufacturing industry's woes. So in essence, a currency based on a good that has volatile pricing could be problematic. Since gold's applications are more limited, it is more stable as currency. Jewelry demand may go up or down, but it's somewhat stable.

Now, the reason why gold has value is two-fold: (a) demand and (b) production costs. Gold has a real cost of extraction. This cost varies from miner to miner and is somewhat debatable (since you have to determine what costs are included in obtaining the final product), but the same is true for all commodities. However, the one thing that you can say about gold versus paper money is that these real economic costs are meaningful. Paper money has a real economic cost, as well, but I imagine it's fairly trivial (a few cents per bill?). Hence, the argument for gold is that it has a significant real economic value attached to it, whereas, paper's value is rooted in something less absolute.

Honestly, I don't think literally using gold as a currency would be very convenient, but there are a lot of reasons it serves very well backing paper money. There are also reasons why when paper money becomes devalued, gold --- with its real economic costs --- gains value versus paper money.