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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... .

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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.

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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

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