Friday, August 20, 2010

Gold - Part 2

Well, it's been a while since part 1, and I have been thinking lately about a different angle on gold.

This is probably an odd angle, actually, but I think it will help shed more light on the slightly mysterious subject of what makes gold valuable. I'm going to take a bit of a flipside view of gold to do this -- looking at the reasons I gave for why gold was valuable in Part 1, and then disproving most of them!

Firstly we need to start a thought experiment. Imagine that you go to the toilet, and come back with a small sample of, um..urine. Wee, piss, you get the idea. Now further imagine that you add a small preservative to this, and then seal it in a small glass vial which in total weighs exactly one ounce. Place it on the table and next to this, place a one ounce of gold bullion bar. Let's look at these two things side by side.

I think it's fair to say that very few people would part with good money for what I will now mostly refer to as "the vial". It is intuitive that this is not very valuable, if at all. I have not tried to sell a vial of my own urine, but I don't think I'd get a lot for it, do you? Perhaps less intuitive for some, is that the gold is by contrast considered very valuable. Even if you do not understand why exactly, or agree that it should be, at least take it for the truth that the market price of gold is currently well north of $1000.

What I want to examine is what these two objects have in common, because these can't really be the things that makes gold valuable. Let's get an obvious one out of the way quickly and by way of example of what I am talking about; they are both yellow. In fact, gold can be a slight range of colours from white, light yellow, straw yellow and a pink yellow (some copper content). I believe urine can have a similar colour range -- if you drink a lot of beer it is diluted and goes pale, and if you are sick and there is blood in there too, it can be pink. Gross perhaps, but I'm just saying they have a reasonably similar colour pallet. I am further suggesting that we can conclude it's not the colour of gold alone that makes it valuable. If it was, the vial would be valuable too, and in the previous paragraph we concluded it isn't.

On a similar vein is the "shiny" quality. Gold is shiny. I would like to point out that so is aluminium foil, and that's not selling for $1000 per ounce. I suspect too that the glass vial could refract light in a most pleasing manner if you took the time to hold it up to a light just so, and look at it like that. So I think Shiny is out too, although you could keep arguing this point for a little longer perhaps.

What about divisibility? One claim about gold is that it's "easily divisible". This is supposed to make it a good bartering/monetary metal as you can portion it out as needed. I have read of merchants that trade in gold wire, as this can be cut to any length. This makes perfect sense, and it can then be easily then wrapped around something, like your wrist for example, so it's practical. On the other hand, if you have a one ounce bullion bar, like the one on our imaginary table, then the only way for the common man to divide this is using a hacksaw. You might get two rough pieces and a waste of gold filings (and if I did it, blood everywhere). Sure, if you happen to have a furnace you could remelt these filings, or sell it as dust by weight, but it's becoming a fiddle. Consider next our vial. If you unstopper it you can pour out as little or as much as you need into another vial. On this basis, I think that the wee is also easily divisible. If they are both easily divisible, it's not this factor that makes the gold the more valuable thing on the table then, is it?

How about "universal recognition"? One supposed benefit of gold it that it's known the world over. I would suggest that everyone the world over goes to the toilet at least once per day too. In this experiment (at least), this is not the deciding factor.

Gold is "rare" as well, being found only in certain rock deposits in limited places on the planet. Is this the thing that makes the gold valuable? Well, the urine could be considered rare, from a certain perspective. If you think it's YOUR urine, then only you can make it, then even over your entire lifetime I would wager (not actually having done the calculations) that there would be more gold on the earth than urine you could produced. From this (admittedly highly contrived) viewpoint, the urine is probably rarer than the gold. Of course, if you take the capacity of all the people and beast in the world, then the vial contents is not rare at all. I'm not really trying to deny this, but just to extend the thought experiment where possible. Suspend reality a little to stay with me here.

Moving on then to the next property, let's now consider the argument often presented that gold has "little industrial use". Because it's more-or-less unused, it can focus on being a monetory metal the logic goes. Other commodities are more affected by industrial demand fluctuations which effect long term price. This is all well and good, and sounds reasonable. Then we look on the other side of the table and try and think of industrial uses for the vial, and draw a fairly big blank. Urine is not useless, but it's also not exactly turning the wheels of industry today either.

Gold makes excellent jewellery, and this demand partially makes it valuable, right? Well, you could turn the vial into a pendant and wear it as jewellery too. It's a matter of taste, after all. No, I don't mean for you to taste it! It just needs some good marketing, perhaps? If Angelina can wear a vial of blood for a while, why not piss?

I don't think gold is valuable just because it's a solid either. Our vial is a solid of sorts anyway, in that it's made of glass. And you could freeze it's contents to make it all a proper solid, but I'll admit that not being a solid at room temperature is the reality here. There are plenty of other solid objects in our life that are not valuable, such as lead. This is further a soft metal, so it's closer to gold in this regard. Is being a solid the single secret to the high value of gold? Doesn't seem likely.

Gold is a dense metal though, which makes it compact for carrying vast wealth. On the table the two objects are the same weight, one ounce. The glass vial, being not as dense, takes up slightly more space but is still easily transportable. It seems unlikely that this is the make-or-break property that differentiates the two objects in value, wouldn't you say?

So, to summarise the thoughts so far as to what is apparently NOT responsible for gold's high value : It's shiny or yellow or a solid or dense, it's divisible or universally recognised, it's rare or has little industrial usage, or that it makes good jewellery. Not a bad list of things that we have excluded, don't you think? Did you think you'd get all that just by comparing it to vial of piss? Any surprises so far? Might be a good time to stop reading and think -- if it's not these things, what is it?

Let's move on to some more difficult things then, if you are ready...

What about durability? Gold is effectively "everlasting", and never tarnishes. Golden objects unearthed from thousands of years ago are practically untouched by time. This is a tough one, and the vial is not looking so strong here. Note that I sneaked in a preservative in the bottling process to add some life to the argument. I would further suggest that for most people, the important span of time is one human lifetime. If something can last 100 years, then it's probably considered by most to be pretty durable. Could a perfectly sealed, with preservative, vial last that long? I have no idea, and I doubt anyone has tried this, but let's say that it might, in ideal conditions (probably away from light and heat). Gold wins here, but not without a fight, and it's not clear if this is the one property that makes gold so special.

How about the "product of labour" argument? That gold is so hard to mine and refine, and represents many hours of labour that can't be faked. This is similar to rarity, but with a twist. It's not exactly hard work to make urine is it, so I think gold wins here too. Staying with this though, are there any other things you can think of that take a lot of time/effort to find or create, but are yet worthless? If it's truly worthless, then you probably would not even bother, but that doesn't mean that examples don't exist. How about finding naturally burnt toast in the shape of Homer Simpson? It might take days of popping toast in the toaster before one comes out looking like him. Would that make it valuable? Sadly, in our sick and twisted eBay world, it might! Oh well, bad example then, but I think you can probably find another.

Gold has been a historical store of wealth, and has a lot of "folklore". The same can not be said for the vial, I don't know any stories extolling the virtues of urine. Kings and Pirates and all that. So chalk one up for gold, again.

So some possible reasons that gold IS valuable are that : It's durable, its a product of labour and that it has some folklore. Not the longest of list, is it?

I will stop this now, because I think I've made the point I set out to make. I do want to just say that I know quite a lot of the logic here is weak in places, at best. The point was not to prove in a watertight logical argument what makes gold valuable, but to playfully consider a situation and see what ideas might come of it, and in the process perhaps questioning some assumptions commonly held.

I believe that gold is valuable for good reason, and that is simply because it has many properties that make it valuable. It's not just one, but them all. Other things may have one or more of these properties too (like our vile vial), but gold has the complete set, which makes it stand apart from everything else. Picking them out one by one like I have done above is a divide and conquer technique -- they all seem weaker on their own. It is the sum of the parts which makes up the real story of gold.


Motley Fool said...

Actually the thing that makes gold valuable is marginal utility declining the slowest of all things and the high stock-to-flows ratio. The latter is why it keeps value very well. If memory serves the stocks-to-flow ratio is about 90 for gold.

oldinvestor said...

There is a deep and basic reason why gold was first noticed, and then appreciated by so-called primitive man.

Of all the 92 naturally occurring elements, it is the only metallic element that commonly occurs in its elemental form. This is because of its unique non-reactivity with other elements to form complex compounds. Usually every other element must be smelted in some form to obtain its elemental form.

Sure, you can occasionally find pure crystals of silver or copper, but the vast majority must be refined by a smelting process to obtain their elemental form, a technology that was not available until well into the city-state era. Gold, in many areas, can be picked up in its basic, unalloyed, pure form.

Thus, in earlier days, no other element could be obtained, in its original, elemental form. Why was this important? Because gold in its elemental form could be easily worked and shaped into object of utility and decoration, unlike all other complex mixtures of metallic elements we call rocks.

It would thus be an absolutely unique substance in the primitive world, and would have attracted attention, and gradually come to be accumulated, valued, and used as a store of value and trading vehicle.

Saul said...

Oldinvestor : An excellent observation! I believe you are right in what you say.

What is awesome is when you see in a museum an ancient Egyptian gold ring or similar, and it's just as perfect now as the day it was made. Objects made out of other metals or alloys - not so much.