24 March 2009

Gold's Enduring Allure

Through this recession, gold has rather steadily gone up in value. Gold is a good investment for the simple reason that lots of people think that it is a good investment. It's value lies more in consensus reality than in actual fact.

If you doubt that gold has little value, make this choice. Would you rather live in a country with lots and lots of gold - say a pound per person - but primitive living conditions or in a country with no gold and advanced medical care that extends life expectancy and the number of years you can be productive, access to a wide variety of interesting foods, clothing, housing, and entertainment options, and leisure time enough to enjoy them?

One of the biggest problems with the field of economics is that it comes on the heels of physics. Newton did not just articulate universal laws but was made head of the Treasury and set the price for silver - a price that lasted for centuries. Economists try to construct elaborate mathematical models to prove that their science is as rigorous as that of physics. And even the layman gets caught up in this, making gold out to be something of consequence. We think that things that we can hold are more real than things that we feel. We want to be physicists.

And yet it is quality of life that is the prize of economic advances - not the size or quantity of goods. Quality of life is more difficult to weigh than an ounce of gold, but it matters more. We still have a tendency to be disdainful of things like happiness and quality of life for the simple reason that they seem harder to measure than units of productivity, etc.

And yet our economy is increasingly producing goods that have no substance outside of the experience they create and their market value: video games, movies, music, and software are some of the highest value goods that we in the US now produce. Even molecules that are sold as drugs are purchased for their effects (less depression, lower blood pressure, smaller tumors, etc.) and not for the substance.

Gold has an allure but it won't always. The most obvious reason is that someone will eventually master a form of alchemy and be able to manipulate matter to create gold out of any base metal. But more importantly, it'll lose it's value simply because it is not as important as the things that money can buy - money denominated even in something as insubstantial as blips on a computer screen.


Anonymous said...

In the 17th century, Holland based their currency on tulips. It worked well for decades, until people decided they were kind of sick of tulips and started planting other things. That's when it all fell apart.

Lifehiker said...

True enough. But, as I learned in economics class, "perceptions count". If gold is perceived as having value by many people, then it has value.

Right now, with many other perceived stores of value (like stocks) being devalued by many, gold looks quite attractive to some.

Why, then, do I own no gold? I guess I subscribe to your idea that "value" should be attached more to active assets. But that's just my perception.

Daryl said...

Investment in gold is one of those strange quirks. People buying now will likely be wondering what they were thinking.