Gyroscopic Investing

This isn't an argument for or against gold. I will not propose a better alternative nor will I complain about its use. The purpose of this post is to explore something that I never thought of before tonight that many of you may not have thought of either.

Gold is not "free" to obtain. A government, as a member of the global economy cannot simply say "you, Mr. Worker, created X units of value and I shall hand you Y units of gold to use as currency."

In order to get gold, someone has to dig it out of the ground. For thousands of years, men have dug into the ground using a variety of techniques, gradually becoming more sophisticated over time. It's true that gold is rare, and there is a finite amount of it (technically there's a finite amount of every element, so that's not saying much). However, there's still a lot of gold buried in the ground.

Why don't we go dig it out? The problem is digging the gold out will cost more than the value of gold on the free market plus a reasonable opportunity cost for the risk-rate of resources required to perform the dig.

In other words, we might know where gold is buried, but if it costs $2k per ounce to dig out, because it's too deep or too spread apart, then we won't bother digging it out because the market price is $1.6k per ounce today. There's an equilibrium where the more the price of gold rises relative to the cost to dig it out, the more that miners will bother to dig it up.

Here's my point. If instead of using gold as a currency, we used something that was "free" or near free to make/acquire, then we wouldn't be wasting global resources to digging gold up. There's overhead involved in digging up gold. What if we put those same people to work doing something else that created value to society? The desire/need to use gold as currency costs the global economy in lost efficiency of global resources.

This just came to me as I was reading about the gold-rush in the early days of America. All those people "wasting" resources to dig a symbolic metal out of the ground, when they could have been putting their resources towards something else. These people were not creating value by digging into the ground. They were simply creating more symbolic units of money. It seems like a waste.

Again, I have no solution and am not passing judgment. Just simply using my critical thinking skills.

Maybe gold is actually a very cleverly disguised form of Keynesian stimulus.

TripleB wrote: Here's my point. If instead of using gold as a currency, we used something that was "free" or near free to make/acquire, then we wouldn't be wasting global resources to digging gold up.

But if a nearly-free thing became economically valuable, then everyone would run out and make/acquire it, creating a huge oversupply, and the economic value would fall back to nearly zero. I.e. hyperinflation. For something to work as money its supply has to be limited somehow. Either inherently (gold) or by legal decree (dollars).

TripleB wrote: Again, I have no solution and am not passing judgment. Just simply using my critical thinking skills.

Historically, gold had an "inflation rate" of 1%-3% due to new discoveries and mining, so I'd say that was the cost to the global economy.

I much rather use fiat for a medium of exchange.  Economies of scale.

TripleB wrote: Here's my point. If instead of using gold as a currency, we used something that was "free" or near free to make/acquire, then we wouldn't be wasting global resources to digging gold up. There's overhead involved in digging up gold. What if we put those same people to work doing something else that created value to society? The desire/need to use gold as currency costs the global economy in lost efficiency of global resources.

Who or what defines what is "valuable to society"? There is no objective answer to that, is there?

In the absence of knowledge of what each and every person in society deems most valuable, the best thing we have to guide us in a free market is the price mechanism. The price of something tells us in a way how much society "values" that thing.

Gold is expensive because people want it. Its demand is high relative to its supply. Given that people want it, and gold miners are giving it to them, aren't gold miners providing a valuable service to society?

An interesting observation on gold and silver inflation can be found in Milton Friedman's book Free to Choose:

Milton Friedman in [i]Free to Choose[/i] wrote:In Europe in the Middle Ages, silver and gold were the dominant money, and inflation of prices in terms of gold and silver occurred because precious metals from Mexico and South America flooded Europe via Spain.  In the mid-nineteenth century inflation of prices in terms of gold occurred around the world because of gold discoveries in California and Australia; later, from the 1890s to 1914, because of the successful commercial application of the cyanide process to the extraction of gold from low-grade ore, primarily in South Africa.

Supply and demand...