Monday, March 7, 2011

How Many Grams of Fat In An Ounce Of Gold?

How much is GOLD worth? Or even more basic, why is gold worth anything? Why does the Pound Sterling or the Euro or the U.S. or Canadian Dollars have value? Only because "we" say so!

The above statement is an over-simplification of a complex, and seldom discussed matter of economics - THE THEORY OF MONEY. Think of this concept: Money, regardless of country, and so-called "precious metals", have value only because the people of the world say they do. In reality, what we call money is a short-hand and efficient method of barter. After all, we use money to get ("buy") something of value from someone else.

There was a time, not all that long ago, when if someone wanted a pair of shoes, that person would trade a cobbler a bushel of corn or wheat or maybe 5 chickens. The person would get new shoes, and the cobbler would eat. Fair trade! At some point, people got tired of carrying bales of hay, sacks of corn, homemade wines/beers to the shoe maker or the dress maker. There was the thought that if there was something everyone wanted, then that item could be used to exchange goods and services. Thus enter GOLD.

Why gold? Don't really know. It can be pretty and it doesn't get corroded or corrode other things so it has use in electrical parts, and jewelry, and it can be pretty but it is prized well beyond its actual use. Here is the point - Assume you are on an island with no food but plenty of gold; gold is everywhere. FOOD is nowhere. Which has more value? Let's go off the island and into many parts of the world where food is scarce, where even gold can't buy food because there isn't any. Which has more value. How much gold would you trade to have enough food?

From the use of GOLD or diamonds or other things found in nature, we created an artificial "product" with which to barter - to exchange goods and services; we call it MONEY. It only has value if a certain number of "money" (dollars, rupees, rubles,euros, pounds etc) will be accepted in exchange for goods, like food. And, the real value is determined by how much food, clothing, steel, etc. each amount of money will "buy" (be accepted for the exchange).

Okay - this is the stuff that will put you to sleep anytime but the point is that, with the current economic situation, the price of GOLD has soared meaning that one ounce of gold will buy more whatevers than it would before the crisis; actually twice as many. Why? Because people want GOLD. Irrationally, there is the thought that gold is inherently valuable - that it is worth a great deal just by being itself.

What if, just what if, we rejected GOLD having a special value; said it was a rock, nothing more. If everyone agreed, then it would become worth no more than a regular old rock you find in the woods or elsewhere on the land or in the sea. GOLD is only valuable because people have decided, without even thinking about it, that GOLD is special; not just pretty, but special.

When the conversation shifts to why the U S Dollar is worth something more than the Crane Mfg paper it's printed on, we enter the world of monetary economics. Here, the value, the amount of corn or wheat or oil a United States Dollar will buy, is actually based on the U.S.'s ability to produce goods, manufacture, assemble, produce metals from raw materials like rocks, make silicon chips for computers from sand. Add to the mix, the country's ability to defend itself and others, the technological abilities of the nation etc. In other words, the total production of the country in an agreed upon period of time.

The only point to carry away from this posting is that "money" has no real value, nor does gold. It is only worth what people say it is. Does that mean that all gold should be discarded - NO! At least not until the world agrees it's just a pretty rock.

More next time.

Author's Copyright by Richard I. Isacoff, Esq, March 2011

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