What Is "Value" Actually Worth?
In the event of an economic Armageddon, a barrel of oil would have far more practical use than an ounce of gold, right?
Last Wednesday, Greg Weldon wrote about the "global credit boom, and an intensified secular erosion in the 'value' of the US Dollar as the world's reserve currency."
He explained that "this is the dominant macro-monetary dynamic, and it does continue to sustain the longer-term secular uptrend in gold."
Which got me to thinking: What is "value" actually worth?
Obviously, as the most basic tenet of economics dictates, value increases when demand overtakes supply.
We all know about supply and demand. Let's take a look at perception and human psychology.
Is there an intrinsic practical value of gold that dictates its price? In the event of an economic Armageddon, a barrel of oil would have far more practical use than an ounce of gold, right?
In the simplest of terms, yes. One can't run machinery or heat a home with gold. However, as a former ad agency creative director, I know a bit about creating demand. Which, of course, is the basis of value.
In John Huston's "The Treasure of the Sierra Madre," a gold prospector named Howard (played by Huston's father Walter) describes the value of gold like this:
Howard: Why's gold worth some twenty bucks (!) an ounce?
Man: I don't know. 'Cause it's scarce?
Howard: A thousand men, say, go searching for gold. After six months, one of 'em is lucky-one out of the thousand. His find represents not only his own labor but that of nine hundred and ninety-nine others to boot. That's uh, six thousand months or five hundred years scrabbling over mountains, going hungry and thirsty. An ounce of gold, mister, is worth what it is because of the human labor that went into the finding and the getting of it.
Howard was obviously not a student of Austrian economics, whose founder, Carl Menger, dismissed the labor theory of value. Goods acquire their value, Menger theorized, not because of the amount of labor used in producing them, but because of their ability to satisfy people's wants.
Take water. Menger wrote that the first pails of water are used to satisfy the most important uses, and successive pails are used for less and less important purposes-making pail #1 more valuable than pail #16.
But gold is money and water isn't because the market says so. The word pecuniary derives from the Latin pecus, meaning cattle-which some cultures used as money.
You'd also have a hell of a time trying to stuff a Hereford into your wallet, and I'm almost certain they won't accept one at Bloomingdale's as payment for a new briefcase. (Although, with the right set of skills, you could turn a steer into a briefcase with no department store middleman necessary.)
A future briefcase…
…a former cow
So, is it simply that gold has greater liquidity than everything else?
Essentially, yes. Because people want it.
"Gold and Economic Freedom," written by Alan "Jimmy the Greek"span in 1966, defended the gold standard thusly:
In the absence of the gold standard, there is no way to protect savings from confiscation through inflation. There is no safe store of value. If there were, the government would have to make its holding illegal, as was done in the case of gold. If everyone decided, for example, to convert all his bank deposits to silver or copper or any other good, and thereafter declined to accept checks as payment for goods, bank deposits would lose their purchasing power and government-created bank credit would be worthless as a claim on goods. The financial policy of the welfare state requires that there be no way for the owners of wealth to protect themselves.
In a book titled "The Power of Gold," economist Peter Bernstein says gold is useless as a metal for most practical purposes and that it originally held value as decoration and adornment for the wealthy ancients. When it was later minted and used as coins by the Lydians in 635 B.C., gold took its first step from the concrete to the abstract, in terms of value. Bernstein says that, as an exchange medium, gold isn't much different from the four-ton stone coins used by the Micronesian people of Yap.
The giant stone coins of Yap
Then, why is gold, in fact, different?
Because you can't put a price on status.
Is Absolut "worth" more than Fleischmann's? Is the grain used to distill 750 milliliters of Absolut worth more than the grain used to distill 750 milliliters of Fleischmann's?
What really makes Absolut worth more than Fleischmann's is ego-driven. Ordering an Absolut and tonic satisfies the human need for status in a way that ordering a Fleischmann's and tonic doesn't-which, quite frankly, could change given the right marketing campaign.
Exactly what DeBeers uses to make diamonds "valuable."
Naturally occurring diamonds are no rarer than rubies or sapphires. They're simply carbon. What makes them so expensive is the value of marketing: if the price of the diamond you propose with isn't equivalent to two months salary, you've done something wrong.
In the book "Twenty Ads that Shook the World," James Twitchell writes that, until 1947, opals, rubies, sapphires and turquoise were considered more exotic than diamonds and were much more widely used for engagement rings.
Why? Because in 1947, the now-defunct N.W. Ayer advertising agency told consumers, on behalf of DeBeers, that "A Diamond is Forever."
Later ads for DeBeers persuaded people to treat their diamonds as heirlooms. People listened, which eliminated the aftermarket for diamonds. Without people reselling their diamonds, demand for new diamonds increased.
Several years ago, Laura Robin Benedetti and Professor Raymond Jeanloz of Berkeley published their findings that diamonds may be raining down through the atmospheres of Neptune and Uranus.
These planets contain extremely high levels of methane, which Benedetti and Jeanloz have shown can turn into diamonds at high temperatures and pressures.
They squeezed liquid methane to several hundred thousand times atmospheric pressure, then focused a laser beam on it, heating it to 5,000 degrees Fahrenheit.
Diamond dust appeared.
Living beings release methane through flatulence. Therefore, flatus can produce diamonds under certain conditions.
Something to think about when you're paying for that $20,000 engagement ring.
One last note: further proving that something of value can be created from something with no intrinsic value, a British company called I Want One of Those (www.iwantoneofthose.com) is selling, well, nothing-for £3.49, plus £3.95 for delivery. Nothing (the product) is an empty 17x9x7 centimeter plastic sphere "packed with millions of protons, neutrons and what have you," as described on the I Want One of Those website.
I just ordered three.
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