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The Decoder: The Price of Gold


Why the cost of the yellow metal is so volatile.

Gold is currently trading at around $1121 per ounce. Why?

The simplest explanation is that, as the most basic tenet of economics dictates, value increases when demand overtakes supply.

But is there an intrinsic practical value to gold that dictates its price? In the event of absolute economic disaster, a barrel of oil would have far more practical use than an ounce of gold, right? We can't run machinery or heat a home with gold. So, what's the foundation upon which this thousand-dollar plus valuation is built?

In John Huston's 1948 picture 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 put forth in producing them, but because of their ability to satisfy people's wants and needs.

Take water. Menger wrote that the first pails of water go toward satisfying the most important uses, and each successive pail is 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, and there's good reason why companies like Barrick Gold (ABX), Newmont Mining (NEM), AngloGold Ashanti (AU), and Goldcorp (GG) aren't digging for H2O.

It stands to reason that value stems simply from the worth the public at large places on a good or service. The word "pecuniary" derives from the Latin "pecus", meaning cattle-which some cultures used as money.

You'd have a hell of a time trying to stuff a Hereford steer into your wallet, and I'm almost certain they won't accept one at Nordstrom as payment for a new Coach briefcase. (Though, with the right set of skills, you could turn a steer into a briefcase with no department store middleman necessary.
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