She replied, "Because people will pay money for it."
I asked, "Why will people pay money for it?"
She said, "Because it has value."
I asked, "So why does it have value?"
She said, "Because people... will... um..." She frowned for a bit.
The thing is, the idea that gold has some kind of intrinsic value is so deeply embedded into world culture that no one seems to question it. But it's worth examining.
Gold as Money
There are a number of properties that make something useful as money:
- Scarcity.
- Permanence. If something will physically degrade over time, it's not useful as money. The metals used for coins don't corrode.
- Divisibility. If you can't divide money into units small enough to be trivial, you're right back at one of the problems with barter.
- Fungibility. Any given unit should be tradable for another same-size unit. Currencies like USD do this better than gold, as gold has varying purity, and testing for purity is non-trivial.
- Identifiability. It should be easy to recognize a unit of money for what it is.
- Transportability. It should be easy to transport non-trivial amounts of the money.
- Uselessness. If a money is useful for purposes other than monetary, industrial demand can violate its purpose or confuse its value. The copper in a pre-1982 US penny is worth more than a penny; the only reason people don't buy pennies and melt 'em down for copper is because it's illegal. And even though it's actually worth more than a penny, most people will only assign a penny's value to it.
Intrinsic Value
I've seen a number of authors/pundits explain that unlike Bitcoin, gold has "intrinsic value," and because Bitcoin doesn't, it has no real value. Part of the problem is that there are lots of definitions for this term, but they all seem to boil down to literally: the value that innately exists in the subject of discussion. But what exactly is that intrinsic property of gold that gives it value? When I started asking this question on forums, I got many variations of these answers:
- Bitcoins are just like tulips.
Except tulips fail at the aforementioned attributes 2, 3, 4, 6, and others would also include 7. (I personally don't care for tulips.) And you can't magically transport tulips around the world in minutes.
- Gold has intrinsic value because people will pay money for it, and that's why it has value.
- Gold's intrinsic value has been acquired over time as people have used it for money.
- Gold's intrinsic value is the cost of mining it. After all, the price of gold is very close to the cost of mining it.
Some people try to peg Bitcoin "mining" as a source of "intrinsic value" for the currency, as there are costs in hardware and electricity to produce Bitcoin. But the fact that mining currently produces Bitcoin is unrelated to what someone is willing to pay for the unit. In fact, the same amount of Bitcoin will be produced no matter how much additional cost is expended. (The difficulty of "finding a block", which is the goal of every miner, automatically adjusts to keep the block creation rate at about one block every ten minutes.) However, like mining for gold, the amount of Bitcoin mining performed will find an equilibrium to the cost of mining it in electricity, hardware, and administration. For this reason fewer and fewer miners use GPUs-- the only ones that still do either have subsidized electricity or don't care that the value of the Bitcoin mined is less than the cost of electricity spent to acquire it.
Money is a Useful Illusion
The "price of gold" is, from one moment to the next, defined as the market price of gold. And by market, we mean "whatever someone is willing to pay for it." If we ignore for a moment the emergent industrial uses of gold, we're back to the fact that for most of its history, gold was useless as anything but money, but because it was so useful at being money (because of all of the properties outlined above), it was therefore used as money. People accepted gold in exchange for goods and services because they expected that others would exchange their goods and services for gold. Soon enough, lots of people started to recognize gold as a useful barter intermediary, and that network effect plus its utility at being money made it the universal store of wealth.
But if you're starving, and your neighbor is starving, no amount of gold will buy his loaf of bread.
It turns out the reason gold has value as money is only because it's so darn useful as money. "Shiny" doesn't hurt, but your significant other won't be impressed by an iron pyrite ring.
In the end, the intrinsic value of gold is the same as the intrinsic value of Bitcoin: it's very useful for lubricating trade. (That being said, Bitcoin has a long way to go before it enjoys the same network effect and recognition that gold has.)
Usefulness has its own intrinsic value. If you don't believe me, ask your employer why they pay you.