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March 24, 2013, 11:14:41 AM |
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That's not true. The value of anything depends on the utility it has, not in the cost of production. The two may be correlated but the causation direction is the opposite of what is being suggested here. That is, because of a high utility value, people are competing to produce the good in question, which drives production costs up. If utility value drops, it doesn't matter what it costs to produce it, the end price will drop as well (which means that people will not compete to produce it, which may decrease production costs, which may bring us back to step 1).
In the example of gold you gave, production costs are $1300 when gold is at $1600 (hypothetical figures but in the ballpark). When gold was at $800, production costs were at $600. What happened inbetween? All available gold with easy access/cheap mining costs was mined, and after the value went up to $1600, it became economical to mine gold with production costs of $1300. If gold goes to $3000, it will be economical to mine gold in more difficult to mine locations with costs of say $2500. If then gold were to fall back to $1000, it would not be economical to mine gold at either $1300 or $2500, so you would see production costs quoted at <$1000 (most likely mining would decrease substantially in that scenario, as presumably all gold with sub-$1000 production cost would have been mined when gold was higher). So, in that scenario, all gold would be worth $1000, no matter what the production costs were. Even those mined at $2500 (when it was profitable to do so), it would still be worth $1000, as that would be the current price, as decided in the market, and determined by the actual end utility (for either consumption or investment purposes, it doesn't matter).
Let me give you another example: imagine you want to build a house. Estimated building cost is $200k. In scenario A, estimated cost turns out to be the actual one. In scenario B you encounter a huge rock where you dig for the foundations, and to remove it it costs an extra $100k. Total cost for building is $300k. The end result in either scenario is the exact same house. Would you say that its value is different in the two scenarios? Absolutely not. Its value is decided by the market, according to its utility value (roughly equal to Net Present Value of all future rents minus maintenance costs and taxes). This is completely unaffected by whether it cost $200k or $300k to build it.
And one more example in the BTC world. If I produce 1 BTC using a super efficient ASIC miner run on solar panels and wind turbines at a marginal cost of production of exactly zero, versus using an inefficient GPU running on grid electricity at a marginal cost of production of $150, do these bitcoins worth their respective costs? No, they are worth whatever the current value of BTC is, let's say $70. And if tomorrow 1BTC=$200, they will both be worth $200, irrespective of their production costs. Likewise, if bitcoin fails to gain further traction, and a new and better alternative replaces it, so BTC's utility value drops and its price goes to $0.05, both of these bitcoins will be worth exactly $0.05, not whatever amount of energy was used to produce them, as that energy is what in economics is called a sunk cost.
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