Why didn't gold prices plummet when we decided to stop using gold as a currency?

[Bizmark13]

If increased Bitcoin adoption results in higher Bitcoin prices then why didn't gold prices plummet when we decided to stop using gold as a currency (i.e. gold adoption fell)?



It used to be that currencies represented a specific quantity of gold. The value of these currencies were pegged to that of gold and could be converted to physical gold if desired. Hence, it could be said that gold was very much in demand. Bakers sold their bread for gold. Farmers sold their crops for gold. Teachers taught their students for gold. Of course, people preferred to transact in paper representations of gold for the convenience.

This was true until the Great Depression when societies began to leave the gold standard. Suddenly it was realized that gold was no longer attractive as a currency as it was hindered by its inflexible supply. No longer did the baker demand gold for his bread. No longer did the farmer demand gold for his crops. No longer did the teacher demand gold for her teaching.

And yet despite discovery of this flaw and subsequent mass abandonment of the usage of gold as a currency, gold prices didn't fall but instead they doubled during this period.

While leaving the gold standard meant that currencies were no longer paper representations of gold, they were still backed by a reserve of physical gold and it was still possible to redeem US dollars for gold until 1971. After 1971, it was decided that a currency without any ties to gold whatsoever would make a better medium of exchanging value. Yet despite this, the price of gold still rose.

Why is this so? Isn't decreased adoption synonymous with decreased demand? When people decide to abandon a currency - whether it be cowrie shells or gold in lieu of another currency (in this case, paper), would we not expect to see the value of the old currency drop as demand for the new currency increases?

[Bizmark13]

I understand that my first post might not be very clear so here's another way of looking at it:

The population of the United States was 75 million in 1900. Now let's imagine there was a total supply of 8,000 tons of gold (I have no idea if this is correct or not but it's not important). So you have the whole 75 million people (i.e. a large demand) chasing 8,000 tons of gold (i.e. a small supply). When there is large demand for a small supply, you would expect to see the price at very high levels.

Today, the population of the United States is 300 million. Now let's imagine that the supply of gold is unchanged but the demand for gold is much lower than before. As I mentioned previously, bakers, farmers, and teachers don't want gold anymore. They want paper. Only a small segment of society wants gold (e.g. investors, jewelers, tech companies, etc.). Perhaps this number is as low as several hundred thousand individuals. When there is such small demand and the supply is unchanged, you would expect to see the price at much lower levels.

(However, according to this graph, US gold production has increased by 2-3 times since 1900 so with even more gold in the market and less people who want it, we should be seeing even lower gold prices that that.)

[oblivi]

Simple. Something doesnt necessarly need to crash if it stops being used a currency, if you can still sell it at high prices. People will pay you what they think gold's value is. Supply and demand thats all.

[bitcreditscc]

Very interesting aspects of currency are demonstrated in your analysis. It begs the question of exactly how value is determined.

[painlord2k]

Very interesting aspects of currency are demonstrated in your analysis. It begs the question of exactly how value is determined.

Value today is determined looking at the value yesterday and observing the behavior of markets.
So if gold quoted $1000 yesterday, you start supposing gold will be sold and bought at the same price today; then you go and discover if there is enough buyers and enough sellers to keep the price there or there is a difference enough between buyers and sellers to cause the prices to move.

[keelba]

Quick search on Google found this:

http://goldratefortoday.org/explaining-gold-rate/

[keelba]

So basically, ever since it became legal to once again own physical gold, people who understood a little bit about economics and inflation (in the 1970s we had stagflation, an even worse condition of a stagnating economy combined with inflation) bought gold as a hedge against the decreasing value of the dollar. Looking back through recent history, you will see that when crisis hits, demand for gold goes up. Only today, we have so many "gold like" instruments traded which are convoluting the actual price of gold so we have no idea what physical gold is really worth anymore. But we will find out soon enough when the gold ETF and ishare holders realize that their paper gold is not really gold and want to trade it in for the real thing.

[twiifm]

You should find a chart with dollars index on it to see the correlation

[Lethn]

People didn't stop using gold as a currency, the governments did.

[OROBTC]

...

"Money" is typically defined as three things/ideas: Store of Value, Unit of Account and Medium of Exchange.

Gold is now mainly a Store of Value.  People like me hold some gold because we have lots of confidence in that role of Store of Value.

[Bizmark13]

Simple. Something doesnt necessarly need to crash if it stops being used a currency, if you can still sell it at high prices. People will pay you what they think gold's value is. Supply and demand thats all.

But today, the supply of gold is higher and the demand is lower. Yet even adjusted for inflation, gold is worth more today than it was 100 years ago.

So basically, ever since it became legal to once again own physical gold, people who understood a little bit about economics and inflation (in the 1970s we had stagflation, an even worse condition of a stagnating economy combined with inflation) bought gold as a hedge against the decreasing value of the dollar. Looking back through recent history, you will see that when crisis hits, demand for gold goes up.

So the demand from this small percentage of society was enough to make up for the bakers, farmers, and teachers who no longer demanded gold as payment for their goods and services?

[flipstyle]

You can thank JPMorgan.  They bought and continue to buy majority of the world's gold reserves.  Without them, the market would crumble.  But with them, the market is controlled and suppressed at the push of a button.  Fun stuff.

[odolvlobo]

Also, in 1975, it became legal to own gold bullion in the U.S., and the result was a huge demand for it and a skyrocketing price. Notice however the collapse that followed.

[bitcreditscc]

Very interesting aspects of currency are demonstrated in your analysis. It begs the question of exactly how value is determined.

Value today is determined looking at the value yesterday and observing the behavior of markets.
So if gold quoted $1000 yesterday, you start supposing gold will be sold and bought at the same price today; then you go and discover if there is enough buyers and enough sellers to keep the price there or there is a difference enough between buyers and sellers to cause the prices to move.

So, boiled down value has become a matter of opinion and trend?

[johnyj]

The "rising value of gold" myth generated from a prerequisite that people regard USD as a unit of value, which is an illusion. In fact, it is USD who has lost its value sharply since the removal of gold standard (if you consider one ounce of gold as a standard unit of value)

Some people might argue that the price of anything else has not changed too much against USD, but that is because: The value of all of these other thing's also dropped together with USD

Value is decided by supply and demand, when supply increase a lot and demand keeps more or less the same, the value sinks. The added USD supply increased lots of production, and decrease the product's value at mean time, so that their final price measured in USD keep the same

But you can't increase gold production with simply adding more USD, the supply of gold is limited and the extraction is very energy consuming just like bitcoin mining, so the gold value kept the same, as a good indicator to show how much more USD they have issued

[dinofelis]

So, boiled down value has become a matter of opinion and trend?

Yes, that is the core concept of value ! 

Value is what you value.

[dinofelis]

If increased Bitcoin adoption results in higher Bitcoin prices then why didn't gold prices plummet when we decided to stop using gold as a currency (i.e. gold adoption fell)?

Essentially because we didn't !!  We didn't stop considering gold as a monetary asset.  People still CONSIDER gold very valuable, and that is why it IS very valuable.  At no point in history, gold has lost its monetary value completely.  People still consider it as a store of value, and that is what makes it a store of value.

Something is money if enough people think it is money, and for gold, enough people have always considered it as being money.  Not money to buy a loaf of bread with (but gold was rarely used for small transactions).  But money as store of value.

[flipstyle]

If increased Bitcoin adoption results in higher Bitcoin prices then why didn't gold prices plummet when we decided to stop using gold as a currency (i.e. gold adoption fell)?

Essentially because we didn't !!  We didn't stop considering gold as a monetary asset.  People still CONSIDER gold very valuable, and that is why it IS very valuable.  At no point in history, gold has lost its monetary value completely.  People still consider it as a store of value, and that is what makes it a store of value.

Something is money if enough people think it is money, and for gold, enough people have always considered it as being money.  Not money to buy a loaf of bread with (but gold was rarely used for small transactions).  But money as store of value.

This.  It's held 'value' since the beginning of time all the way back to the ancient egyptians.  Perhaps because of its beautiful luster and allure...whatever the reason, it's always been held in high esteem in virtually every society since the beginning of civilization.  As to how it'll be regarded decades/centuries from now is yet to be determined, but if you're betting on the long horse, gold would probably be the one least likely to completely sh*t the bed because it's got a lengthy resume.

[keelba]

So the demand from this small percentage of society was enough to make up for the bakers, farmers, and teachers who no longer demanded gold as payment for their goods and services?

Currently 1% of the world's population owns something like 98% of the wealth (maybe it's not 98% but I do know it is an unbelievably high percentage). So is it so hard to believe that these people, the ones who would be concerned about preserving their wealth vs. the ones who live paycheck to paycheck, would be buying up all the gold?

[chipzac]

You can thank JPMorgan.  They bought and continue to buy majority of the world's gold reserves.  Without them, the market would crumble.  But with them, the market is controlled and suppressed at the push of a button.  Fun stuff.

wouldnt be the  first time JPMorgan makes a huge mistake