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

[Q7]

Gold in part holds its value because of its limited supply. Unlike fiat where we keep on printing, more money supply, means it value becomes diluted. Thus in reality for the same amount of gold, essentially we need more and more of the paper currency as time goes back to purchase that very same amount of gold.

[1714958926]

1714958926

[dinofelis]

Gold in part holds its value because of its limited supply. Unlike fiat where we keep on printing, more money supply, means it value becomes diluted. Thus in reality for the same amount of gold, essentially we need more and more of the paper currency as time goes back to purchase that very same amount of gold.

This is true, but there is a caveat:
it is not because something is in limited supply, that it is a monetary asset, or that it has value as a store of value.
The link between both properties (limited supply, and monetary asset) is in fact very weak, although limited supply is a basis for a "sound money" doctrine.

You can have things in limited supply which have no function as a monetary asset at all (are not a store of value), and you can have things of which there is a continuous supply, and which have nevertheless a monetary function.

My first kid's baby drawings are for instance an asset in limited supply.  In fact, because my first kid is not a baby anymore, there is an absolute guarantee that there will never any produced any more.  We actually threw away most of them, and only kept a handful as souvenir.  I'm 100% certain that those drawings, even if my first born becomes a nobel prize winner, will never be a monetary asset :-)

The often-mentioned beanie babies are also on limited supply.  They are not a monetary asset either.

In order for something to become a monetary asset, there has to be a sufficient number of people wanting to consider them as such.

As you mentioned, fiat money is in continuous supply, but nevertheless, it is a monetary asset.  Too much supply can induce the loss of its status as monetary asset (hyperinflation), and that has happened to quite some fiat moneys, but the "big" fiat moneys are around for many decades or even a century or more, without them loosing their status as monetary asset (they loose in value, but not in status as monetary asset).

The problem with continuous supply of monetary asset is not so much in the risk of hyperinflation (although that can happen).  The true problem of continuous supply is the seigniorage.  The fact that the suppliers of the money get all the value of it (which is taken on the inflationary effect, paid by the holders of the asset).  This unwanted transfer of value is problematic.  This is why a sound money doctrine wants a finite supply.

[expert4knowledge]

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.)

Gold price is not high only because individuals buy it but also because governments buy it as a support for their economy and their currency, it has been something valuable for years so you cannot realize the concept well. Also the people who buy gold may seem few at the first but they are usually rich.

[zimmah]

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?

you are forgetting that dollar plummeted in value ever since it got off the gold standard.

Gold did not become more expensive, the dollar became worth less.

But because we all 'count' in dollars no one notices.

We should stop counting in dollars, since dollars have no value at all except the psychological value we give it. It's worthless junk nothing more.

I can't wait for the day humanity finally notices we should count in gold, silver, bitcoin or other limited commodities that could serve as currency with real value.

Anything that can be printed or replicated without limits can not hold value.

[zimmah]

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.

yeah, so many idiots on the world every ounce of gold has been sold to 6 or 7 different persons because of all this 'paper gold'

if you buy gold, demand it to be delivered in pure gold, not some kind of "look at how stupid I am for buying the most expensive piece of paper saying I have a claim on a piece of gold I never even laid my eyes on" paper.

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.

yes even in history only the rich used gold, and even then they used small pieces and only for big services.

for their daily shopping they used copper and sometimes silver.