Does gold have any value?

“I didn’t have time to write a short letter, so I wrote a long one instead.” – Mark Twain

Yes, I didn’t have time to figure out good, 140-char answer to questions I received from Steve on Twitter, so I figured I’d write a long blog post.

[warning: controversial topic ahead. If you disagree with me, best is probably to agree to disagree or simply to ignore this post. Have a nice day! I do enjoy a good discussion though.]

To understand my views on gold, you have to understand my views on wealth. To me, wealth is what sustains and expands life. This is a biophysical perspective. I relates to my views that life is a process that is able to limit the effect of the 2nd law of thermodynamics within certain boundaries and that God is who is able to reverse it.

To me gold is not wealth. I don’t know any living matter that is able to directly draw energy from it. Can’t eat it, can’t warm yourself from it. Rather, the only value of gold is social: ownership of gold implies that you are able to satisfy your life needs such as food, shelter, health, and instead can focus on other needs such as recognition from others. If you can own something that isn’t wealth (but simply beautiful and scarce), it can only mean you are wealthy. Although I don’t have historical facts to back this up, I suspect gold was the currency of kings and salt the currency of folks, so historically and possibly to this day, if you want to be perceived as socially closer to the king, you want to own gold.

So gold has social value: it’s value is derived from the fact that others value it. Maybe that’s why Soros called it the ultimate bubble. Even though it is not wealth, it can be exchanged for wealth. It is not wealth, but it represents wealth, and representing wealth is what money does. Of course, Gold has several interesting characteristics as a metal that were historically helpful in this role: it’s scarce and hard to fake, and it’s easy to authenticate.

The problem with gold is that it is scarce, so if a group of people don’t have gold and want to trade to their mutual benefit, they either can’t trade, or have to borrow gold from someone who does own it. This implies that in a society in which taxes must be paid in gold, the result is certainly the enslaving of a class of people by others (note that government-issued money that must be used to pay taxes is just a variation on that, with the added caveat that governments are not constrained by the supply of gold, but by their ability to enforce increasing taxes).

People do not want their productive and creative capacity to be limited by the amount of gold in the ground, nor do they want it to be limited by what the elite or the majority think is a good amount. People want to be only limited by their own imagination and their ability to turn ideas into reality. The major role of government should be to provide the platform to make this a possibility for everyone.

True freedom would be the ability to issue your own IOUs and through the magic of computer networks and security, to turn it into “gold”, so you can buy things and pay with your own creative capacity. Technology is readily available: cryptography can provide the same anti-counterfeiting, anonymity and ease of authentication that gold provides. What is missing is social acceptance, the networks that provide the good enough liquidity for these IOUs to function as money. Research shows that a little trust goes a long way.

I think network money will prove much more valuable than gold to represent wealth. It only requires a few admired “kings” to decide to own network money rather than gold, and the rest of the people will follow. Gold will certainly continue to play a role in this world, likely an increasing role as a currency, but I don’t buy the fact that soon we’ll be back to a fully backed gold reserve standard with gold at $5000/oz+. This is why I don’t invest in gold no matter how high prices are going. I invest my money in wealth and I invest my time in building network money, focusing on social aspects first, not technology first.

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