Gold fans like Peter Schiff have beat the drum for years that gold has intrinsic value that Bitcoin does not.
Let’s dig in to that claim.
Before we start, I want to emphasize I do love gold — if Bitcoin didn’t exist, I’d own gold instead. So this isn’t personal, it’s just business; I simply think Bitcoin does everything gold does and does it much better.
Gold’s “Intrinsic Value”
Goldbugs claim gold has “real” or “intrinsic” value because people like to wear it and they like to use it in manufacturing.
Of course, as an Austrian, all value is subjective – it’s all in your head. So “intrinsic value” is an incoherent concept. After all, plutonium has very different value in a nuclear reactor compared to, say, accidentally biting in to some in a ham sandwich.
Still, I’ll take the spirit of what goldbugs mean by “intrinsic,” which is that gold has value based on its physical properties.
Gold’s Big Three Demands: Industry, Investment, Jewelry
In Austrian economics, subjective value doesn’t mean you just make it up, it means people value a thing for what problem that thing solves; how it improves their life. This is true for every good including gold and Bitcoin.
So what problems does gold solve? In actual numbers, roughly 8% of annual gold demand is industrial, another 37% is jewelry, and the remaining 55% is investment. The numbers are similar for gold stockpiles: 15% of gold stocks are industrial, 47% is owned as jewelry, and 38% is held as investment.
It’s worth noting from the above that, compared to flow, gold industrial and jewelry stocks are both running down, while gold investment share is rising. I’d interpret that as companies substituting cheaper industrial inputs for gold, while jewelry investment demand is shifting to regular investment vehicles with a different blend of transaction costs and physical risks — it’s usually easier to steal a bracelet than, say, a bullion bar in a vault.
So, whether you measure in annual or stockpile, gold is roughly 10% industrial demand, 50% pure investment, 40% jewelry demand. With a bonus speculative side-bet on fiat’s demise. This is a pretty complicated demand picture compared to other commodities.
So the first point is that a large part of gold demand is not at all intrinsic; it’s explicitly investment speculation or store-of-value, just like Bitcoin.
And the other half of gold demand is overwhelmingly jewelry, of which a big hunk is itself disguised investment demand. After all, Chinese, Indian, Arab cultures — indeed every culture that came across gold — have for thousands of years given gold jewelry as large gifts, such as at weddings, specifically because it represents an emergency asset.
Gold Demand by Function: Use vs Store of Value
In terms of function, all three of gold’s demand baskets do different things.
Industrial gold is demand for use, to combine with other inputs to yield a higher-price output that turns a profit.
Investment demand, meanwhile, is store of value: protecting assets so you can spend them in future without too much loss of purchasing power.
And then the third basket: jewelry. Which is a combination of the other two: demand-for-use and demand as store of value. Jewelry’s demand for use is partly physical: it’s nice to look at. And it’s partly abstract: it might gain social status convertible to power and glory, or it can get you laid.
Meanwhile, jewelry made from gold, having similar store-of-value use as gold, beats most things including most of history’s national currencies. Although it therefore also suffers the same lousy storage and transaction costs as gold.
In sum, in terms of goldbug’s “intrinsic” model, this means only about 1/10th of gold’s demand is pure use based on physical properties – the industrial hunk. The investment half is clearly not physical — it’s abstract speculation, just like Bitcoin. And the final 40% in jewelry is a mixture of physical and abstract sources of demand.
Gold’s Jewelry Demand
The key becomes what proportion of jewelry demand is physical features — based on looks alone. Here it gets tricky, because gold jewelry, like many goods, does a lot of things at once. We can’t see into the brain of a jewelry buyer any more than we know if a Lamborghini owner bought because it’s a beautiful car, because it’s fast, or because it gets you laid. Perhaps a little of everything, but in what ratio.
Alas, there’s no objective way to measure exactly how pretty gold is compared to silver, which is 75 times cheaper. After all, cubic zirconium is almost as pretty as diamonds, and pyrite (“fool’s gold”) is almost as pretty as gold, yet they get no respect. Indeed, oil slicks in a gutter can be very pretty, but are generally not bought for looks.
Still, we can get a ballpark: A national survey found 11% of women prefer gold, 17% silver, and 35% white gold, which is gold alloyed with zinc. Meaning that, in 2018 America anyway, silver was more popular as jewelry than gold. Given silver today is $24 per ounce, and noting that silver also has industrial and investment uses that soak up some of that $24, this implies gold’s jewelry demand based on looks alone is somewhat less than silver’s $24/oz.
By the way, a fun side-note is since alloyed white gold jewelry is more popular than pure gold, it implies that for most buyers pure gold is actually negative value: the extra gold turned an elegant zinc-alloy into a gaudy yellow hunk.
Conclusion
Put these all together, and we can ballpark gold’s physical appeal: maximum $24/oz in physical jewelry demand, plus industrial demand that we can estimate by other industrial metals mined in similar quantities like cadmium, niobium, or tantalum. Which average to about 70 cents per ounce. Put them together and gold’s physical or "intrinsic” value is, generously, $24.70 per ounce.
Meaning the other $1,758.30 of gold’s price — 98.5% — is the precise set of features that Bitcoin offers: store of value and abstract benefits like ideological satisfaction, joy of ownership, and speculation on the death of fiat. And, among those, based on the above, the overwhelming majority is precisely that function where gold does absolute worst against Bitcoin: store of value.
Final note, I’m hoping some goldbugs might be reading, so remember it’s never too late to buy Bitcoin. After all, you bought gold after how many thousands of years, which is pretty late. So start small, dollar-cost-average little by little into somewhere like Swan Bitcoin, and before long you’ll be right here with us, cherishing gold like a fondly remembered first love, but happily married to a Bitcoin who knows how to treat you right.
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How Much of Gold's Price is "Real"?
Wow, this is an outstanding perspective on what gold actually is. I always wondered what portion was really used for jewelry, and now I have a really good idea. I have said, "Bitcoin is better at being gold than gold is, in every way." I mean in terms of portability, fixed supply and in purchasing. Another one of my favorites, that I like to use on Twitter, is: "Have you seen the vig on buying and selling gold? Ridiculous."
People can say there is a fixed supply of gold, above the ground and below, but no one knows what it is. Additionally, if gold price goes up, more gold is mined. So different from Bitcoin.
Peter, thanks for an outstanding article.
I put half of all my money in gold and half of all my money in Bitcoin every month, only taking out what I need for rent / basic necessities in cash. I have no idea which one is going to "win." So I just do both.
One of them has "won" for over 6,000 years and in Venezuala recently, nobody ended up falling back on Bitcoin, they fell back on gold.
The other has been around for 10 years, but could be the "new gold."
Fuck if I know. Worst case scenario is I preserve half my wealth while the other half goes to zero. Best case scenario -- gold continues to maintain purchasing power as it has for thousands of years as the dollar falls and I have a bunch of cool coins and bars, and Bitcoin goes to like $100 million per coin lol.