Topic: Why didn't gold prices plummet when we decided to stop using gold as a currency? - page 2. (Read 2167 times)

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.

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

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.

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.)

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?