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Rationality is not defined by what people do, no matter how long they do it. For 10s of thousands of years, people lived their lives based on the fact that the sun revolved around the earth. That doesn’t make the idea any less rational.

Why is gold a valuable medium to transfer work? Mostly, it is the “fact” that we know people will value it as a medium.

In the past, gold was chosen for a host of irrational reasons. It was fairly rare, so those in power could control the supply. It was shiny, and was easy to work, so people in power could convince others that they wanted it (much like we’ve somehow convinced people they need diamonds, and thus propped up an irrational value for those stones). It was easy to divide up, which made it useful over things like rare rocks, which would take a lot of work to use as payment “here, let’s wait an hour while we try to chip off just the right amount of crystal”.

Does gold have an intrinsic value? Yes. There are things today that require gold. But gold for useful purposes consumes about 1/4th to 1/2 of the supply each year. So if Gold was not loved simply for having gold, supply would greatly outstrip demand, and the price would plummet.

And today, we don’t have the need for easily manipulated metal — we easily work with composite materials, and can make beautiful shiny things without an ounce of precious metals.

About the only thing that gold still has is that you can’t just create it out of thin air. There is a limited supply. At some point, that limited supply was growing at about the rate that seemed useful for a growing economy, but that was also rather random and coincidental.

Suppose that tomorrow, someone discovered a new mine with as much gold as currently exists in the world, thereby doubling our supply. What would happen to the price of gold?

If it did not change, that would show that the price of gold is irrationally derived by emotional reactions. If it dropped in half, it would be rational but belie the concept of gold as a “currency”.

You can’t eat gold. You can’t drink it, you can’t wear it. It won’t help your crops grow, you’d be hard-pressed to use it to build a shelter. As a metal, it is pretty useless, won’t stop a bullet, can’t be used to form a wagon, or a wheel.

We made it into coins. The coins had value because the government promised it would have value.

In my lifetime, the price of gold has changed as much as the price of beanie babies.

When the stock market hits ridiculous heights, we speak of “irrational exuberance”. “irrational exuberance” is slang for “the value that the world has put on stocks, based on their own emotions, detached from any real-world value”.

Well, Gold’s price is pretty much detached from it’s real-world value, and has been for most of the history of the world. Things irrationally priced still have real value, and you can actually make tons of money as people irrationally drive the price up.

If you want to argue that the price of gold is rational. OK, I’m looking at the one-year chart for gold. One year ago, gold was about $1600. Was that a rational value, or was it a value that was inflated by irrational pricing?

IF you said “rational”, then in June GOld was about $1200. Was THAT rational pricing, or was that an irrational devaluation by people who got scared?

It is very hard to look at this chart and find any rational basis for the movement of gold. I know people try to “explain” it, usually with a conspiracy theory of people destroying gold stocks or artificially selling gold they don’t have to drive down the cost. The explanations seem irrational as well.

I’m not telling anybody NOT to buy gold. I am saying that the price is irrational, and that there is no rational reason why tomorrow, the world could not wake up, say “hey, you know, what we all really need is FOOD”, and sell off all their gold to get food, and drop the price of gold by a factor of 4.

Just as one day, people woke up and said “we really don’t want beanie babies”.