What is gold backed by?

ickets:

So, what is gold backed by?  Other than jewelry, its close to useless.  It is used to produce very few goods.  In other words, other than historical precedence, its backed by nothing.  In fact, clean dirt has a higher value than gold when it comes to surviving or having the ability to produce tangible goods.  Copper has many uses, silver has many uses, but gold almost none.

Gold has held its value in times when single economies have collapsed - but there has been no test of gold in the following combination of events:  a) Global modern economy  b) multiple leading currencies dying  c) modern banking and infrastructure.

Nice post/good question.

With the current problems we are facing, I really don't think gold has much significance in the "real world."

"Over the years, gold has not been a good investment. Actually over the past 200 years, its returns have barely kept up with inflation. Its dismal returns negate any benefit the portfolio receives from so-called reduced volatility. Furthermore, if one holds gold physicals, they would incur an additional cost which would lower returns even further." ---Andy Abraham

In a post collapse world, bartering will take over.

ZIMBABWE: Far From the City's Money, Villagers Barter Again - IPS ...

11-2-2009

Many Zimbabweans are resorting to bartering. "I traded some soap for two buckets of maize meal [Zimbabwe's staple food]. It was far much better than trying to buy it in the shops," said worker Richard Mukondo. "People in the rural areas are even worse off. You can see they are hungry and their clothes are in tatters. They trade in whatever they can produce: tomatoes, onions, chickens and eggs."
www.guardian.co.uk/mon...

Barter only hope for survival in Zimbabwe - Poverty - NZ Herald News
www.nzherald.co.nz/pov...

Nov 2008
"Their country was once the breadbasket of southern Africa, but now more and more Zimbabweans are forced to hunt for sustenance and barter essential commodities in exchange for food."
www.npr.org/templates/...

Aug 7, 2008
Petrol coupons the new currency in Zimbabwe - Mail & Guardian
www.mg.co.za/article/2...

Jan 22, 2009 ... Unemployment is 90 per cent, prices are doubling every day and barter has replaced a worthless currency.
www.aei.org/publicatio...
All meaningful trade in Zimbabwe is done by barter or in foreign currency amid inflation higher than 230 million per cent.

"Turning to foreign exchange or barter is what you would expect in countries that have had inflation of more than a few hundred per cent a year."
www.economist.com/worl...

Bartering in Argentina:
"Street protests have toppled four presidents in two weeks, but Argentina's 21st-century Great Depression is deepening. And it's driving tens of thousands of people to the "National Barter Network," centered at Bernalesa. Last month alone, the network expanded from a half-million to 640,000 families. Here, and at 600 other markets, they're trading goods and services for creditos, which can then be used to purchase other goods and services. "If you don't have any money, this is the only way to survive," says Irma Gonzalez, 46, a who lost her legal secretary job three months ago and is planning a barter-market clothing business. ... Some municipal governments, including the town of Gonzales Chaves in Buenos Aires province, are accepting eggs and chickens as tax payments, using them to feed poor families. The future? "Argentina can become one big barter club," says chemist Horacio Covas, a barter network co-founder. Indeed, the only economy that's growing in Argentina right now is the prehistoric one."

Business; For Wary Argentines, The Crops Are Cash
By LESLIE MOORE
Published: Sunday, December 1, 2002
"City dwellers have also discovered grain as an alternative currency. Ana María Berardozzi, an advertising executive in Buenos Aires, sold her country home for grains. ''It was something of a shock -- my mind is still in pesos or dollars, not sunflowers and wheat,'' she said.
www.nytimes.com/2002/1...

Argentina had to revert back to the barter system in order to rebound.

Gold 101: Hard Rock and Death Metal

Some nuggets about America's dirtiest industry.

March/April 2009

Share of revenues that hard rock mining companies pay for operating on public land: 0%

Estimated value of minerals mined from public lands since 1872: $408 billion

Amount the federal government would collect annually if mining companies paid royalties: $100 to $200 million

Minimum number of times legislation to require royalties or leasing fees has been beaten back in Congress: 14

Amount mining companies save annually due to a tax break on income from public lands: $327 million

Amount a Canadian firm paid for 1,950 acres of public land in Nevada in 1994: $9,765

Estimated worth of the gold on that land: $10 billion

Number of new claims staked on public lands in the West since 2003: 206,688

Number that are within 5 miles of a major city: 16,282

Number that are within 5 miles of a national park: 2,901

Portion of all toxic waste released in the US in 2006 that came from mines: 1/3

Factor by which metal mines emit more mercury than all other industries combined: 9

Amount of waste produced by mining the gold for a single wedding band: 20 tons

Estimated cost of cleaning up the 500,000 abandoned mines in the US: at least $32 billion

Some nice comments on this piece:

You can't eat yellow metal. And as far as cellphones go, as soon as the social order breaks down a bit more, you're going to see those things smacked away from the sides of babbling schizos' heads. With a lead pipe.

http://www.motherjones.com/environment/2...

Not everybody is going to have chickens or eggs or dirt or fertilizer (or ammo, TP, tanks of propane, stored grain, or whatever) with which to barter.  Some kind of medium of exchange is going to be necessary.  After the collapse of paper currency, who's going to trust "Town Bux" or whatever local paper money?  I suppose folks could operate on an IOU basis, but in difficult/desperate times, are you going to sell what you have for a piece of paper promising later recompense?  Why would they need an IOU unless they had nothing useful to offer?

A medium of exchange needs to be something that can't be dummied up out of thin air (like paper money) or is easily procurable outside the market, and so precious metals enter in.  It's not like folks can run out to the local creek and pan up gold or anything (or silver).  PMs are universally recognized as stores of value, IMO.  Now, tomorrow and the day after.

Just mah $0.02...

Viva -- Sager

SagerXX,

     I agree with you for the short term time frame, perhaps the next 20, maybe 30 years. I'm thinking of a timeline for my children. Major structural changes will happen which will make the essentails of life - water, clean air, clean soil - the only things that matter. PM's only have significance in a world where the basis of life is not threatened. Gold has little value in a world made uninhabitable by our perpetual growth economic paradigm.

The True Cost Of Gold

Gold is always thought of as a “precious metal” due to it’s rare nature and the difficulty (human labor) in obtaining it.

There is a real-life hidden cost of gold however, one that is almost always overlooked. Mining for gold, in this case, an entire mountain, requires the forest to be be clear-cut and laid waste. Cyanide is then used to leach out the microscopic gold particles, which in turns leaks into the water and streams with devastating consequences:.....

There was a good article published this year in, I think, Grist or Mother Jones that was a pretty good expose on the environmental cost of gold mining in America. I wish I could find it.

Concur that that is a possible scenario.  The idea behind my li'l stash of PMs is to get through a possible currency collapse, preserve value until such time as a more useful-everyday thing can be bought with them.  I'll set up my descendants (biological & otherwise) as best I can.  Beyond 20 years from now, they'll have to navigate for themselves...or by then I'll have come up with another brilliant plan.  

Viva -- Sager

PMs are especially good for people living in apartments/condos within cities and who don't have a lot of space to clutter thier lives up with stuff.

You can't eat gold but you can stick it up your A** and run for the hills!

Also: correct me if I'm wrong but I'm going to guess that gold has been too expensive to waste on usefull things.

That'd be a tad uncomfortable . . . And inconvenient when you're scared goldless . . .   Double-!

Gold to me is more honest than Fiat, that is why people lean toward gold.  Human effort and labor went into gold mining.  Fiat is a joke.  I was reading some articles about the evils of fiat and usury, all makes sense.

"Gold and silver force honesty in economic transactions, whereas paper money is economic fraud, an abomination, an unjust weight and measure, oppressive, unjust, counterfeit, and criminal"

"It is said that those who loan money need the interest due to inflation and due to the time value of money.  But this is like saying criminals need to commit crimes in order to make money"

Rickets,

I am sorry all these well-meaning people have not answered your question.  Let me take a shot:

Gold is backed by the fact that it cannot be created at will.  It is backed by the fact that it needs nothing to back it.

I know this is a hard concept to get one's head around at first, but if you think about it for a while it becomes clear.

You say that gold has no use.  That is wrong.  Gold has a very, very important use:  it has a use as money.  Money is absolutely necessary.  It is as important to human society as just about anything else.

But what is money?  As Chris says, it has to be a store of wealth, a medium of exchange, and a unit of account.  Gold and silver are really the only things that fit the bill.  They cannot be created at will.  Every molecule is fungible with every other molecule.  And every person in the world knows what gold and silver are and recognize their value.  You will be hard pressed to come up with any other substance that fits the bill.

Rickets,

I have also pondered the same thing and pretty much agree with you. Here is my limited perspective on the value of physical gold:

• Gold is just another financial asset like stocks, bonds, etc.. It is not money, its an investment.
• Its not a store of wealth any more than a stock certificate serves as a store of wealth.
• Its value is determined by the probability of selling it for more dollars than was given to purchase it.
• This probability is increased if the majority of the other market participants are seeking to buy gold for whatever reason.
• This probability is decreased if the majority of the other market participants are seeking to sell gold for whatever reason.
• In theory, gold could serve as a store of purchasing power and a barter currency in the absence of a government and financial system. But until the government accepts gold as payment for taxes, or ceases to exist, gold is only an investment and nothing more. But even if the government one day ceases to exist, then I would expect that many things would become more valuable than gold (got bullets?).
• The probability of making a profit on your gold investment is significantly diminished if you must sell it because you have an immediate need for cash. 
• Its a mistake to assume that in times of panic or crisis, that any investment, including gold, will return a profit. When people are in "panic mode" they are concerned about one thing....survival. Cash is the most flexible means of ensuring survival. 

To conclude, I think that many people buy gold under the influence of many false assumptions. The market has a way of punishing people's expectations and assumptions.

My two cent perspective....Jeff