Real rates are the driver of gold

The argument

In the past, gold was strictly for ornamental use due to its brilliance, color, and the ease of which it could be shaped. In the modern era, it’s considered an extremely versatile metal with many applications across technology and aerospace, making it not just pretty but important. The price of gold is rather high, partially due to its rarity and in part due to the effort it takes to process it. However, the gold rate increases and decreases with supply and demand. As the supply decreases the price increases and vice versa. The same relationship exists for its interest rate. Since gold is considered a safe investment when interests rates are down, people try to place their money in something stable, such as gold. When playing the market you have to be careful, so gold is a stable investment.

Premises

Counter-arguments

Acquiring and harvesting of gold is not a cheap process. While there are gold veins and gold deposits all around, actually acquiring that gold takes time. The process of extracting the gold from the rocks is also labor-intensive and time-consuming. This is one of the things that drive up the rate of gold but being good or bad solely relies on the method of how it’s acquired. The problem doesn’t lie in the actual process but the people who do this process. Is the labor fair, is the method destructive, is the nature around these mines preserved or destroyed in the process? These are the questions to ask, and their answers define whether gold is good or bad.

Rejecting the premises

[Rejecting P1] Listing supply, demand and interest rates together conflates a mechanism with a tautology, since every traded price is set by supply and demand. Gold's mine supply is close to fixed year to year and small against the stock already above ground, so price movements come overwhelmingly from shifts in the demand to hold it rather than from supply. The premise also names the wrong variable: the relationship the argument's own title invokes runs to *real* rates — the nominal rate less expected inflation — a distinction the body never draws. [Rejecting P2] The relationship is a tendency, not a rule. Gold has fallen through periods of low and negative real rates and risen through others, because the dollar's exchange rate, central bank purchases and jewellery demand move it independently. "Stable" also describes the wrong property: gold has drawn down by more than forty per cent from peak on several occasions, which is volatility rather than stability, and it pays no income, so holding it costs whatever return is forgone elsewhere. [Rejecting P3] Granting this, the argument arrives at the conclusion that gold's merit depends on the environment — which does not answer the question the position was raised to settle, and concedes that the case rests on anticipating a variable investors have not forecast reliably.

Further reading

The key paper on Gibson's Paradox is here. https://www.nber.org/papers/w1680.pdf Here is a good read on the arguments in favor or against Gold. https://mpra.ub.uni-muenchen.de/65484/1/MPRA_paper_65484.pdf