Gold Price: Little Correlation with Its Utility

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"For gold, part of the challenge, as well as the fascination, is that there is so little of it."

While investors flock to new gold-backed funds, jewelry still accounts for two-thirds of the demand, generating a record $53.5 billion in worldwide sales in 2007. For gold, part of the challenge, as well as the fascination, is that there is so little of it. In all of history, only 161,000 tons of gold have been mined—barely enough to fill two Olympic-sized swimming pools. More than half of that has been extracted in the past 50 years. Now the world's richest deposits are fast being depleted, and new discoveries are rare.

I cannot understand why people and central banks are willing to pay so much for gold. Most items that rely primarily on scarcity to attract consumers eventually lose demand and their high value. With gold, however, consumers can't seem to get enough. I cannot think of a single other product whose attraction has such little correlation with its utility.

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