Many economists will argue that certain commodities, such as gold, real estate, or even fiat, have intrinsic value. Do they?

The free market. It's a concept that goes way back to famous thinkers like Adam Smith, who conceived of the idea of an "invisible hand" that guided the value of everything through supply and demand. It seems like a simple concept: the more demand there is for something, and the less supply there is at the same time, the greater the value will be, and vice-versa. The market will decide on the value of things.

It is actually extremely difficult to have a purely free market. Prices are influenced by all sorts of things that are not entirely manipulation-free. Interest rates are probably the most obvious example. Governments and government bodies will often set interest rates to reduce or increase spending. If, for example, interest rates are lowered, consumers can afford to borrow more money. However, investors stand to make less profit if interest rates are too low - so a balance is necessary. Increasing interest rates can be good for business and banks, but not so great for the average consumer - especially one who is over-burdened with debt. The government has a great deal of influence on economies through this one simple mechanism - but it isn't truly a free market then, is it?

We tend to assign value to assets and commodities based on our frame of reference - that is, what we have been willing to pay for any given item in recent memory. Here is a simple example: Say you buy a house for $300 000. In your mind, the house has a value of $300 000. Years go by, and the market changes. Interest rates have climbed up and prices have crept downwards in your housing market. It turns out now, your house, on the open market, is only worth $275 000. In your mind, it's worth $300 000. But that doesn't matter. It's only worth whatever others are willing to pay for it.

Another example: gold. Gold is seen as a long-term safe investment, By and large, I'd agree. But that doesn't mean gold necessarily has any intrinsic value, per se. It has whatever value the free market decides to pay for it. It can go up or down in value. And it has. And it will again.

Now, gold and property do have intrinsic value in other ways. You can live on a property. You can use gold for many applications including jewellery, electronics, and so forth. But in terms of an intrinsic monetary value, it's pretty subjective.

Fiat is probably the worst example of intrinsic value, yet it is used as an example of a currency with intrinsic value because it is backed by a nation's economy. The problem is, it is subject to conditions that are heavily manipulated by banks and governments. Because of the government's ability to print money as needed and the natural tendency to move toward further debt, fiat inevitably declines in value. Not only that, banks can fractionally lend out money over and over again, holding only a small fraction of it in reserve, resulting in a smaller and smaller portion of real money existing in the system.

So, while things can have intrinsic value in terms of their utility, items can not have any true, objective, intrinsic monetary value. It is entirely subjective. Remember this when you decide to invest in something. Think about the value it may be perceived to have - not the value you personally believe it has at the moment. Then, let the invisible hand do its work for you.

image source:

https://www.jmbullion.com