Precious metals are a commodity like any other commodity. They are valuable because people had to spend effort finding and mining them, and because people find them useful enough to exchange other valuable commodities for them. Their price, measured across decades going thousands of years back, is tied to their use value.
It is true the prices can be manipulated over the short term - in 1979, the Hunt brothers made silver go from $6 an ounce to $48 an ounce before it crashed back down. Over the long term though, the value of commodities are tied to their value - how hard it is to find and mine gold, and whether people find it useful enough to exchange other valuable things for it.
In other words, their subjective value? Gold has no value to me at all, as I don't have any use for it. If you tried to sell me gold, the only reason I'd buy it is if I could immediately resell it for a profit. My subjective value of gold is, therefore, $0.
The price of gold is not really determined by it's subjective value. It's determined by the cost to mine the stuff. The reason 5 lbs of potatoes cost like $5 and 5 lbs of gold costs like $90,000 is because that's what it costs to dig them up even if you prefer the potatoes.
If you were starving on a desert island I'm willing to bet you'd pay significantly more than $5 for 5lbs of potatoes if need be, because of their subjective value.
Likewise, people spend $$$ to mine gold because it's (subjectively) worth $90,000 for 5 lbs. If gold was as effectively rare as it is today, but easier to 'harvest' when you did find it, it would likely be worth about as much as long as all the other subjective factors still held.
Even today Saudi Arabia can pump oil for obscenely low prices (single digit USD per barrel), but it still sells near the market rate.
Congrats, you just decided that gold miners are the most altruistic people in the world, charging people only what it costs to mine the gold, not what the market would bear. I wish other companies could be so generous!
Also, I would recommend "Making Money" by Terry Prachet. Good book that actually explores a lot of the same ideas behind gold as the basis of a currency. In essence, the main character eventually realizes that the gold doesn't actually mean much, the true value of currency is that the society says x money gives you y goods.
Ah - that was a simplification. If it costs $1000 to mine and sells for $2000 then short term the miners will make a profit but long term people will build more mines. This is a slow process - 10 or 20 years but eventually supply exceeds demand, the price drops to $700 or some such, the miners go bust and the cycle repeats. But generally the price stays within a factor of two or so of the production cost.
so you talk about supply and demand, yet think cost is set purely by suppliers? What do you think would happen to the cost of potatoes if only 10% of last years harvest was harvested this year. It would go up, but only to the point where the supply vs. demand equalized, i.e. 90% of people wouldn't be buying potatoes cause they cost way too much, but there would be 10% of the people(like my wife) who would still be willing to buy them at $50 for 5 pounds, cause she values potatoes that much(she's got a serious fixation on potato soup). I.e. the value of a good depends on the person doing the valuing, i.e. subjective value.
It is also very difficult and expensive to dig into the ground with your bare hands and fish out worms, but if you did so you wouldn't be able to charge huge amounts of money for your hand-fished worms. Why? Because worms have almost no subjective value.
