Noah Smith: What is the payoff structure of gold?:
Even if one would not personally choose to make one-way directional bets on an asset, one might want to specify the asset's full state-contingent payoff structure, for those who do choose to speculate or to use the asset to hedge their idiosyncratic risks. In other words, when does gold pay off? [John] Cochrane tosses out a possible answer:
There is all this bit about gold, guns, ammo and cans of beans. If you think about gold that way, you're thinking about gold as an out of the money put option on calamitous social disruption, including destruction of the entire financial and monetary system. That might justify a different answer.
This idea is pretty common. But is it true? Would gold really pay off in the event of a calamitous social disruption? I'm really not sure that it would….
[If] fiat money's value rests on the stability of governments; remove governmental stability, and people will go back to using gold…. If that happened, it would be handy to have stocked up a whole bunch of the suddenly back-in-use medium of exchange. But I seriously question whether this would ever happen…. Gold has always had a lot of limitations as a medium of exchange. Most notably, it is relatively easy to steal. To realize this, all you have to do is look at games like World of Warcraft, Diablo, Dungeons and Dragons, or the original Final Fantasy…. You… get gold not by doing an honest day's work, but by… beating people up and taking their gold…. The entire world of modern fantasy role-playing is a [n un]subtle joke on gold's unsuitability as a medium of exchange.
Now in the past, people just sucked it up and dealt with this, spending large amounts of money and effort to guard their gold…. So if fiat systems collapsed but electronic networks remained intact, it seems to me that we'd move to some sort of Bitcoin-type artificially scarce digital currency, rather than gold…. ToyotaBucks.
OK, but what about a calamity so huge that electronic networks collapsed? In that case, wouldn't we have to go back to using physical money? Maybe, but it wouldn't be gold. In the days when people carried around gold doubloons and whatnot… stable centers minted and gave out the gold coins. But in the event of a massive modern global catastrophe that brought widespread anarchy, the gold bars buried in your backyard would not be swappable for eggs or butter at the corner store. You'd need some big organization… that big organization will simply kill you and take your gold bars, Dungeons and Dragons style…. Gold is never coming back as a medium of exchange, under any circumstances. It is no more likely than a return of the Holy Roman Empire. Say goodbye forever to gold money.
So when does gold actually pay off? Well, remember that stories do not have to be true for people to believe them…. Gold is like a credit default swap backed by an insolvent counterparty--it has no hope of actually being redeemed, but you can keep it around forever, and it goes up in price whenever people get scared…. Gold pays off when there is an outbreak of goldbug-ism. Gold is a bet that there will be more goldbugs in the future than there are now. And since the "gold will be money again" story is very deep and powerful, based as it is on thousands of years of (no longer applicable) historical experience, it is highly likely that goldbug-ism will break out again someday…. If your income for some reason goes down when goldbug-ism breaks out, well, go ahead and place a one-way bet on gold.