With all the talk about recession, depression and doom, gold seems to be again in the mind of many people, and its price climbed significantly (with large fluctuations). So why would people rush to gold?
We live in a world of fiat currency, and if people stop trusting in the currency, they abandon it and by experience something else it used as money, typically another currency. This phenomenon of dollarization is based on the fact that people still trust the replacement currency, ofter the US dollar. But what if people do not trust that either, as some imply is likely?
Thus people fall back on gold. But gold is not a good currency for everyday transactions, as it is not possible to have small change in gold. This used to be a problem before fiat money, as discussed by Thomas Sargent and François Verde.
But whether gold is the optimal currency is not the question here, it is why people value it at all. It is rare, it is shiny, people like to look at it (although this may just be because it is highly valued). But it is not particularly useful. If you think about it, if society or the market collapses, there is not much you can do with a gold bar apart from hitting people with it or using it as a doorstop. Ammunition, tools, clothing, food are much more valued in such circumstances.
Is the value of gold just an illusion, as much as the value of fiat money? Why would people trust gold more than money? In fact, Dubey, Geneakoplos and Shubik argue that given that gold has no consumption value, it should not be valued. Cigarettes, however, are valued, and their value disappears once consumed.