Investing in gold is stated by some as a "safe haven" approach in dire economic times, as gold supposedly retains its value in bad times, and perhaps gains value while other financial instruments decline.

However, there is an irony to this idea of "the value of gold" which often escapes proponents of this investment strategy.

To understand this irony, you first have to understand that gold itself only has value because we believe it does. It is a commodity, within a commodity marketplace. Therefore, it has value because I believe you believe it does, which is what makes value-based trading possible. If you didn't believe gold had value, you wouldn't want it. Only because we agree does gold have value.

We often express this value in terms of a local currency. In the US, this means expressing the price of gold in US dollars. The thinking is that gold will be worth more US dollars in bad times. This makes gold a counter-currency -- if the US dollar loses value, gold gains value relative to the dollar. You can get more dollars for each ounce of gold in bad times.

Because the value of gold is expressed in dollars, which themselves have value for the same reason -- because you and I agree they do. If one of us stops believing this, the dollar becomes valueless to our exchange.

Therefore, your faith in gold is based on your faith in the US dollar. If the US dollar loses its value entirely, gold is worth very little, if anything. Or its value will be stated in entirely alien terms. It's only in a very limited set of circumstances that gold is a good investment -- as a way of hedgingagainst the US dollar or whatever local currency you have.

Aluminum used to be the most prized metal on the planet. Napoleon's most cherished eating utensils were made of aluminum, and preserved for us at state dinners of the highest order. But when our abilities to mine and refine aluminum made this metal commonplace, its value dropped precipitously. It is now so cheap that we wrap leftovers in it. Like gold, its value is based on scarcity, and measured by a fiat currency.

The valuations of both gold and dollars are based on a shared belief. They interact, but neither is any more "real" than the other. As a metal, gold has some nice properties, but it's of limited utility. This is why separating currencies from a gold standard and into fiat currencies has worked so well. There was no inherent dependency. The relationship was imaginary, and the separation only shows how fanciful our belief in the value of gold was.

The irony of gold is that its value is imaginary value is measured relative to another thing of imaginary value. But as long as we agree, we're all set.