OK, how do we think about gold prices? Well, my starting point is the old but very fine analysis by Henderson and Salant (pdf), which was actually the inspiration for my first good paper, on currency crises. H-S suggested that we start by modeling gold as an exhaustible resource subject to Hotelling pricing.
Here’s how it works. Imagine that there’s a fixed stock of gold available right now, and that over time this stock gradually disappears into real-world uses like dentistry. (Yes, gold gets mined, and there’s a more or less perpetual demand for gold that just sits there; never mind for now). The rate at which gold disappears into teeth — the flow demand for gold, in tons per year — depends on its real price.
http://krugman.blogs.nytimes.com/2011/09/06/treasuries-tips-and-gold-wonkish/
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