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Why Does Gold Have Value? - Money Talks 8.

Why Does Gold Have Value? – Money Talks 8.


 

Gold has been a valuable commodity since it was discovered thousands of years ago. The Egyptians are one of the earliest cultures to have fashioned gold into jewelry and for other ornamental purposes, marveling at gold’s natural shine, durability, malleability, and wonder.

Gold’s appeal has not diminished over the centuries, nor has its store of value. It is about to be the year 2020, and yet there is arguably no safer way to preserve your wealth than to buy gold. Yet, there is still some misunderstanding about gold by the general public, as evidenced by our recent survey How Well Do Americans Understand Money?

One question that could stand for further clarification is a central one: why is gold valuable?

 

 

Gold is valuable because of its natural qualities

That is, gold is intrinsically valuable. Something with intrinsic value is valuable because of the way that it is. Gold is a metal that is durable, dense, and yet can be fashioned into practically any shape because of its malleability. So, let’s say that you had to go on the lamb or run from an invading army. Let’s also say that you need to hide your wealth for an indeterminate period of time.

 

Paper money can be buried, but you run the risk of it disintegrating over time. Coins are generally not valuable enough to be worth storing in such a scenario (unless they are gold, of course). Contrarily, gold could be buried, stored under water, or hidden practically anywhere without risk of degradation. You could even melt gold down and fashion it in a way that makes it easier to hide. Granted, this is not a scenario that most people are going to face, but it speaks to gold’s long-term value as a means of wealth preservation. Put it this way: if you were going to bury a time capsule for your great-great-great-great grandchildren and had to pick a means of storage, gold would not be a bad choice.

 

Who knows what value your paper money will have over a hundred years from now, if the bills even hold up physically. When your progeny open the time capsule, a gold brick will still be a gold brick, and it will still have value. This unchanging nature both in terms of physical integrity and value is a major reason why gold is valuable.

 

 

Gold is valuable because it is scarce

The value in anything lies in part in its scarcity. Whether it is food on a desert island, a limited edition pair of Jordan sneakers, or tickets to the Super Bowl, the less of a desirable object that exists, the more people are generally willing to pay for it. Gold is a finite resource. It is not cheap to extract from the earth, and much of the gold that exists as a readily purchasable asset is held by those with no intention of giving it up. Their logic: why would I give up my gold? For what? In fact, the governments of the world maintain most of the gold supply in their reserves. This is a smart move, as it ensures a level of control over their national currency’s value (which we will get to later) and also restricts the flow of gold in the private economy, which provides a floor for the price of gold by ensuring a restricted supply.

 

Mining gold is also expensive, especially at this point in time when most near-surface gold has been mined. This means that the supply of purchasable gold, while always increasing, is unlikely to jump in a way that materially impacts supply. So, the amount of gold that is actively available for purchase today is only a fraction of the gold in existence. And because gold is a universally-accepted commodity with intrinsic value, it maintains a baseline demand over time. To reiterate: scarcity plus desirability equals value. Gold is scarce, it is desirable as a store of value, and thus it is valuable. 

 

You know what is not scarce? Paper money, which is a fiat currency backed by nothing of tangible value.

Gold is valuable because it is recession and depression-proof

Gold is a time-tested store of value that only becomes more valuable during severe economic downturns. Conversely, paper money could theoretically become valueless, depending on the severity of the downturn. History has shown us that this is a distinct possibility. See: the United States of American circa 1929, Germany circa 1914, and Zimbabwe circa 2019 as examples of how an economic downturn can ravish the value of a national currency, to the point where it is more useful as kindling for a bonfire than as a way to buy food or medicine.

 

In strong economic times, sellers follow the government’s lead, accepting paper money and coins in exchange for essential and non-essential items alike — milk, medicine, meat, even Mercedes-Benzes. But when the economic stuff hits the fan, the purchasing power of a dollar declines rapidly, as consumer confidence in an entire economic framework diminishes and, if inflation cannot be stopped, collapses. In these times, the wise hold onto what they know to be valuable: gold. Its scarcity, density, and time-tested desirability as an asset with real value makes it even more valuable as the value of a paper currency crumbles.

 

This is why American President Franklin D. Roosevelt decreed a mandatory buyback of gold in April 1933 amidst the Great Depression. Executive Order 6102 essentially made it illegal for private American citizens to own any significant amount of gold. The ostensible purpose of this decree was to reverse inflation and restore confidence in the U.S. dollar, but its net effect was the U.S. government taking control of the vast majority of the national gold supply (shout out Fort Knox).

 

And yet, we’ve since abandoned the gold standard, print money like there is no tomorrow, and remain as vulnerable as ever to recessions, all while the purchasing power of the dollar declines each year

 

Check out our “Money Talks” series, to learn more about the financial system!



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