Why is Gold Valuable?

Gold has been valued for thousands of years due to its rarity, durability, and universal appeal. Unlike paper currency, gold holds intrinsic worth and has been used as a store of value, a medium of exchange, and a hedge against economic instability. Its scarcity, resistance to corrosion, and historical significance make it a trusted asset in times of financial uncertainty. In this article, we explore the key reasons why gold remains a valuable and sought-after investment.

Economical History of Gold

Gold has captivated human civilization for millennia, serving not just as a precious metal but as an enduring symbol of wealth and power. Its allure stems from its unique properties: it is rare, durable, malleable, resistant to corrosion, and aesthetically pleasing. These characteristics have established gold as a cornerstone in the development of economies throughout history.

No nation questions its value, and during times of chaos and uncertainty, the precious metal provided a healthy dose of confidence and stability. Even today, central banks everywhere hold a portion of their wealth in gold.

Gold represents an excellent indicator of inflation. Because gold's supply and its production rate are limited, an influx of currency to which gold is compared will see the metal rising in relative value.

Contrast and Importance of Gold

Most generally agree that gold has intrinsic value. But gold has been around so long, will this commodity lose its value?

It could be argued silver is more valuable than gold because its physical attributes (such as conductivity) make it indispensable in our technologically advanced world.

Or what about platinum? It's much rarer than gold, yet the market prices platinum at an approximately 31% discount relative to the yellow metal. Rationally, platinum should trade at a higher premium, but it doesn't.

The early universal acceptance of gold's scarcity incentivized ruling powers throughout human history to modulate its acquisition and distribution. The holistic record of gold is not just of rational scarcity, but of deliberate manipulation.

To put it simply, we all recognize gold's inherent value. But how much of this recognition is a byproduct of long-term social engineering is open to debate.

Pros and Cons of Investing in Gold

As an investment category, gold (especially physical gold bullion) offers a viable alternative to stocks and cryptocurrencies. For one thing, gold is “real” in that it is unlikely to ever go to 0.

With a track record of over 5,000 years, you're not going to find an asset class quite like it. At the same time, no investment is without risk. Here are some pros and cons to consider.

Pros

• Inflation Hedge: Arguably the most important reason to invest in gold is its natural hedge against inflation. As you know, central banks can theoretically “print” as much money as they want. However, the amount of above-ground gold is incredibly scarce. Further, the amount mined annually doesn't fluctuate significantly. If a central bank prints more currency, gold will simply rise in value to preserve its value relative to that currency.
• Universal Appeal: Back in the early 1990s, the currency of the Soviet Union became worthless overnight. Because the communist empire collapsed, its state-issued money no longer carried any value. If you had gold, you might not fret about a currency reset or collapse because the precious metal is essentially the universal benchmark of value.

Cons

• Limited Growth Potential: Unlike a company's stock which represents equity in a business enterprise, gold is just gold. Without a negative catalyst such as a currency crisis or fears of rampant inflation, the precious commodity doesn't offer much of an incentive. Also, it doesn't help that gold obviously yields nothing passively.
• Not a Social Hedge: While gold provides an inflation hedge, it doesn't protect against severe social fissures. For instance, when the pandemic first struck us, toilet paper represented the most sought-after commodity, not gold. This also raises the philosophical question that if society melts down, money of any medium may not have much meaning.

Gold Production for Commerce

Gold plays a significant role in the financial realm. However, you may be surprised to know that gold as an investment only represents its second largest source of demand. In fact, investment and central banking demand combined still doesn't reach the biggest source of demand. When asked why gold is valuable, the answer is probably adorned on our body somewhere: jewelry.

Relevance of Gold

Gold is one of the rarest commodities, and we only mine about 2,500 to 3,000 metric tons worth to feed growing global demand.

In contrast, according to the Board of Governors of the Federal Reserve System, the M2 money stock currently stands at over $19.4 trillion, up 26% year-over-year. It's easy to “manufacture” currency to accommodate various monetary policies. Obviously, the same cannot be said for gold.

Gold is not only a store of value but a consistent benchmark. You can't arbitrarily increase its supply, meaning monetary tools such as fractional reserve banking are simply out of the question.

This purity of valuation is one of the reasons why investors prefer the universal stability of gold.

Where to Invest in Gold

While very few financial advisors will recommend their clients to go completely into gold, the precious commodity has a place in a diversified portfolio. You could consult these best gold brokers for more detailed information.

A Relic But Certainly Not Barbarous

Through its history as money across millennia, modern societies today still recognize gold as both a store of value and a symbol of social power and influence. Although we no longer exchange this precious metal as a currency, it's still vital as an investment platform and a benchmark of economic health. While it's not without risks, gold provides a measure of confidence that arguably no other asset class can provide.

Frequently Asked Questions