Why is Gold Valuable?

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Contributor, Benzinga
October 25, 2022

Not only does gold present itself as a universal store of value, it has historically attracted investors for its natural scarcity. 

Cryptocurrency and technological innovations bring potential competition to gold, but the precious metal leverages a long history of monetary value that nothing else can rival. 

Learn more about why gold is valuable now.

Economical History of Gold

Barter represented the earliest method of the exchange of value. Later on, between 9,000 to 6,000 B.C., early societies exchanged cattle and other livestock as a form of money

Around 1,200 B.C., communities located in modern-day China began using cowrie shells as mediums of exchange. Later, early humans adapted the cowrie shell concept to bronze and copper coins. 

Later, around 500 B.C., other societies in the world adopted precious metal coinage, which included gold and silver. Because of precious metals’ geological scarcity, it was easier for early civilizations to exchange goods and services of substantial value.

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 supply and its production rate is 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 it’s the 2 l-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.

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Accounting for 48.5% of global gold demand by industry in 2019, consumer interest in jewelry has contributed the most to generally rising prices of the precious metal. 

Interestingly, via logical deduction, this dynamic suggests that most of the gold ever mined still exists in a readily accessible form. As further evidence, only 7.5% of global gold demand comes from the technology industry.

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.

Best Gold Brokers

While very few financial advisors will recommend their clients to go completely into gold, the precious commodity has a place in a diversified portfolio. 

As you don’t know what lies ahead following this unprecedented pandemic, the historical provenance of gold offers a substantial degree of confidence.

You should 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 the precious metal as 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

Q

Q. How old is the gold on Earth?

A

According to research which the University of Arizona led, more than 40% of the world’s gold is 3 billion years old.

Q

Q. Who decides the value of gold?

A

Ultimately, the value of any asset comes down to what a person is willing to pay for it. However, it’s helpful to think of gold not in terms of currency exchange rates but what a particular weight of gold (say 1 troy ounce) can buy.

Q

Is gold better than cash?

A

Many people believe that gold is better than cash because when interest rates are low, it is difficult to earn income on cash. But gold will always be valuable and increase in worth>

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