Why Is Gold Valuable?

If you ever talk to older generations or any conservative investor about the value of gold, you will hear a common claim – gold has remained a precious commodity that has rarely depreciated over time. It has proven over the centuries that it can be the closest people may get to a risk-free investment. Right now, gold is selling at an all-time high in 72 different national currencies, though the US Dollar is yet to catch up. (1)

This is a rare achievement. If you were to go back in time right now and ask anybody about gold, be it kings, philosophers, or Isaac Newton, they would all agree that gold is worth whatever the cost. They would likely assume it would stay that way for the coming generations. Our crowns, heirlooms, and even some luxury supercars all feature this precious metal.

Just what makes gold so priceless? How does it endure the test of time?

A Brief History Lesson

Gold is just one of over 100 elements in the periodic table, but it stands out over all the metals. It’s used in electronics, architecture, household ornaments, and many other applications even though it is one of the rarest minerals on Earth. Through all market crises, most notably the 2015-16 stock market selloff where the Dow plummeted over 1,100 points, gold has been heralded as a stable safe-haven asset. (2)

Most of the gold we have today arrived on Earth long before we did. It came aboard meteorites that punched through the surface of the Earth some 200 million years after its formation. (3) It has since fascinated poets, nobles, and economists throughout our fledgling existence. We’ve used it as currency for most of our recorded history until developing more efficient ways of minting.

The earliest use of gold as a formal currency dates back to the 8th century BCE in Asia Minor, where irregularly shaped coins were stamped on one side with the face of a king. These coins were excavated in Sardis, now modern-day Turkey. The stamps reflected the likeness of King Croesus of Lydia. The Lydians could refine their gold with salt and furnaces that could purify them at 600 to 800 degrees Celsius. (4)

However, before the advent of coins, there was already an informal system of values in the Age of Antiquity. People would weigh gold, silver, and copper to provide the equivalent value in goods and services. Romans, Egyptians, and ancient Indians have all used gold in some way as a form of currency.

The Gold Standard

People who delve a little deeper into literary terminologies have often asked about the gold standard. One of their burning questions is, “What is it?” And if this standard is so good, why don’t we use it anymore?

Under the gold standard, all forms of currency are defined as a certain amount of gold. For instance, a US Dollar was worth 1/20 of an ounce or 10 grams of gold in the Era of the International Gold Standard before World War I. The value of one ounce of gold was precisely $20.67. (5)

The silver standard follows the same idea. The British monetary unit, the Pound Sterling, meant exactly one pound of sterling silver. These standards functioned without government intervention through private institutions minting gold coins and printing gold-backed paper currency. A bank would guarantee you your money’s weight in gold if you decide to exchange it because gold’s purchasing power has never been proven to depreciate. (6)

Fiat Money

Under today’s unbacked or fiat money, there is no gold value guarantee. Most countries left the gold and silver standard because they constrained their governments’ economic reach. The obligation to redeem a bank note’s value in gold or silver has limited money printing at times when governments, rightly or wrongly, thought more state control over money printing was a better idea.

A common objection to the gold standard is there can be some random shocks to the global supply and demand patterns for gold, which can give gold-backed currencies unstable purchasing power. However, through many gold rushes and cultural revolutions, the inflation rate in the US remained less than 1.5% during the Gold Standard Era. This is a testament to the unwavering value of gold.

Extreme Rarity

While we don’t use gold to back our currency any more, gold is still highly prized. As of this writing, an ounce of gold costs around $1,700. Each year, gold production adds around 2,500 to 3,000 tons to its total above-ground stocks. This sounds like a tremendous amount, but in reality, it can easily fit inside the average living room. (7)

Just recently, a vast store of gold was found sitting underneath volcanic reservoirs in New Zealand. (8) When it’s mined, it can be worth billions for the country, especially now that gold prospects of its size are becoming rarer and rarer.

The Two Elements Fit for Reserve Currency

Over many years, humans have tried manipulating different metals to use for currency. Alkaline metals were extremely reactive to cold water, producing all sorts of contortions like metal hydroxide, hydrogen, and salt. People in ancient China tried to use lead and copper, but they quickly corroded.

The other two precious metals in the periodic table, lead and palladium, are technically more valuable than gold. These elements are so rare that they can’t have any practical use outside of heirlooms and highly technical applications. It takes over 1,700 degrees Celsius to melt platinum and 1,555 degrees Celsius to melt palladium. This brings us back to the need to use silver and gold.

Silver is durable and rare enough to be desired, which makes it a great currency and suitable for making into reserve bars. Gold, on the other hand, is very inert. It’s the least reactive of any metal in the periodic table and won’t corrode when exposed to elements like water, oil, or oxygen.

Gold never rusts, decays, or tarnishes. If you make a golden bust of your pet dog and leave it in your basement for the next 1,000 years, it would look the same when archeologists unearth it. This is unlike copper, which would turn green in only a few years. (9) Gold’s condition makes it the perfect metal for use in reserve bars.

Great Aesthetics

Another excellent characteristic of gold is its workability. It’s so easy to manipulate and turn into various shapes and art forms, whether it’s statues, plates, or decorative coins. People perfected the technology behind melting gold centuries ago, and it’s now a highly efficient process you can do at home.

Gold’s chemical symbol “Au” is from the Latin name aurum, which means “shining dawn.” The ancient Egyptians claimed that gold was the color of the skin of their sun god, Ra. Unlike fashion fads that come and go with seasons, gold has been a timeless statement that has been popular throughout history.

It’s no surprise that something so easy to manipulate, timelessly beautiful, and enduring for thousands of years, has been used in everything we find fascinating. Gold is prominently utilized in the Sistine Chapel, the Taj Mahal, the Queen’s crown, and the Golden Buddha. Gold has been mentioned in poems, in the Odyssey, and many other timeless works of art.

Gold’s usefulness appearance secure its place as one of the most desirable precious metals.

Modern Uses

Throughout our history, gold has always been used to symbolize power, opulence, purity, and accomplishment. Nowadays, gold is seen as the shining embodiment of wealth, achievement, and excess. You can see it in Grammy awards, Oscar trophies, and Olympic medals.

Other elements, like carbon, can be fashioned into diamonds that can be equally as rare and beautiful as gold, but none has held a more distinct place in our cultural lexicon. It is used in smartphones that cost $50 million (10), Lamborghinis that are worth $7.5 million (11), and even in ice cream cones for you to actually eat. (12)

Gold also has a ton of industrial and other unexpected applications thanks to its malleability, conductivity, and high resistance to corrosion. Nowadays, nearly anyone can take pure gold, a hammer, and an anvil to create unique items like gold leaf. If you’ve never heard of it, gold leaf is a very thin form of gold that feels like cloth. It is used to coat wagyu steaks, a topping for desserts, and an additive in candy making.

Gold’s reflective properties and ability to be thinner than paper make it an ideal component for space suits and satellites. The Hubble Space Telescope has several layers of gold to keep it from corroding, and photos of astronauts on spacewalks reveal a layer of gold in their visors, protecting their eyes from harmful cosmic rays. On the ground, engineers have used gold leaves to cover the windows of the Mandalay Bay in Las Vegas because it repels light and heat so well that it lowers their cooling bills.

Into the Future

Gold is used in nanotechnology because it resists many types of bacteria and breaks through the body’s defenses. At an atomic level, gold is a different color: sometimes crimson or light blue. Also, it has predictable reactions with specific proteins. Gold is already used to fight cancer at a cellular level. A study in the Proceedings of the National Academy of Sciences found that if you mix gold nanoparticles with tea, they combine and latch onto prostate cancer to attack it.

Pure gold attached to the underside of the eyelid can ease problems for people with facial paralysis or Bell’s palsy. Also, when injected into a patient’s joints, gold nanoparticles can alleviate arthritis. The University of Washington has found that injected gold can reduce surface swelling, damage, stiffness, and pain.

Gold can also protect the quality of the air we breathe. If you own a car purchased after 1975, it probably features a catalytic converter. These devices serve to convert noxious gases into less harmless forms. Gold may be a valid replacement for platinum, palladium, and rhodium, which are rarer metals used in mass production of catalytic converters.

Among its futuristic uses, the most practical is probably in the field of electronics. Gold can stretch to only a few microns thick and bond materials inside computer chips. On a macro level, it can work to protect conductors like copper or silver from corrosion, which is why premium microphones and AV equipment feature gold plated jacks.

Things Are Looking Up

When you look at the value of gold in countries like Australia and Canada, prices are rising radically. These valuations are not from inflated currencies but come from two of the most productive economies in the world. Even in developing countries like Argentina, gold is seeing a surge in value. It remains largely unaffected by the inflation of their fiat currency.

Gold used to be $20.67 an ounce before the Coinage act of 1834 and the formation of the Federal Reserve. If you take $20.67 and look at the percentage of change today, when the price of gold is currently $1,735, the dollar has lost over 98% of its value. These numbers show that there is only a little over 1% of the dollar’s purchasing power left since the gold standard’s removal.

Gold, however, has remained stable in its outlook. It has not wavered because of the depreciation of a country’s currency, stock market crashes, or disruptions in global supply and demand. It walks a straight line, rarely ever flinching, to more and more value.

This makes gold the best choice for a retirement plan or a very long-term investment. Some even argue that gold and silver can no longer be called investments but simply hedges against inflation. Gold, on its own, has a more than a 6,000-year track record of appreciation, and things are looking up for investors who have taken stock in it early.

Sources

1. https://www.fxstreet.com/analysis/gold-hits-an-all-time-in-72-currencies-201901151333
2. https://en.wikipedia.org/wiki/2015%E2%80%9316_stock_market_selloff
3. https://www.sciencedaily.com/releases/2011/09/110907132044.htm
4. https://www.ancient.eu/gold/
5. https://en.wikipedia.org/wiki/Coinage_Act_of_1834
6. https://www.investopedia.com/ask/answers/09/gold-standard.asp
7. https://www.gold.org/about-gold/gold-supply/gold-mining/how-much-gold
8. https://qz.com/486557/millions-of-dollars-in-gold-and-silver-are-sitting-under-these-new-zealand-volcanoes/
9. https://www.livescience.com/32487-why-does-copper-turn-green.html
10. https://www.luxhabitat.ae/the-journal/top-10-most-expensive-mobile-phones-in-the-world/
11. https://www.cnbc.com/2013/09/17/gold-plated-lamborgini-yours-for-73-million.html
12. https://www.businessinsider.com/24-carat-gold-ice-cream-is-now-a-thing-2018-2?r=US&IR=T