Why is Gold Valuable?

27 Nov
why is gold valuable

Why is Gold Valuable?

No other element has captivated mankind throughout history quite as much as gold. The oldest known gold artifact, found at a prehistoric settlement in southern Bulgaria, dates back to 4,500-4,600 B.C. Beyond its captivating beauty, gold is also a commodity with sustainable value.

Gold is an investment you make because it will always have value, unlike the unstable U.S. dollar, which has lost 96% of its purchasing power in the past century. It is said that in Roman times an ounce of gold would purchase a man a toga, a belt, and sandals. Today still an ounce of gold can buy you a suit, shoes and a belt. After thousands of years and countless transformations in currency, why is gold valuable?

A Brief History of Gold

According to the British Museum, the earliest coins are found mainly in the parts of modern Turkey that once comprised the ancient kingdom of Lydia. They are made from a naturally occurring mixture of gold and silver called electrum. This is the earliest we know man used gold as currency. And these Lydians used it much in a way we do now, by measuring the weight and assigning value.

Gold has historically been used as currency because it is rare enough to retain value without being so rare it is impractical to use. If man used common elements like iron for currency we’d be using very large, cumbersome coins. If you used diamonds to purchase bread you would need impractically small diamond chips. Gold, instead, has remained a viable currency for millennia.

The Gold Standard

Historically, gold was primarily valued intrinsically. This is why European rulers sent explorers around the world seeking the metal. But it truly gained value in the 1800s when countries adopted a gold standard. A gold standard established gold as the only metal that paper money could be redeemed for.  

Gold remained incredibly valuable, but when World War I broke out, countries revoked the gold standard so they could print more money. They returned to the gold standard after the war. In the aftermath, the U.S. faced the Great Depression. In 1934, the Gold Reserve Act prohibited private ownership of gold, and FDR increased the price of gold for the first time in 100 years. The gold standard officially ended on August 15, 1971. The Ford presidency lifted the prohibition on gold on December 31, 1974. 

After gold returned to the free market, its value based on the laws of economics saw incredible growth. Gold skyrocketed to over $100 shortly after being untethered from the U.S. dollar, according to Statista.

Why is Gold Valuable According to Economics?

Gold, like any commodity, is governed by the economic principle of supply and demand. The law of supply and demand is a theory that explains the interaction between the sellers of a resource and the buyers for that resource. The law of demand suggests that at higher prices, there will be lower desire for a commodity. Conversely, at lower prices, demand will be high. In a perfect market, buyers and sellers can find the exact point at which most people want something, while sellers can charge the highest possible price. 

Investment demand is the demand for gold for investment purposes. This demand is made up of direct ownership of coins or bars, or indirect ownership via Exchange-Traded Funds. Investment demand is the most important category of gold demand that drives the price of gold. Factors that affect the investment supply for gold include the level of confidence in the economy, the U.S. dollar exchange rate, the level of real interest rates. 

Another economic function that controls the value of gold is called price elasticity of demand. This is change in demand to a change in price. Something is inelastic when changes in price have a relatively small effect on the quantity of the good demanded. In turn, a good is elastic if changes in price have a large effect on the quantity of the good demanded. Gold is a relatively inelastic product, meaning it can retain its value over time, according to a study by Science Direct

Why is Gold so Rare?

Gold owes part of its value to its rarity, meaning there will never be an overabundance of supply. According to the BBC, all the gold mined throughout history would fit into a square box with sides of around 20 meters (65.6168 feet) in length. Gold is rare because atomically, it is very large. Gold consists of 79 protons, 79 electrons, and 118 neutrons, which means that even in the extreme heat and pressure, natural gold production is rare. 

Elements in the Earth’s crust are measured in parts per million. Copper has a parts per million value of 60. In comparison, gold’s parts per million value is just 0.004, according to learning platform Lumen. Gold’s relative rarity means that the supply remains suppressed, leading to greater demand.

Investing in Gold

People have been investing in gold for centuries. Gold is a safe investment, not a value-creating one. It’s what you buy and where you put your money when chaos threatens markets, when instability rules, and when the dollar looks unattractive. Gold will always have value. If you’re ready to make a safe investment, speak with an RME associate today. Connect with Republic Monetary Exchange today to discuss investment options with a knowledgeable gold and silver professional.For an in-depth look at the legacy of gold in North America, read The History of Gold in America infographic.