Why Is Gold Valuable?

Why Is Gold Valuable? The passion for gold isn’t a recent development in the human experience. Ancient civilizations used the precious metal to honor rulers and gods, and many of the oldest cultures saw a link between gold and immortality.

There is evidence that Egyptians began crafting in gold as early as 5000 BC, and artifacts left by the Incan people indicate they believed it was literally the sweat of the Sun God Inti. 

By 1500 BC, gold was recognized as a medium of exchange in international trade, and that tradition continued for centuries.

Empires and nations minted their own versions of gold currency, and there was a constant push to explore new sources in hopes of increasing wealth.

In 1511 AD, Spain’s King Ferdinand said, “Get gold, humanely if you can, but all hazards, get gold.” This prompted exploration of the Americas, and eventually, the birth of the United States. 

What history doesn’t explain is the why. Why is gold valuable in the first place? After all, there are other metals that are more rare, and there are any number of gems that could serve the same purpose as a store of value. Yet wars have been fought, civilizations created and destroyed, and lives changed forever by gold. 

What Sets Gold Apart From Precious Metals?

Gold attracted the attention of ancient cultures, because it was (and still is) hard to come by.

A little more than 190,000 tons have been mined to date – over six billion ounces – and most of that has been extracted since mining technology advanced in the 1950s.

While that might sound like a lot, it’s actually a relatively small figure. If melted and consolidated, six billion ounces of gold would fill less than four Olympic-sized swimming pools. 

In addition to its scarcity, gold is beautiful. That, along with its extraordinary malleability, made it an attractive medium for adorning temples, objects, and even people.

Gold is chemically inert, so it is not corrosive and it never breaks down. It is an effective conductor of heat and electricity, both of which increase the number of applications in which it is helpful. 

Gold is essentially indestructible, and all of the gold ever produced is still in existence today. It stretches without snapping into pieces, and it stays intact even when flattened to exceptionally thin sheets. Finally, it has a low melting point, so it is easily transformed into a wide variety of shapes and sizes. 

Gold As A Store of Value 

Until the 1930s, a country’s wealth was determined by how much gold it owned. Other forms of currency were backed by the amount of gold in a nation’s vaults.

Many governments abandoned this standard in the early 20th century, though the United States held onto the method for longer than most of its peers.

Eventually, it became clear that economies were rising and falling without the influence of gold, and other forms of measuring a nation’s wealth were adopted. 

However, despite the fact that governments no longer measure wealth by the amount of gold they own, gold continues to be a coveted commodity.

It’s position as a universally recognized store of value prompts individuals, institutions, and entire nations to collect gold as a hedge against volatility in other instruments. In other words, gold remains intrinsically valuable regardless of economic conditions, making it one of the “safe haven” investments. 

Gold As A Safe Haven 

Gold holds its value when other assets don’t, because it is a critical component in a number of products.

Of course, gold is used for jewelry, but it also has important technological applications. Its ability to conduct heat and electricity puts it in high demand for mobile devices, and it can be found in some of NASA’s most complex innovations. 

Today, researchers are exploring opportunities to leverage gold in medicine. Certain tests contain trace amounts of gold, and gold nanoparticles are being used in certain situations to deliver medication throughout the body.

There are uses for gold in the treatment of rheumatoid arthritis, and some of the world’s most advanced scientists are looking at the possibility of using gold in cancer diagnosis and treatment. 

When considered alongside the fact that central banks want large stores of gold in their vaults, these direct applications illustrate why gold is valuable. The next question is how to invest when you don’t want the bother of storing gold coins, bullion, or bars?

Options for Investing in Gold

Aside from actually owning gold in the form of jewelry, coins, bullion, and bars, there are a number of ways to invest.

A variety of stocks, Exchange-Traded Funds (ETFs), such as GLD, and mutual funds are almost exclusively focused on gold and companies in the business of mining and selling gold.

These types of investments carry several benefits in addition to solving the obvious problem of gold storage. For example, they may pay dividends, providing income that gold itself does not. 

Choosing alternative methods of investing in gold attracts some, because of the opportunity to diversify portfolios. ETFs and mutual funds might purchase shares in a range of businesses related to mining, from actual extraction to production, recycling, and so on.

Another strategy is to buy shares of companies mining a variety of precious metals. That adds some stability as the price of gold rises and falls. 

The bottom line is that gold has been intertwined with human civilization from the start, and it has a long history as a store of value. More than that, it’s intrinsic properties make it valuable in a wide variety of industries and applications. While few advisors would recommend investing exclusively in gold, it certainly has a place in any diversified portfolio. It tends to add stability, holding its value and increasing when the market is otherwise in decline. 

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The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.