Gold – Why is it Valuable?

February 10th, 2011

Why IS gold valuable? We all know that gold is used in jewelry, but really, why is it that a simple element of the periodic table can command such huge piles of cash, when no-one really uses it for anything other than accenting their wardrobe?

The answer lies deep inside some of the biggest and most secure vaults in the world. That’s where most of the gold that has ever been mined is sitting right now. Most of the crude oil that has ever been pumped from the earth has been burned. Most of the wheat that man has grown as food has already been eaten. Even most of the silver that has even been mined has been consumed in photography, mirrors, switches, and these days, consumer electronics. The consumer electronics industry uses a tiny bit of silver in every darn thing they manufacture. Most of the silver that has been mined has been used in ways that prevent it from being reclaimed economically. But not gold! For thousands of years, humankind has been extracting it from the Earth, and hoarding it away. People have kept track of where it is.

This gives gold a very unusual property that almost no other substance known to man shares – predictability. Oh, sure, we know how much sea water there is on earth from year to year, but there is no practical way to possess any significant portion of it. The volume of all the gold ever mined and hoarded by humans is quite small by comparison – imagine a cube, about 60 feet (or about 20 meters) per side. That’s it. Through thousands of years of trying, that’s all we’ve come up with. And very little has been lost to landfills. It is very easy for a country, or other powerful individual or organization, to amass a non-trivial percentage of all the gold in the world in a secure, undisclosed location, where they know it will remain safely in their posession.

As such, gold has long served as a perfect “yardstick”. Almost everything else we associate with a quantity of capital fluctuates in quantity. Copper inventories can soar or crash, depending on mining output and consumption. Money supplies can be vastly inflated, causing the market desirability of any given unit of the currency to fall off sharply. The supply of gold, on the other hand, increases at about 1% to 2% a year, and has for decades. There will be no surprises, in terms of how much gold there is. And there is almost no other thing that one could accumulate that that is true of.

And this is the reason why most of the gold in the world is in the vaults of powerful nations, organizations, and individuals.  Anything else they might `hoard`to preserve their wealth would be subject to changes in value as a result of fluctuations in the World`s stockpile.  Gold is predictable.  Gold is stable.  Gold is the gold standard.  In a world where growth is seen as the only thing to aspire to, the value of such stability is easily forgotten.  The US hasn`t forgotten.  Germany hasn`t forgotten.   France hasn`t forgotten.  Russia hasn`t forgotten.  They still hoard unimaginable piles of the stuff, knowing full well that it will provide stability in a volatile world.  Which, of course, keeps the price very high.  The price of gold would drop like a stone if even those 4 countries decided to cash in their reserves.  But they do not.

And so gold remains very valuable.

For a very pessimistic take on the world of money, and the role that a beautiful, distinctive, inimitable, divisible, indestructible, compact, rare commodity with an extremely predictable supply may play in a world where money itself becomes volatile, check out this article by Timothy Wood.