Why is gold valuable?

take everything

This has been bugging me a bit and this is probably the only place i'm gonna find an answer so i hope you don't mind me posting this here.

Why is gold valuable.
I get that there is a small supply.
I get that it's less than easily accessible.
I get that it's shiny.
I get that historically it was highly valued by ancient cultures for presumably its shininess (and if i'm not mistaken used as primitive currency?).

But none of that leads me to think it must be valuable.
Shouldn't value be derived from a commodity's intrinsic utility to humans.

The best i've come up with is that it's a vestigial, arbitrarily-agreed upon currency that backs up paper money.

This leaves me with 2 questions:
1. Why does paper money have to be backed up (this is my main difficulty i guess).
2. And why does gold have to be the thing to back it up?
Why not oil for example (at least this has utility and therefore value).

This is a bit of a frivolous query i admit, but as with so much of economics i find it so arcane.
Any answers apppreciated.
Thanks

amacachi

What modern currencies are backed by gold? That's part of the answer to what you're asking.

magoko101

It's a traditional form of storing/holding wealth.
No different to many others such as diamonds, silver, property etc...

If your hungry your not going to be able to eat any of them or fiat currencies for that matter...

As for backing up a currency... it's a means by which to prevent paper money becoming just that... paper.
As such a piece of paper can be produced for pittance... where as the cost of gold extraction is a little higher.
By backing your paper currency with gold you are insuring that the paper currency is restricted in it's supply. You need to produce more gold in order to have more money in the system.
The end product is that today as a result of the invention of lots of paper money... money is valued at very little while gold is valued much higher.
If the dollar had continued to have been backed by gold then the effort put into back it with gold would probably have meant more value was place on it and it was distributed more wisely (no guarantees of course).
A little like people appreciating the money they work for more than the stuff they got easily... such as credit for instance.

There in lies the reason why you'd look to back it with gold of course... any commodity works just as well in theory.
But as gold is stable, easy to store, easy to transport etc... then it lends itself to being more suited than say oil etc.

smcgiff

Traditionally it had value because it was shiny as you put it and rare back in a time when metal of any kind was incredibly rare. Gold V Iron ... you can imagine what a local chieftan would want his broach made out of.

In modern times it has intrinsic value in that it is used as a conductor in computers. It is still relatively rare.

smcgiff

take everything wrote: »

This leaves me with 2 questions:
1. Why does paper money have to be backed up (this is my main difficulty i guess).

Don't know any country that's pegged to gold any more. A lot of countries keep gold reserves, but that's different. The UK (G Browne) recently sold off a lot of its gold just before it sky rocketed

take everything

OK as i said i'm a bit clueless about economics hence my flawed understanding of the relationship between gold and currency above.

Is this a reasonable interpretation:
It's primarily a historical/traditional thing.
If in the past rich people valued gold (for whatever original (however spurious?) reasons) it then becomes hard to remove gold as a sort of currency over time, and it retains its value relative to other things for this reason.
Its transportability/storability being other factors.

The scarceness/inaccessibility is not the full story.
More the continuing of a tradition of valuing one particular scarce/inaccessible resource (ie gold) over and above many other equally scarce/inaccessible resources.

magoko101

take everything wrote: »

Is this a reasonable interpretation:
It's primarily a historical/traditional thing.

Historical in the sense the reasons it is deemed to be of value still hold. Not readily available, pretty, transportable, etc..
These still hold true somewhat today.

If in the past rich people valued gold (for whatever original (however spurious?) reasons) it then becomes hard to remove gold as a sort of currency over time, and it retains its value relative to other things for this reason.
Its transportability/storability being other factors.

The scarceness/inaccessibility is not the full story.
More the continuing of a tradition of valuing one particular scarce/inaccessible resource (ie gold) over and above many other equally scarce/inaccessible resources.

It wasn't just rich people who valued gold of course. Gold was deemed to hold a certain high value and of course rich people would have more. You also have had silver coinage of a lesser value along without other metals of course.
No real reason for it really other than when you look at most civilizations, they've all seemed to have valued it irrespective of direct contact (say south america n egypt n out own celts).

As for what currencies can be backed with... highly unlikely to see it beng backed by gold any time soon. But it's expected that due to fears of inflation people will look to buy gold in order to store there wealth. This in turn forces up demand n the value of it.

take everything

Historical in the sense the reasons it is deemed to be of value still hold. Not readily available, pretty, transportable, etc..
These still hold true somewhat today.

When i say "historical" i'm just wondering if its value has more to do with gold having been established as a "currency" in the past and the difficulty of disestablishing such a system (even if the original reasons for which it was valued became less pertinent).

Of course as you say those original reasons (it's desirability vs its availability) still exist but i was just wondering if those original reasons were less relevant today than its historical establishment as a "currency".

Or is it indeed solely the balance of its desirability vs its availability that determines its value.
Sorry for my confusion.

Joe1919

Gold ( and silver) always has an intrinsic value in terms of its malleability and resistance to oxidation and tarnishing, hence its suitability for jewellery, dental work, cups (chalices) etc.
This was especially the case before stainless steel.
It resistance to oxidation and high conductivity makes it a valuable metal in electronics.

Scotty #

Gold is EXTREMELY rare. Even with todays modern mining techniques only about 1,500,000Kg are produced a year. When you consider that gold is very very heavy, that's not a lot. It's equivalent to about a 15 x 15 x 15 foot cube.

In ancient times there were not that many materials to make decorative items from but gold was one of them. As it was rare, and much sought after, this increased it's value. It became so valuable that one single piece that could fit in your hand could buy you many many things. Because of this it naturally progressed to becoming an (international) currency.

If your mobile phone was solid gold it would weigh about 1KG and be worth €30,000.kk

andrew

AFAIK gold, apart from use as a conductor (for which only a small amount is needed) has no intrinsic value apart from the value society has placed upon it because it's rare and shiny. This is due to it's properties as a metal; it's very unreactive and won't corrode or tarnish etc, so it stays nice and shiny pretty much forever.

The reason people want money to be backed by gold is because they believe that the implementation of monetary policy is a bad thing (because it can lead to inflation, or something). A gold standard would prevent governments from implementing monetary policy. To this end, people who advocate a return to the gold standard are just being silly, because monetary policy is useful.

thebman

Well on top of the above properties, gold is soft for a metal and easier to work with than many other materials while being pretty, having the above values and still being strong enough.

When it was hard to find tools to work with metal and metal was harder to work with than it is today, this would have been a factor.

FISMA

There's so many reasons as to why Gold holds a special place in our hearts that it is hard to know where to start.

Science wise, Gold does not "rust," it does not oxidize, it is nonreactive. This makes it incredibly valuable when it comes to critical areas where conductivity is important.

Your airbags will hopefully sit dormant for years. However, if they are needed, you better hope that the contacts have not been corroded as any time delay could mean the difference between life and death.

Silver and copper will react and "tarnish." Al reacts to form a sort of protective ceramic coating and I think (but don't quote me) that Pt reacts too, albeit not too easily.

This puts Gold into a league of its own when it comes to computers, medicine, and automotive applications. True, there's only a tiny bit, however, multiply that by a billion or more, and ...

True, lots of other things have been valuable, like salt and Al. Well, there are mountains made of salt and plenty in the ocean. The only trick is getting it out - extraction techniques.

Once upon a time Napolean had guests for dinner. He used the Al spoons and gave the Au to his guests. Why? Humility? No. Al was so expensive to manufacture, that it was worth more than Gold. Nowadays, we can extract the Al much more cost effectively which is why it is so cheap.

Au is rare. All of the Gold ever mined would fit into an Olympic swimming pool. Go out into your garden and pick up a fistful of clay. There's plenty of Al in there, but not Au.

Sure, we might just find a new strain of Au, however, that does not happen too often in the history of the world. The more we search, the greater the cost.

Oil - there's plenty of it and we can manufacture it synthetically. Also, there's lots of old wells about the Earth. Wells are not run dry, but become cost-prohibitive. There's still oil down there - it is just not worth the effort. It is like a tube of toothpaste - easy to get out at first, but the more you use, the harder it is to get out. At some point, you just get a new tube.

Until Physicists are able to efficiently turn Pb into Au, the price of Au will remain high.

"Paper" money, really cotton, linen, and polyester is just FIAT - it's worth whatever you believe it to be. IMHO, it should be backed by something or some % thereof. Otherwise you get, well, look around and realize that this is only the beginning. We haven't even cleared the deleveraging phase of recovery let alone restructure.

You can print a million €'s for everyone tomorrow and we'll all be millionaires. However, you cannot give everyone Au, there's just not enough. For some reason we like/covet/desire/whatever the stuff. 5000 years of precedent is enough for me. Gov'ts can print money, but they can't print Au. The stock-market's scared bunny is Au.

If you can find a way to get people to stop wearing it as jewelry, there will be no stopping you.

Also, peasants (pardon the derogatory term) know the value of Au. In countries that have historically have unstable gov'ts which change the paper currency at will, the people have often turned to Au. Even today in Vietnam, India, and many others, people still turn to physical Au.

Go to google finance and watch what happens to the GLD (gold fund) just prior to the Indian marrying season and Christmas time. It has been a favorite buy-sell time for me for decades - not as predictable as of late.

Did you know that you can hammer Au into such a thin sheet that it would become translucent? I guess it would look green.

Économiste Monétaire

The Economist carried an article on gold a few weeks ago:

http://www.economist.com/node/16536800

hinault

FISMA's post is very interesting and correct.

What I find incredible is that gold was recognised throughout the world, almost from inception, as being the most valuable commodity.
Different civilisation in disparate locations throughout history all derived the same conclusion regarding gold.

Gold was traditionally the value that backed paper money.

Paper money was, if you like, a note passed from buyer to seller whereby a piece of gold was to be transferred from the buyer to the seller to pay for good purchased.
And the paper (money) could be redeemed against the piece of gold in question.
That was how paper currency started.

Up to a point in time, paper money (currencies) were valued on the gold standard.

I think President Nixon moved the US dollar away from the gold standard in 1971 and this led to the abandonment of the gold standard generally by international currencies.

Finnbar01

Uses of gold.

1. Jewelry: The Primary Use of Gold
2. Financial Gold - Coinage, Bullion, Currency Backing
3. Uses of Gold in Electronics
4. Use of Gold in Computers
5. Use of Gold in Dentistry
6. Medical Uses of Gold
7. Uses of Gold in Awards and Symbols of Status
8. Uses of Gold in Glassmaking
9. Gold Gilding and Gold Leaf
10. Future uses for gold.

http://geology.com/minerals/gold/uses-of-gold.shtml

11. Use of Gold in Food and Beauty Products

http://www.utilisegold.com/uses_applications/food_beauty/

Also cultural, hsitorical and religous uses of gold.

kmick

Historically gold was how we paid for the exchange of goods and services. It was tangible, durable and people valued it. Initially all currencies were tied to a metal standard which meant if I had 1 pound sterling in my pocket the british central bank would exchange it (in theory) for sterling silver at a set rate.

http://en.wikipedia.org/wiki/Gold_standard


However in the example of the UK the world wars essentially forced them into bankruptcy. They had to sell off their stocks of gold to pay for weapons and oil and to fund the war. So they broke the silver standard that existed.

That standard ensured that governments could not spend more money than they had so it limited them. When they moved to a Fiat money system
http://en.wikipedia.org/wiki/Fiat_money
which is money without any intrinsic value they could inflate or deflate by producing more or less money on a whim.

So back to the original question as to why it is valued. There is a common perception around that a lot of countries are a whisker away from sovereign defaults. In the case of a sovereign default say in the UK the British pound would be worthless. So gold is kind of like an insurance policy against runaway inflation, default and collapse.

One of the major downsides of gold of course is that it does not pay a coupon or interest rate so as interest rates rise we should see the price of gold fall again.

Finnbar01

kmick wrote: »

One of the major downsides of gold of course is that it does not pay a coupon or interest rate so as interest rates rise we should see the price of gold fall again.

When interests rate are rising that's because inflation is present in the economy. Gold has always being used as a hedge against inflation. So if anything gold would rise and not fall.


Take a look at this graph: http://en.wikipedia.org/wiki/File:Gold_price_in_USD.png

That's just my opinion not finanical advice. Lols.

kmick

Finnbar01 wrote: »

When interests rate are rising that's because inflation is present in the economy. Gold has always being used as a hedge against inflation. So if anything gold would rise and not fall.


Take a look at this graph: http://en.wikipedia.org/wiki/File:Gold_price_in_USD.png

That's just my opinion not finanical advice. Lols.

As interest rates rise inflation tends to fall. Low interest rates are more likely to cause inflation. Also it cost people holding gold more as they are getting a zero rate and the markets are paying an increasingly higher rate.

johnmcdnl

http://www.youtube.com/watch?v=vVkFb26u9g8

It's a short documentary that explains where money comes from and shows how gold is linked with the value of money

rigumagoo

This has been bugging me a bit and this is probably the only place i'm gonna find an answer so i hope you don't mind me posting this here.

Why is cash valuable.
I get that there is a small supply.
I get that it's less than easily accessible.
I get that it's paper.
I get that historically it was highly valued by ancient cultures for presumably its paperyness (and if i'm not mistaken used as primitive currency?).

But none of that leads me to think it must be valuable.
Shouldn't value be derived from a commodity's intrinsic utility to humans.

Time Magazine

rigumagoo wrote: »

Shouldn't value be derived from a commodity's intrinsic utility to humans.

Think of real-world contracts, like a lease on an apartment. Useful to both parties (landlord and tenant) because it clearly outlines the responsibilities and the requirements of the agreement. And a contract signed today is legally enforceable tomorrow. Very useful thing to have knockin' around, and people like useful things. (Of course if there were a communist revolution and the legal system broke down tomorrow the contract would not be useful, but that's pretty unlikely.)

Money acts as a contract for any good. I can use it as a contract for a cup of coffee. Coffee seller will accept this contract to buy something tomorrow. That's useful. (Of course if there were a communist revolution and the legal system broke down tomorrow the contract would not be useful, but that's pretty unlikely.)

johnmcdnl

rigumagoo wrote: »

This has been bugging me a bit and this is probably the only place i'm gonna find an answer so i hope you don't mind me posting this here.

Why is cash valuable.
I get that there is a small supply.
I get that it's less than easily accessible.
I get that it's paper.
I get that historically it was highly valued by ancient cultures for presumably its paperyness (and if i'm not mistaken used as primitive currency?).

But none of that leads me to think it must be valuable.
Shouldn't value be derived from a commodity's intrinsic utility to humans.

it should be - historically money was linked to gold but the capitalists decided to abolish the gold standard basically so they could make more money... and to control inflation etc etc is what they'll tell you...

The gold standard only allows as much money to be produced as gold is produced - this means to get more gold they'd have to mine more gold which is difficult so the bankers lobbied and lobbied until the gold standard was gotten rid of so more money could be loaned out so the banks could get richer quicker basically

Money is worthless in reality - it's only the common man's belief that money is valuable that gives it value - nothing else....

take everything

Time Magazine wrote: »

Think of real-world contracts, like a lease on an apartment. Useful to both parties (landlord and tenant) because it clearly outlines the responsibilities and the requirements of the agreement. And a contract signed today is legally enforceable tomorrow. Very useful thing to have knockin' around, and people like useful things. (Of course if there were a communist revolution and the legal system broke down tomorrow the contract would not be useful, but that's pretty unlikely.)

Money acts as a contract for any good. I can use it as a contract for a cup of coffee. Coffee seller will accept this contract to buy something tomorrow. That's useful. (Of course if there were a communist revolution and the legal system broke down tomorrow the contract would not be useful, but that's pretty unlikely.)

Don't think he was looking for an answer, just making a point (by parodying my OP) about how the question "why is gold valuable?" is not dissimilar to asking "why is current currency valuable?".
And i accept both are socially agreed upon contracts.
Maybe i was really wondering why gold (having been a primitive currency) continued to retain its value with the advent of contemporary currencies.

That and questions like:
1. If you found a massive goldmine in your back garden tomorrow (ie increasing the world supply massively say), would you be richer or would gold devalue?
2. If gold was found to cause cancer tomorrow or even if gold just became incredibly naff (thereby presumably diminishing the demand suddenly) would a guy with gold be suddenly poorer.

I can see how contemporary currencies (whose supply is controlled by governments and whose demand is controlled by the "social contract" aspect mentioned above) have value.
But are the supply and demand (and hence the value) of gold really as unchangeable as that of printed money.

andrew

Gold varies in value just like money does (not sure whether this graph is inflation adjusted, but the point remains.)

Hasschu

Men may come and men may go but old man river goes on forever. Gold is like that, it has a pleasant colour, it is pleasing to the touch, it is malleable, it has a low melting point, it does not tarnish. How could you not adore it. The human mind attributes value to gold that has been consistent for thousands of years. Economic systems implode with regularity every fifty to 400 years, capitalism has had a good run. Fiat currency I will not comment on so as to avoid the onset of depression. As long as the beady eyed Frankfurt bankers have influence over the value of the Euro there will be no need to buy gold, just ride it out and keep control of yourselves until the Gold bubble goes pop.

Austerity

Hasschu wrote: »

Men may come and men may go but old man river goes on forever. Gold is like that, it has a pleasant colour, it is pleasing to the touch, it is malleable, it has a low melting point, it does not tarnish. How could you not adore it. The human mind attributes value to gold that has been consistent for thousands of years. Economic systems implode with regularity every fifty to 400 years, capitalism has had a good run. Fiat currency I will not comment on so as to avoid the onset of depression. As long as the beady eyed Frankfurt bankers have influence over the value of the Euro there will be no need to buy gold, just ride it out and keep control of yourselves until the Gold bubble goes pop.

You call gold a bubble, how many people do you know who actually own any physical gold?

If gold was a bubble wouldn't everyone and their grandmother be buying gold? I don't know any single person who even owns a single ounce of gold.

Hasschu

Austerity- More than half the population own gold in the form of watches, jewellery, ornaments, nick nacks. In some countries gold is "the" store of wealth, places like rural India where people in the midst of poverty and malnourishment walk around with thousands of Euro worth of gold anklets. Not much faith in the Rupee? In Ireland we are blessed with a sound currency managed by responsible people. When we managed our own currency I can attest that there were gold Sovereigns, Kruger Rands, Canadian Maples in nooks and crannies in many households. Presently the very rich in the developed world see Quantitative Easing being rolled out in waves as countries try to devalue their currencies and improve their trading positions. The rich have the usual assets, property, stocks, bonds, bank deposits...... Rampant inflation will cut into those hence the need for a store of real value of which precious metals are the most useful. Compact, rust free, tarnish free, highly portable, concealable in case you have to make a run for the border if things get out of hand on Kildare Street.

Wantitnow

Gold has intrinsic value, and there is a limited supply. Fiat money is worthless paper or digits on a computer that can be printed / created almost without end. The only value paper / computer money has is in its scarcity - in our debt based economy all money is created and lent at interest, so there is never enough to pay back all the loans plus the interest, and the system can only keep functioning by ever greater amounts of debt being created to pay of the previous ones.

This is where we are now, all the governments and peoples of the world are upto their eyeballs in debt and the system is locking up. It's the same as when all those pyramid schemes started to run out of victims, and all the people that had invested in them ran around to all their 'friends' desperately looking for investors, trying to keep the pyramid going until they got their payout. Except this time it's a debt pyramid and the 'friends' knocking at the governments door are the banksters who want us to take out a multi billion euro loan to invest in their ponzi scheme, so they can get all their money out before it collapses - and collapse it will, and we'll be the ones locked into debt slavery for the rest of our lives.

Glad I got that off my chest...

Économiste Monétaire

Wantitnow wrote: »

Glad I got that off my chest...

Marvellous, but this isn't your blog. Keep the rants, conspiracies, and trite populist phrases (e.g., 'banksters') out of this forum. Only warning.

drunken_munky52

Gold has always been an investment flight. Its value is inverse to the value of the currency. Its a phycological pattern based on the fact the gold is a relatively scarce resource and has some applicable applications (other than jewelery). People are selling their gold because they can get currency for it, which I believe is non-nonsensical. Gold standards are corrupted.

The value of gold is determined subjectively, so even if you had a gold standard you could still manipulate its value of the natural resource.