Ive never been able to understand the concept of gold. Why is it so valuable? How do countries know that the amount of gold being held by other countries? Who audits these gold reserves to make sure the gold isn’t fake? In the event of a major war would you trade food for gold? feel like people would trade goods for different goods in such a dramatic event. I have potatoes and trade them for fruit type stuff. Is gold the same scam as diamonds? Or how is gold any different than Bitcoin?
In: Economics
Gold is a finite resource. It has value beyond just an object (ie electronics). You can’t just make more gold.
Conversely. Paper money you can just print and print and print. If one day people decide they can’t exchange paper money the only thing it’s good for is kindling for fire.
> Why is it so valuable?
Because it’s rare and people covet it.
> Or how is gold any different than Bitcoin?
Gold is a physical thing, for one. And it has been continuously valuable for millennia, not just a few years like Bitcoin.
Gold has three main properties that makes it valuable. It’s rare, it doesn’t rot and it’s attractive to the human eye.
When the main value in the world is labour, you’re going to want something that everyone recognizes as a common token for the labour. Money, in other words. Gold is hard to deflate (it’s rare), it’s easy to make coinage (it’s softer than many metals) that doesn’t rust (unlike silver and copper that corrode easily) and it has a really nice shine to it. It’s relatively easy to judge the authenticity of gold when compared to other metals.
As far as value during times of crisis, I’ll borrow the words of Moist Von Lipwig:
“[A] potato is always worth a potato, anywhere. A knob of butter and a pinch of salt and you’ve got a meal, anywhere. Bury gold in the ground and you’ll be worrying about thieves for ever. Bury a potato and in due season you could be looking at a dividend of a thousand per cent.” ~Terry Prachett, Making Money(Discworld #36)
In order:
Gold holds value because there is a set amount of it on the planet. This makes it inflation proof because no government can arbitrarily print more gold.
They don’t, really.
No one. Most countries switched off the gold standard and over to fiat-based currency where money is just worth whatever the government says it’s worth, and other countries value it depending on how wealthy the country is. The US, for example, is not letting any inspectors into Fort Knox to see how much gold is actually there.
If the country you live in has a coup and the money is now worthless as happened historically in Germany or Zimbabwe, for example, you might have a small, fungible amount of valuable substance such as gold to help you escape to someplace safer or buy goods along your journey
Gold isn’t exactly the same scam as diamonds. Diamonds have no inherent worth and their price is kept artificially high by a cartel system headed by De Beers.
Gold is a thing that actually exists and cannot easily be faked unlike bitcoin. Gold is also a commodity, so you can find a buyer for it anywhere and they will give you the same value day to day.
Gold does not meaningfully appreciate though. As the saying goes, in the times of ancient Greece, an ounce of gold buys a fine suit of clothes. Today, an ounce of gold also buys a fine suit of clothes. This is why using your money to buy gold to just hang out in your vault is not a sound investment, because it will not become valuable more quickly than inflation so you can’t make money with it versus just putting it in an index fund or buying stocks.
Gold is simply the most useful metal.
If gold were cheap, we would use it for everything, from coating things we didn’t want to tarnish, to electrical wires, to every trace on a circuit board. It has a wonderful combination of being electrically conductive, thermally conductive, rustproof, non-toxic, antibacterial, easily workable, and usable with every metalworking application.
Jewelry, dentistry, electronics, metalworking – every generation of technology we find new uses for it. Why? Because gold is a heavy metal that’s remarkably non-toxic. You can use gold as everything from radiation shielding to weights.
But, it’s incredibly rare, and it’s impossible to manufacture in any meaningful quantity. You could spend all of the power generation on earth running particles accelerators, and you’d struggle to make a few grams of the stuff in a year. That leaves mining, and the existing reserves.
No, gold is not a scam like diamonds, or bitcoins. Gold is an ultra-rare metal created from the explosion of neutron stars, and it represents, in short, a tremendous amount of energy stored as a useful metal.
Quite a while ago, I heard an interesting Planet Money episode where they discussed why gold became a common currency. Their approach was to go through the whole periodic table and eliminate all elements that would be impractical for this purpose. Some because they were too common. Others because they were too rare. Or they didn’t exist in a solid state at typical earth temperatures. Or because they were radioactive, or not stable enough to maintain their composition.
By the time they’d eliminated everything that would be impractical, they were only left with the elements that are traded as precious metals.
I think for gold, it helps to understand the history of it.
So pre-history, humans coveted gold. Why?
Because before we could work metals, gold was soft enough to be worked, hard enough to not be readily accidentally damaged after it was worked, and didn’t corrode like other metals did.
Those aspects of gold culturally gave it an appeal to people. Like the anti-corrosion made people think gold had anti-aging benefits. The fact it was malleable made people associate it with positive change or adaptability.
So then, over the next few thousands of years, as people wanted it, other people wanted it **just because other people wanted it**. Once it got pegged with that sort of universal value, it became a way to barter between currencies. Like today, you have an exchange rate, and people buy currencies directly with currencies. But in the early days of currency, you had to trade something people wanted to have them part with their currency, and they probably didn’t want your foreign coins. People were always happy to take gold though, because they knew they could sell.
This led into modern banking. The Knights Templar are often thought of as the grandfather of modern banking, and a lot of what they did was take someone’s assets at one branch, exchange them for a bill denoting the worth of their stores, and then to give that bill at a different branch for valuables that could be locally traded. These valuables on the back end often were gold or small jewels.
In the 20th century, gold was found to be an excellent resource for circuitry. It conducted electricity better than almost anything we could find, but critically, it didn’t conduct as much heat and had a higher melting point, so it is one of the ideal metals for small circuits. Of course uses like this made the price go up, but it’s still valuable as a bartering tool regardless.
Gold is rare and mostly hard to get. Makes it valuable. Gold doesn’t rust. It’s stable for a long time period. It’s soft and can be worked into beautiful forms for jewelry. It has a sublime shine which is appealing to human eye. These days, gold is also used in high end electronics for all its special properties as a metal that can be worked easily and won’t rust.
Finally gold’s element designation is AU. Because if someone takes it from you, you can say AU give me my gold back.
Gold is a soft metal, so can be shaped easily. Gold doesn’t rust, so stays pretty for a long time. Gold is rare and requires lots of work to mine. Vanity is a common driver for determining what is considered “expensive” that does suffers from a “chicken and the egg” problem, but it’s durability has made it rise above art, fashion, titles, and so forth, which come and go.
The world mostly moved off of gold as being the standard in 1933 when President Roosevelt because deflation encouraged hording, while a small amount of inflation encouraged investment.
People trade their paper money for gold nowadays because the paper money depends on the strength of a country in comparison to other countries. Gold doesn’t have many intrinsic value nowadays, so it is faith-based, faith that other people will also try to buy gold when times get hard.
Bitcoin also has no intrinsic value, but breaks ties to any given country’s strength on the world stage, so people want to hold onto their buying power when countries start making more and more foolish decisions, like not playing nice when deciding how big to make a fee when trading with them or going to war.
Other precious metals like platinum is an alternative that is also rare and doesn’t rust (sometimes we want metals to be hard instead of soft because machines and chemicals are rough with them). Like gold they mostly rely on faith rather than having an intrinsic value. The value often quoted is in the automotive industry, namely the exhaust cleaner, but if the world shifts to electric, then these precious metals won’t be needed. Copper has a tiny growth and the most intrinsic value, but is fairly common.
To understand the rarity of gold, there has only been approximately 244,000 metric tons of gold mined in human history. Compare this to approximately 3,000,000,000 tons of iron ore that is mined **each year**. Add to that it’s usefulness, workability, and other features and it is easy to see why gold has been valuable for a long time.
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