Warren Buffet said gold has “no utility.”
When asked why central banks hold gold bullion, Former Fed Chairman Ben Bernanke simply said, “tradition.”
The thing is, they’re both right. Gold doesn’t produce earnings or dividends, and many banks and investors do hold it for, among other reasons, tradition.
And yet a single ounce of gold—roughly the size of a sugar cube—currently sells for over $1,000. And it’s been part of the world’s many monetary systems for literally thousands of years. What makes it so darn valuable?
There are five primary reasons why gold has been valuable since it was first discovered, and why it will retain its value into the future (check the gold price per ounce). Let’s have a look at them.
Reason #1: Chemical Properties
The first reason gold is valuable is linked to its physical properties that render it ideal for use as money.
In the days of early man, barter was the most common means of trade. But as huts evolved into houses and villages grew into towns, the need for a standardized form of money also grew.
Almost anything can be used as money, though obviously some things work better than others. It's hard to transact an exchange of value with things people don't want, and other things don't store value well. Over thousands of years, gold emerged as the best form of money.
It’s a bit puzzling why gold’s chemical properties are seen as superior to other metals. After all, when compared to gold:
Silver has far more industrial uses
Copper is much more plentiful and has superior electrical conductivity
Platinum and palladium are both more rare and the best known metals to reduce harmful auto emissions
So what makes gold so valuable chemically? Here’s why mankind chose it over other assets…
Gold cannot be destroyed by…
Water (it doesn't rust or tarnish)
Time (coins remain recognizable after a thousand years)
Fire (minimum 1945.4° F to melt)
Gold doesn't need…
Feeding (like cattle)
Fertilizer (like corn)
Maintenance (like printing presses)
As a metal, gold is uniquely…
Malleable (it spreads without cracking)
Ductile (it stretches without breaking)
Beautiful (ask any bride)
Rare (all the gold ever found would only fill two Olympic-sized swimming pools)
There's no superstition here. It's just common sense. Gold has the ideal chemical properties to serve as money and a good store of value—just as aluminum is good for making aircraft, steel is good for building structures, uranium is good as nuclear fuel, and paper is good for making books.
We don’t print books on aluminum or build skyscrapers out of paper. Every element has its ideal use.
Reason #2: Timeless Appeal
Of the 118 elements in the periodic table, gold is arguably the most attractive to the human eye. And of the “noble” elements, most are silvery in color (except for copper, which corrodes and discolors when exposed to moisture).
This is another core reason gold has been successful as money: it captivates.
And that appeal has not changed. An Egyptian Pharaoh thought it was just as beautiful and desirable as a bride does today.
Reason #3: History
Analysts’ negative view on gold will often recite a popular and shopworn myth: gold isn’t a good long-term investment. That mistaken belief usually rests on a short-term look at gold by critics that are biased toward owning stocks.
Let’s look at the gold price since the founding of America.
Since going off the gold standard in 1933, and ending full convertibility in 1971, the gold price has been in a long-term uptrend. Clearly, the value of gold has grown once it was allowed to freely trade.
Let’s peer further back in time to get a better perspective. Consider how gold’s purchasing power has endured throughout the centuries…
During the time of Christ, an ounce of gold would buy a Roman citizen his toga (suit), a leather belt, and a pair of sandals. Today, one ounce will still buy a good suit, a leather belt, and a pair of shoes.
In 400 BC, during the reign of King Nebuchadnezzar, scholars have discovered that an ounce of gold bought 350 loaves of bread. Today, an ounce still buys about 350 loaves ($1,100 divided by 350 = $3.15/loaf).
In 1978, gold averaged $193/oz, and it took 290 ounces of gold to buy the median priced new home in the US. In 2014, gold averaged $1266/oz, and it took only 225 ounces of gold to buy the median priced new home in the US. The other 65 ounces would buy you an in ground pool and luxury automobile. Gold not only held its value, it boosted your purchasing power.
The alternative to using gold coins or gold bars as money has been paper currencies. Government fiat currencies—those backed by nothing but trust in the issuing authority—are a relatively new invention. And none of them have lasted for long! Eventually, they have all failed.
The same is true for stocks and bonds. A stock certificate or bond issued a hundred years ago is all but certain to be worthless today. That’s not to say that stocks and bonds are bad investments. The point is that different assets have different purposes and different life spans.
Gold’s purpose is as a long-term store of value, and as insurance against crisis and inflation. History shows it has done just that.
Reason #4: No Counterparty Risk
Gold is the only financial asset that is not simultaneously someone else's liability.
Gold doesn’t require the backing of any bank, government, or brokerage firm. Gold cannot suffer a default or its value fall to zero.
No counterparty risk means that once you have physical gold in your possession, you don’t depend on someone else to fulfill a contract or keep a promise for it to retain its value.
Stocks, bonds, ETFs… essentially all paper assets require another party to make good on their end of the deal. Not so with a gold coin in your hand.
Keep that in mind the next time you have any doubts about gold’s long-term value.
Reason #5: Financial Advantages
Gold has specific financial attributes that make it highly valuable. What other assets deliver the following qualities:?
Gold has no…
Time limit (most metal is still in existence)
Shelf life (it never rusts; silver does)
Counterparty risk (remember Greece and Cyprus bank customers?)
As money, gold is…
Liquid (easily convertible to cash)
Portable (you can hold $50,000 in a small coin tube)
Divisible (splitting up diamonds changes their value)
Durable (how long would wheat last as money?)
Consistent (one piece of real estate is always different than another)
Convenient (copper coins of sufficient value would be too bulky and heavy)
Value dense (high value held in a small quantity)
Private and confidential (you control who knows you own it)
Gold cannot be…
Printed (it takes a mine 10 years to go from discovery to production)
Counterfeited (you can try, but technology will catch it every time)
Inflated (it can't be reproduced by the whim of a central banker)
Gold is valuable because it has intrinsic financial traits that no other asset does.
Why Is Gold Valuable?
Gold will retain its value into the future for the simple reason that it always has. People have valued gold for over 3,000 years. It is the ultimate form of money. No matter what the social, political, or financial climate has been in the world, gold has never gone to zero or defrauded an investor.
How many stocks have survived for thousands of years? Gold is an excellent wealth and portfolio diversifier for the reasons we list above. The coins you buy today will outlast you!
We know gold is valuable because mankind has chosen it, history has proven it, and its zero counterparty risk confirms it.
I recommend diversifying your portfolio into one of the most valuable assets that exists (learn where to buy gold and how to buy gold). Gold isn’t a panacea, but it does offer advantages over almost any other type of investment or asset.