When you hear the word “gold,” your mind most likely makes an instant mental connection to wealth and value. But why is gold so valuable?
Gold has played a pivotal role in history, with wars fought over it, new nations formed around it, and people, ideas, and things moving and merging in its wake.
Fast forward to the 21st century, and we’re spoiled for choice around investments. There are numerous stores of value that investors can seamlessly access. But even now, countries and individuals still rely on gold as a safe haven for wealth.
Just last year, we saw demand surge to an 11-year high as central banks went on a bulk bullion buying spree.
What about this particular metal makes it such an enduring store of value?
Keep reading to find out a few of the reasons behind the value of gold.
1. Gold Is an Ancient Medium of Exchange
Historians estimate that humans have been using gold since 4000 BC. Initially, ancient cultures used gold primarily for jewelry. In 1500 B.C., gold became widely recognized as a standard medium of exchange for international trade, and Eqypt, home to the gold-bearing region of Nubia, became a wealthy nation off the back of its gold.
During this time, gold shekels became a standard unit of measure in the Middle East. In 1091 B.C., China legalized small squares of gold as legal tender.
The next country to create a gold-based currency was Lydia. Gold played a role in the rise of the Roman Empire. After gaining control of Spain’s gold region, the Romans issued various gold coins.
After this, the British established a metals-based currency, Venice issued the gold ducat, and early European explorers were sent out in search of gold.
The year 1787 A.D. saw the first gold coin struck in the US. Over time, promissory paper notes replaced gold coins as currency, but several countries adopted what’s known as the gold standard, including Britain, Germany, France, and the US.
2. Gold Has Tangible Value
Besides having a rich and long history as a medium of exchange, gold also has tangible value. Unlike digital assets, stocks, bonds, and shares, you can physically hold gold in your hand.
While it’s not recommended that you store gold coins or bullion in your backyard, many investors appreciate the physical nature of gold. Precious metals can’t “evaporate” overnight, and their value is less vulnerable to market swings.
A company can crash and burn overnight, leaving investors high and dry. But a bar of gold remains a bar of gold, no matter what the markets are doing.
Gold also has a variety of industrial applications, which further supports its value. Thanks to its malleable nature, conductivity, and resistance to oxidation, gold is used in:
- Electronics manufacturing
- Dentistry and medical tools
- Defense, automotive, and aerospace industries
Currently, 6% of mined gold is used in electronics, 37% goes to bullion, 9% to medals and coins, and 47% is used in jewelry.
3. It’s a Limited Resource
Another reason why gold is valuable is its limited supply. If you’re wondering how much gold there is in the world, it’s estimated that the earth’s crust only contains 0.005 parts per million.
So far, humans have extracted a good portion of this. Roughly 244,000 metric tons of gold have been discovered. Of this, only 57,000 metric tons remain unmined.
4. Gold Is a Great Inflation Hedge
One of the biggest reasons for buying gold is its capacity to act as an inflation hedge. Inflation is caused by various factors, but one of the primary drivers is increased fiat money supply.
The U.S. has witnessed this firsthand after the Fed increased the money supply by 40% in response to COVID-19.
Unlike notes, gold is something that can’t be printed. The supply is largely determined by physical limitations and mining costs.
When money devalues through increased supply, gold’s intrinsic value remains the same, and its monetary value typically increases, making it an ideal inflation hedge.
Thanks to this, investing in gold is a time-honored way to diversify. Portfolio diversification isn’t just a matter of buying different stocks and shares. If you want to truly diversify your portfolio, you need to invest in asset types that aren’t correlated to each other.
Gold has a very low correlation to most other assets.
5. Gold Is a Safe Haven Asset
Due to its inherent value, gold is considered a safe haven asset. It is one of the assets that investors flee to in uncertain economic conditions. If you take a look at the price of gold over the last ten years, you can clearly see this sentiment play out in the charts during the 2008 recession and COVID-19.
6. Gold Doesn’t Degrade
One of the reasons why gold became a medium of exchange, and a store of wealth lies in its resistance to corrosion and…
Read More: 8 Reasons Why Gold Is Valuable