It is common to see people in the gold market divided into two camps. Some argue that people will no longer need physical gold after increases in inflation and drops in price. Others warn of a future dollar-less economy and recommend buying precious metals before it is too late.
You may believe that gold investment has been too popular recently, or you may feel that the Federal Reserve’s policies will lead to a poor dollar (or neither): regardless of what you believe, one thing is clear: Gold is here to stay. That doesn’t mean the value won’t fluctuate from time to time (commodities always have and always will).
However, it’s no accident that gold has historically been chosen as a currency and hedge against financial uncertainty. Gold possesses many intrinsic properties which confer to its value – properties that do not necessarily rely on the stock market conditions. To understand why gold has remained popular throughout history, we break down essential features of this distinct metal.
1. Gold has real value and is stable over time
Gold is a tangible asset that can be bought, sold, traded, and consumed – thus increasing its real value to the market. As an investor, you should understand that gold has never lost all of its value, even in the most terrible situations for currency (which could not always be said about other investments). Extreme circumstances have forced governments to resort to extraordinary measures, but gold has maintained its real value even during the most extreme events. In times of inflation and scarcity, other assets lose their value – while gold retains its role as a beacon of currency stability.
Currently, the United States operates on a fiat money standard. This means that dollar bills have value because our government claims they do – not because their material resources are scarce or useful in some other way. These are not backed by anything, which would make their value useless. They can’t be reused for anything, and their worth plummets if too many exist in circulation.
The history of fiat money is peppered with examples of inflation, hyperinflation, and even complete financial collapse or devaluation. Gold’s value comes from the fact that it has both cultural and industrial uses, making it a viable resource acquisition and exchange (as opposed to fiat currencies) for thousands of years.
Gold is a precious metal used all over the world. Its primary purpose in many countries is to make jewelry, but it can also be found in electronics and medical equipment. In ancient times, gold has been prized as much for its beauty as its use value. This remains true today. Gold is never without value and has never come close to it.
2. Gold is flexible and survives against the test of time
One of the primary reasons gold has a longer history than other commodities is that it can maintain its value across time and space. Gold survives even the most destitute conditions that can cause it to decay and become useless for trade. Imagine if bananas were used as money. Bananas are soft and perishable, and because they vary depending on the region of the world, they cannot be reliably traded. The same is true for any other “biologically living” commodity.
What about diamonds? Valuable, universally recognized, and physically tougher than gold. However, when a diamond is broken into three pieces, it loses its value. This is because a diamond’s value depends on its inherent symmetry, which means it can only be cut in half. Gold is malleable, which means that it can be manipulated without breaking and always returns to its original form, making it possible to divide the metal equally.
This property (along with its historical value and stability) makes gold an excellent monetary commodity that can be stored and transported without losing its value.
3. Gold is scarce
One of the reasons why gold thrives and fiat currencies die is how easily printed money can be created. Governments and big banks can print stacks and stacks of paper bills, but there’s no guarantee that money printed on paper will maintain its value. Economically, goods are valuable when they’re scarce.
Gold is harvested by mining, which requires labor and equipment to keep up with supply. This may fluctuate throughout the years, but it tends to be consistent, predictable, and suitable for investors. Unless alchemy is discovered, gold will remain scarce due to its requirement for so many different things.
4. Gold does not need government backing to have value
Traders and merchants needed a way to facilitate trade before printing presses or central banks came into existence. Many different things acted as money in ancient times, including rice, salt, fruits, and candy. Yet, it was more precious metals like gold that won the competition to be a financial instrument. This is because gold is hard to counterfeit, and it cannot be traced back to its specific source the way that goods can.
Besides being versatile and lightweight, gold was also readily acceptable by a variety of cultures. Therefore, it had an intrinsic quality that made it the first currency – without any decree from any authority. You don’t need FDIC insurance on gold because you can’t hold fractional reserves of gold in a banking system. Gold is a resilient asset because its intrinsic values have stood the test of time and are not influenced by market trends, economic crises, or even fiat currencies.
What investors can learn from history
As the world transitions into a digital economy, it is valuable to understand why gold has been considered valuable for thousands of years. Gold’s physical properties are relevant in today’s market and can be relied on in an increasingly uncertain future.
When this article was written, the price of gold hovered just over $1,291 per ounce. That’s about half of its peak in late 2011 and nowhere near what it was worth ten years ago. When gold was first introduced to currency after the abandonment of the gold standard, it climbed from $35 per ounce, an increase of more than 3,689%. Meanwhile, the dollar has lost over 90 percent of its purchasing power during that same period.
It is impossible to predict the price of gold decades in advance. However, history teaches us that gold will always be a valuable asset and that its value will generally increase over time. That’s a fact worth knowing for investors who can buy and hold gold to reap the rewards years later.