Why is Gold a Valuable Commodity?
At Sharps Pixley precious metals are, of course, our passion and we love to advise experienced and amateur investors alike when it comes to gold, silver and PGM.
But one enduring question has remained, for years in fact: why has gold remained such a valuable and popular commodity?
Many experts point to the fact that it, in most cases, tradition plays a huge part in our love for the shiny stuff – it’s been operating within the world’s currency system for thousands of years.
Below we have listed five key reasons why gold has been so valuable since its approximate discovery in 3000BC.
The chemical properties of gold have made it very, very useful for creating currency.
In the early days of the history of gold, bartering was one of the most common forms of trading. But as civilisation began to expand; straw huts turned into houses and villages grew into towns, so the need for a more standard form of currency became apparent.
Almost anything can be used as currency, but trying to pull off an exchange using something that someone doesn't want, isn't good value for anyone. It's because of this that gold came to dominate the world's currency.
So, why does gold rank so highly in the chemical stakes?
Gold is immune to:
- Water – it doesn’t rust like other metals.
- Time – even now we’re discovering coins from hundreds of years ago that are still in fantastic condition.
- Fire – gold has a melting point of 1063°c.
Gold is a unique metal because it is:
- Moldable – it will spread out without cracking.
- Flexible – it will stretch without breaking.
- Attractive – that’s obvious.
- Rare – all the gold ever discovered would only fill about two to three Olympic swimming pools.
Gold has the ideal chemical makeup to serve as currency and is a good way of preserving wealth over a long period.
There are 118 elements on the periodic table, but gold seems to trump them all and has a special place in hearts and minds.
Most of the so-called "noble elements" are silvery in colour, with the exception of copper, which corrodes and discolours when exposed to moisture. So, it would make sense that the unique colour and shimmer of gold would’ve captivated our early ancestors.
The Pharaoh's used it to make jewellery and precious ornaments, which we still do today – its beauty seems to be everlasting.
Since coming off the gold standard in the 1930’s and ending full convertibility in the mid-20thcentury, the price of gold has continued its long-term upswing.
To fully appreciate this perspective, it’s necessary to go back in time to consider how the power of gold has sustained through thousands of years of human, political and economic evolution.
- During ancient times, an ounce of gold would buy a citizen a toga, leather belt, and a pair of sandals. Today, the same amount would buy a high-quality suit, leather belt, and pair of shoes.
- During the reign of King Nebuchadnezzar of Babylon, experts have worked out that an ounce of gold would have bought 350 loaves of bread. Today, an ounce still buys about 350 high-quality loaves (£960 divided by 350 = £2.74/loaf).
Paper currencies have been used as an alternative to gold as money. Fiat money is a relatively new invention and is basically currency that a government has declared fit for legal tender, but isn’t back by a physical commodity, which means they are at risk of not lasting for very long – the Papiermark and the original Argentinean Peso are great examples of this.
The same can be said for stocks and bonds. A bond or stock certification issued a century ago will be pretty much worthless today. Of course, though we’re not saying that stocks and bonds are poor investment choices. Any good investor knows that different options have different options and some live longer than others.
As for gold, its purpose is of abiding value, and as a buffer against economic collapse and inflation. And isn’t that exactly what it has done?
No Counterparty Risk
Gold is the only asset that is not concurrently someone else’s risk.
Gold doesn’t need to be backed by any bank, government or brokerage. Gold will not default or drop in value to nothing.
No opposite party risk means that once you’ve purchased gold and have possession of it, you aren't relying on another party to fulfil a contractual obligation to retain its value.
Stocks, bonds and basically all paper assets need another party to ensure they are making the right decisions on their end.
Gold has the following financial qualities that make it highly valuable:
Gold doesn’t have:
- A time limit – almost all of it that has been discovered in still in existence.
- A shelf life – no rusting.
- Counterparty risk.
All gold as a currency is:
- ‘Liquid’ – can be converted into cash easily.
- Separable – splitting up diamonds, for example, changes the value.
- Constant – you know exactly what you’re getting.
- Private – no one will know you have it unless you want them to.
Gold is secure, because:
- It can’t be printed – it takes mines a decade to begin to produce anything tangible.
- Counterfeited – technology is too good for that.
- Inflated – it cannot be put into production at the drop of a hat.
No other asset on the planet has these kinds of benefits.
Will Gold Always Be Valuable?
Gold will remain a precious asset well into the future because, put simply, when hasn’t it? The ancient peoples valued gold and we still do today. No matter the social, political or economic landscape of the world, gold has never been worth nothing.
Gold diversifies wealth and will outlast you and probably everyone that you know, how many stocks and bonds can do that?
Gold is valuable simply because it was chosen by man, has lasted throughout history and has no risk attached to it.
If you’re unsure about your options, you can pop into our London showroom or contact us today.