Why is gold valuable?
Its rarity is one reason why gold has been valuable for centuries
Gold is a timeless asset that has been around for thousands of years — and most likely will be around for thousands more. It has represented wealth since ancient times and has been used as a currency and investment across the globe.
But why, exactly, is gold valuable? We’ll dive into the details of gold’s history, how to measure gold’s value and how it compares to other metals.
Key insights
- Gold is rare, useful, durable and beautiful, giving it intrinsic value and market value.
- As of publishing, gold is priced at around $2,000 per ounce.
- Gold is seen as a safe-haven asset during economic uncertainty.
- Gold can be purchased through gold stocks and funds or in physical form (bullion).
How valuable is gold?
Historically in the U.S., the price of gold was fixed by the U.S. government at $20.67 per ounce. It remained at this price from 1834 until 1933. Eventually the fixed price was raised, and in 1971, the U.S. removed the gold standard. This allowed gold prices to skyrocket and be set by the free market based on supply and demand. As of Dec. 12, 2023, the price of gold was just under $2,000 per ounce.
Today, the value of gold is usually measured by its spot price. The spot price of gold is the price of 1 ounce of gold, denominated in U.S. dollars. This value fluctuates daily.
Gold spot prices are obtained by averaging prices of gold futures from two major derivatives market operators, Comex (CME) and London Bullion Market Association (LBMA). An oversight committee, several banks and a panel of chair members set the spot price twice a day, known as the LBMA Fix.
Individual markets also have their own gold prices, set by the supply and demand of the market — in other words, at what price investors are willing to buy or sell gold (per ounce).
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Reasons why gold is valuable
While gold is inherently valuable for its practical use in industrial and tech applications, it also holds value simply because it’s gold. Here’s a quick breakdown of reasons why gold is valuable:
Rarity
Gold is finite. This means that gold mining takes a ton of effort and the gold supply is not easily increased. In fact, the gold supply only increases at a rate of about 3,000 metric tonnes, or 1.5%, per year. And the costs of mining and extraction efforts make gold a rare precious metal that will always hold value.
Historical and cultural significance
Gold has been historically and culturally significant for thousands of years. From jewelry and ornate buildings to currency and trade, gold has been a symbol of wealth for a long time.
The first gold currency was stamped coins as early as 550 B.C., and more recently, many fiat currencies were tied to a gold standard. Gold is seen as a hedge against inflation and a safe-haven investment for many institutional and retail investors alike.
Industrial and tech applications
Gold does have some practical applications that give it inherent value, such as:
- Electronics: Gold is a great conductor of electricity, making it ideal for electronic applications. It is also noncorrosive and durable, so it will last for a long time.
- Dentistry: Gold is used in dentistry due to its characteristics as non-allergenic and chemically inert. It won’t rust or cause any issues within your mouth. This makes it ideal for fillings, crowns, bridges and orthodontic appliances.
- Medical applications: Gold is used to treat a small number of conditions. It is also used in some diagnostic testing and in small amounts in some medical equipment.
Because people think it has value
Frank Murillo, managing director of Snowden Lane Partners, believes gold is valuable simply because people say it is. And this holds some truth to it.
“I’ll steal a line from Warren Buffet on this one, ‘It doesn't do anything but sit there and look at you’,” said Murillo. “I’d argue there is no real intrinsic value to gold — it does not produce anything to sell and does not generate any profits. Its ‘value’ is driven by the whims of what people think its worth — which says more about the psychology of some investors than it does about its actual value.”
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Gold vs. other metals
Gold is the perfect balance of rare, durable, useful and beautiful. It is more functional in many ways than other metals but isn’t as readily available as others, giving it more value.
Here’s how gold compares to other metals:
- Gold vs. silver: Gold and silver are both popular investment metals and have a long history as currency and in jewelry. But gold is more rare than silver and attributed more value by the marketplace. In fact, gold is currently over 80 times more valuable than silver by the ounce.
- Gold vs. platinum: Platinum and gold are both rare precious metals that are popular with investors. But gold is seen as a more fine metal, is used in jewelry and is more popular with investors, while platinum is mostly used in the automotive industry. Thus, gold has become more valuable than platinum in recent years.
- Gold vs. palladium: Palladium is another rare investment-grade metal that is similar to platinum and is used in the automotive industry. Its price is similar to platinum; it also trails gold in value at the time of publication.
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FAQ
Has gold historically been a good investment?
Gold hasn’t historically been the best investment, though it is known to retain purchasing power and slightly outpace inflation. But when the U.S. removed the gold standard in 1971, gold prices rose quite a bit, averaging over 7.0% annual returns. Historically, the stock market has outperformed gold, but in certain time periods (such as during high inflation), gold has risen in value more than stocks.
Is gold safer than cash?
Gold is a timeless precious metal that holds value, but it is not necessarily safer than cash. Gold prices fluctuate quite a bit and can lose value. And owning physical gold bullion increases the risk of theft and losing a large amount of money at once. Cash deposited in an FDIC-insured bank offers up to $250,000 in protection for each depositor, meaning if the bank fails you get your money back. This can be seen as more secure than investing in gold, as your dollars are protected by the U.S. government.
Is gold good to have in a recession?
Gold can be a good investment during a recession — or it can drop in value along with the rest of the market. But during six out of the last eight recessions, gold has outperformed the U.S. stock market. This isn’t a guarantee, but shows that gold has historically performed well during times of economic turmoil.
Bottom line
Gold has been around for thousands of years and continues to be a favorite alternative asset. Gold’s value is derived from its rarity, durability, beauty, liquidity and popularity. While gold prices are now set by committee based on futures contracts, local markets and gold dealers will have varying prices based on supply and demand for gold.
Gold will continue to be valued by investors, collectors and nations. But while gold is seen as a safe-haven investment during times of inflation or economic uncertainty, it also has a real risk of dropping in value. It’s important to understand your investment time horizon, risk tolerance and goals before choosing to invest in gold.
Article sources
- CME Group, "Gold Futures and Options." Accessed Dec. 12, 2023.
- The Library of Economics and Liberty, "Gold Standard." Accessed Dec. 12, 2023.
- Bullion By Post, "Who sets the price of gold?." Accessed Dec. 12, 2023.
- LBMA, "LBMA Precious Metal Prices." Accessed Dec. 12, 2023.
- Statista, "Gold mine production worldwide from 2010 to 2022." Accessed Dec. 12, 2023.
- World Gold Council, "Money and Gold." Accessed Dec. 12, 2023.
- The Royal Mint, "How Rare are Precious Metals?" Accessed Dec. 12, 2023.
- MacroTrends, "Platinum Prices vs Gold Prices." Accessed Dec. 12, 2023.
- CME Group, "Palladium Futures and Options." Accessed Dec. 12, 2023.
- Statista, "Average annual return of gold and other assets worldwide from 1971 to 2022." Accessed Dec. 12, 2023.
- CME Group, "How Does Gold Perform with Inflation, Stagflation and Recession?." Accessed Dec. 12, 2023.
