Why is gold so valuable? (Moved from CCC)

Factual Questions
1

Hello! This is my first time writting on this board. I love Cecil’s columns, I read them online every day… I sometimes even check many times in a day for a new one!

I have one question though. It’s maybe stupid because it seems obvious, but I can’t think of a good answer for this: Why is gold so valuable? I understand that jewerly is made of gold, and that gold doesn’t rust. However I find hard to believe that that’s the only reason it’s considered a precious metal. For me gold only has value because it has value for everyone else, but if I were in the desert dying of thirst, I would sure prefer a glass of water rather than a gold chain.

Thanks for your time for reading this, and I hope someone answers this question.

Best regards,

Guillermo
Yucatán, México

2

This really requires a separate thread because it’s part of a huge and long-standing argument about the basics of economics.

You should start with reading some of the other threads asking this question. One recent one is Why is gold worth what is, why do we value gold.

3

Than you very much; I only looked through Cecil’s columns, but I didn’t look in the forums… :smack:

Thanks again!

4

<mod>

Split these 3 posts off from a thread about a column in CCC.

No problem, Guillermo. Got you covered. Welcome to the SDMB!

</mod>

5

It’s shiny, it’s relatively rare, and it’s nonreactive.

I think it’s the last item as much as anything that led to its becoming valued. Gold is pretty rare in that it won’t spontaneously change into ‘not gold’. It doesn’t rust, it doesn’t react with other materials. Once you have ‘gold’, you can pretty much count on it being ‘gold’ forever. That, along with some of it’s other properties (e.g. extreme malleability, weight) makes it useful for trade. Basically, it has inherent anti-counterfeiting measures.

Plus, it’s shiny.

6

Part of your self-answer - that’s it’s valuable because people think it is - is of course true. But that’s true of everything. “Value” is an abstract concept. “Value” is purely what someone decides it is; there is effectively nothing that has a fixed “Value.” Not even water, as I can prove by simply walking you into any convenience store and showing you how people will pay more for water than they will for gasoline even though they can get water for free out of a tap (and can’t taste the difference.)

As to why gold in particular sort of became the central currency metal, it’s because it’s the perfect choice. Aside from being pretty,

  1. Gold is essentially inert. It doesn’t rust, tarnish, or degrade, and reacts with almost nothing. Consequently, it keeps forever. 25,000 years from now a gold coin minted today will look exactly the same. This might not seem like a big deal but it really is.

  2. Gold is elemental. There’s no issue of its specific mixture.

  3. Gold is REALLY heavy, and the metals it can be alloyed with generally aren’t, so it’s relatively easy to detect alteration.

  4. Gold is the most malleable substance in the universe. Of all the metals you can work with, it’s the easiest. You can pound on ounce of gold (and that’s not much) into a sheet big enough to carpet your bedroom, or stretch it into a wire 50 miles long. And it’s perfectly recombinable. You can take a gold ingot, cut it up, aork it, and recombine it into the same ingot.

Again, that might not seem like a big deal, but it really is. No mother metal’s as easy to work, and anything that isn’t metal isn’t comparable. Diamonds and other gemstones aren’t recombinable; split a diamond and you have two less valuable diamonds.

  1. It’s rare.

If you were to design the perfect precious metal, you could not come up with a better one.

7

I might have posted this in one of the earlier threads, but in Bernstein’s “The Power of Gold” he makes the counter-intuitive point that in pre-industrial societies gold was pretty much worthless for anything other than ornamentation. It’s too heavy, soft, and rare to be of much use. But malleability, long-lasting, and shiny make it of use for ornamention, with its rarity pushing up it’s value among the wealthy.

8

Isn’t lead more malleable? It doesn’t have the other qualities that gold does, but I believe it is more malleable. I could be wrong.

9

Besides what RickJay says, another reason is while gold is still being mined, there is not a huge amount that would flood the world’s supply and devalue what is in circulation.

10

No.

From Wiki:

The following list ranks metals from the greatest ductility to least: gold, silver, platinum, iron, nickel, copper, aluminium, zinc, tin, and lead. The malleability of the same metals are then ranked from greatest to least: gold, silver, lead, copper, aluminium, tin, platinum, zinc, iron, and nickel.

Gold also has a high thermal and electrical conductivity (second to copper and silver).

11

It is so rare that if you took all the gold in the world and made one large gold bar, it would be smaller than the base of the Statue of Liberty.

12

All the gold in the world, or just the gold that has been mined and extracted?

13

I think the question needs to be broken down a bit. Why gold is valuable for ornamentation is a different question from why gold is valuable for industry is a different question from why gold is valuable as money.

Gold is valuable for ornamentation, I believe, primarily because it’s shiny and rare. The shininess argument, I think, tends to get short shrift, but this has a lot to do with it. There’s plenty of stuff as rare or more rare than gold, but that no one cares about because it’s ugly or it looks just like stuff that’s common. Gold stands out because of its shine and rarity, and thus, pretty much no matter what it is you’re looking at, you’re not going to turn your head away from it quite as quickly if it’s covered in gold.

Gold is valuable for industry, I believe, because of its conductivity and malleability, or its unique properties more generally. However, it’s expensive, as you’ve noted, and so most of the time, if something else will work, you just go with that, leaving gold only for when nothing else will do. Silver, for example is more conductive than copper, and so, silver would be a better choice for electrical wiring, except that it’s not that much more conductive than copper while costing about a hundred times as much. But in photography, silver is essential for developing film, and so you have no choice but to use that. Gold is similar except that examples spring to mind less easily.

Gold is valuable as money, or as a store of value, for many reasons, most of them linked to the ephemeral aspects of the idea of value. In order to be useful as money, it has to be something that everyone wants, at least most of the time. (Dying of thirst in the desert makes gold useless to you, but anything but water is going to be worthless to you in this situation.) So, the question becomes: Why is gold something that everyone wants? There’s a bit of a vicious circle thing going on here, which I think is what gets to most people. That is, if say 90% of the population of a given area likes gold, that makes it valuable to the other 10% as well since they know they can trade it with others for things they want and need. To see how the cycle begins, I think we need to look at the ornamentation bit again. Who gets to do the most decorating? The wealthy. Versailles looks a hell of a lot better than he hoses of the townspeople who lived nearby. Thus since the wealthy were the only ones who had the time and the energy and the means to decorate lavishly, gold is associated with the wealthy, and so, I believe, gold took on the idea of being something associated wealthy people, and over time, something associated with wealthiness, and then, over time, with wealth itself. So, the idea that gold is valuable because it has few purposes other than ornamentation makes a bit of sense to me. The fact that it doesn’t become nongold and can be split and combined but can’t be created essentially at will is part of the draw, of course, but that doesn’t explain the beginning of the vicious circle that makes it what it is. This tends to mean, in the end, that gold is valuable because it’s shiny and rare, as strange as that may seem.

I have no cites, but this is my reasoned guess.

14

he hoses = the houses

Oops.

15

Actually, Adam Smith, the famous economist asked this question: Why is gold, which has no use valuable while water, which is absolutely necessary for life so cheap? He then goes on to explain demand and supply. Basically, gold is valuable because many people want it, but it is hard to obtain while many people need water, but it is easy to obtain.

Now, why do people want it? Well, it is shiny, but mainly because it is rare. And, it’s yellow in color, so people know you have a rare piece of metal. Wear a piece of jewelry made out of platinum, and people don’t know you’re wearing something valuable. Wear a piece of gold, and there’s no doubt.

Planet Money has an interesting podcast called Why Gold.

16

It is true, gold has extremely limited industrial use. It is not worth very much from purely utilitarian perspective.

I think a lot of people are missing the big historical factor in these reasons. It’s valuable today because it has been valued for 1000’s of years. Why was it valuable to our ancestors? Well, many of the reasons above made it valuable to people a long time ago:

  1. It is found in it’s elemental form. This is huge and not to be overlooked. Many other metals have to be found in an ore form and then purified. That is hard work and it is not obvious how to obtain it. People a long time ago could pretty much look at a stream and see a piece of shiny gold at the bottom.

  2. It is soft, so people a long time ago could work it.

  3. It’s melting point is not too high. See #2.

  4. It does not tarnish, which keeps it shiny.

Many of these reasons are good for why it is simply convenient now, but they are huge to people a long time ago. If Gold wasn’t valued throughout history, then we wouldn’t care about it 1/10 of what we do today.

I personally don’t care much for it, but everyone else thinks its cool, therefor it is worth something to me.

17

According to the National Geographic episode I was watching it was only all the gold that has been mined and extracted that would add up to the volume of the base of the Statue of Liberty.

Another reason gold is so valuable is that since it has no tendency to change or rust then its great for the wiring of “need to work systems” even though is has a higher resistance than traditional copper wiring. For example almost all auto manufactures plate the wiring for the airbag systems or any other crash safety system with gold. This way even if a car has been neglected and all the other wiring is failing the airbag should still deploy when necessary.

In the mid 90’s when McLaren was making its McLaren F1 street car they followed the mantra of “no compromises”. Their aim was to make the best street car money could make. For that reason their engine lining was made of gold because according to them gold is the best heat reflector in the world.

18

All the gold ever mined in the history of the world, would be contained in a cube 20 meters long. In other words, it is rare.

Furthermore, gold is the only money in the history of the world that remains valuable no matter what happens, and no government can “print” unlimited quantities of gold, gold can not be printed.

19

Gold can be and is mined and its value has historically always fluctuated greatly as the result of the major gold strikes. Gold was sought specifically because it was valued, but finding a large quantity of it brought its value per unit down. Since gold is not used to back currency today it is not as ardently sought. If it were, new supplies would immediately be gone after, thereby reducing its value. Gold is “printed” in this sense, because more of it is always made available when it is used as currency.

In other words, gold has no intrinsic value. Its value is always what people agree upon is its value. It is exactly identical to paper money in that regard.

20

And the example of the Spanish treasure fleets are a perfect illustration of how gold can be “printed”. The Spanish conquered the gold-rich lands of the Americas, and brought back gold by the literal boatload. And so what was the result? Since gold was used as money, it meant a giant increase in the amount of money, which meant galloping inflation. That is, the price of every good and service in Spain increased dramatically. Or to put it in a more easy to understand way, the value of gold fell dramatically. It only creates “inflation” if you define gold as money and money as gold.

So if you were a merchant in Spain, and you had a stack of gold bars in your basement, those gold bars would have lost most of their value to inflation due to the massive influx of gold from the Americas.

And most of the physical gold and silver from the Americas ended up in the Ottoman Empire, or India, or China, because it was traded away for the fabled “riches of the orient”, because during those times Europe was poor, backward and war-torn compared to the east.

As an opposite example, during the fall of the Roman Empire, gold flowed out of empire. People hid gold and never recovered it, or they packed up their gold and moved east. And the removal of gold from Europe meant a gigantic gold deflation. Gold became more and more valuable.