Why is gold so valuable? (Moved from CCC)

Factual Questions
21

One more idea that I found very helpful in understanding this, is the concept of the “key good”. We all understand barter, where you trade your baskets for the other guy’s chickens. But what if you don’t want chickens or he doesn’t want baskets? Then you can’t trade. But what happens is that one or both of you probably have other goods you’d be willing to trade away or trade for. So if you want chickens but he doesn’t want baskets, maybe you’ve got some cacao beans instead. So you trade him cacao beans for his chickens. And the next day, somebody wants your baskets, but doesn’t have any chickens for you. No problem, he’s got some cacao beans, and he trades you the cacao beans for the baskets. And then you can take the cacao beans to the chicken guy and get your chickens.

In this example, cacao beans are an example of a key good. You might never actually want cacao beans yourself, but you’re happy to accept cacao beans in trade any time, because you know you can always trade cacao beans for whatever you actually do want. Throughout history, lots of goods have been used this way. Cigarettes, whiskey, cacao beans, cowrie shells, cows, and so on.

But the most famous and ubiquitous key good is gold. And this is because gold has a lot of advantages, which have been mentioned before–it doesn’t perish, it’s divisible without losing value, it’s small for its value, it’s hard to fake. So even though gold had a fairly limited utility–it could be made into fancy jewelry–it made a great key good, because even if you didn’t want gold for itself, you would always accept gold in trade because you could easily trade it for what you did want.

And rulers from ancient times facilitated the use of gold as a key good by creating small ingots of metal of a specified weight and purity. Gold coins. And so gold moves from a key good to pure money. Very few people ever melt down the gold coins and actually use the gold. But they don’t care, because they can exchange the gold for any other good.

Of course, then people notice that since nobody actually wants the gold, you could just use a coupon that promises to pay the bearer a certain weight of gold. And once people get used to these coupons, they notice that there’s no need to actually promise to redeem the coupon for gold, because what people want is money, not gold. And then people don’t even need paper coupons, just entries in a bank’s database.

22

To further the discussion of industrial uses, it is often used in electrical contacts where corrosion is a concern, precisely because it doesn’t corrode.

It was used in the face shields of the Apollo astronauts as glare prevention, and to coat the handles on space vehicles to keep them from overheating. (I think the latter was concerned about atomic oxygen corroding the handles, changing the optical and therefore thermal properties, but don’t quote me on that.)

23

It’s just my WAG, but I think the limited utility is a reason for gold as a key good.

If something is useful (say, like real estate or horses), then changing circumstances (increasing population which needs more room for houses and farms, an epidemic which kills off lots of horses, etc) are going to change the demand for the good, thereby changing the value. This is bad from the point of view of people who are trying to save. So better to use something that won’t change in value as much.

And gold fits that. There are fashions of course, but generally gold is used to show that you’re on of the richer people, no matter how absolutely rich everyone is in terms of horses or bearskins or iPhones. So therefore gold still generally keeps the same value.

24

You are right, gold has no intrinsic value and it is worthless.

Send me all your gold and I will take it off your hands…(…same goes for everybody else).

25

From Wikipedia: “In finance, intrinsic value refers to the value of a security which is intrinsic to or contained in the security itself. It is also frequently called fundamental value. It is ordinarily calculated by summing the future income generated by the asset, and discounting it to the present value.”

Gold doesn’t generate future income. Therefore, no intrinsic value.

26

Nobody but you has ever said that gold is worthless because it has no intrinsic value. That’s a falsehood you keep repeating for no known reason.

Gold has an agreed upon value. Just like a piece of canvas daubed with paint has an agreed upon value. Neither has an intrinsic value, but both can still be worth many units of currency. The canvas daubed with paint can be worth a thousand times as much as the gold.

That’s economics. Please learn that simple lesson and stop repeating nonsense in GQ (and elsewhere).

27

This cartoon might be enlightening on that last score.

28

Gold is valuable because other people think it is. There was a time when aluminum cost more then gold. Hell plenty of elements costs more then gold now. Gold is rare but just rare enough that it can be commonly used by peoples. It is easy to work with, ie make coins, it is shiny, jewlery. And now has uses in compiuters

29

Quoth RickJay:

While this is true, it wasn’t really relevant until Archimedes realized how to easily measure the volume of an object, at which point gold had already long been perceived as valuable. So that can’t be one of the original reasons why it became valuable in the first place.

And further to what Lemur866 and Quercus said about key goods, I’ll mention that I’ve personally witnessed the emergence of a key good in an economy, and it was in fact one of the least intrinsically-valuable goods. When I was a kid, I and my extended circle of friends (about 20 of us) all went to a Halloween party at the same house, and then, after trick-or-treating, would all sit down in a big circle in the living room to trade candy. Nobody at all in the group liked Good-n-Plenty candy, but everyone was always willing to trade for it, because everyone knew that they could trade it to someone else. It just sort of spontaneously happened.

30

Has no one mentioned that gold is the most malleable and the most ductile of all metals? This, along with corrosion resistance is key to many of its special applications. The thinness of gold leaf makes it useful for special devices, coats, etc. The malleability enhances its use in jewelry and electrical connections.

Copper may be better, but gold is certainly an excellent conductor (by volume not weight :smiley: ). IIRC, it comes in #3 behind silver, copper.

31

Do you think paper/electronic money has intrinsic value?

32

As a slight hijack, is there any fungible substance that is more rare than gold but less valuable on the open market?

33

Yes, it has its special applications, but those are still small peanuts compared to how other metals are used (copper, aluminum). If Gold’s price was based strictly off its application usefulness like most other metals, its price would plummet.

34

Most of the rare earth metals, I would imagine. And that’s even despite them having practical uses (such as very strong permanent magnets).