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I'm curious about why is there so much financial interest and news coverage about gold.

It's hard to do things like buy food or pay the rent with gold, but I can do this with cash. Gold doesn't yield income like bonds. When I buy a corporate stock, I have faith that the company will grow, prosper, sell products, etc. and this will increase the value of my stock. Gold doesn't grow in value like a corporate stock.

So why does gold have such a high value? Why does the value of gold go up when gold itself doesn't produce anything? Why do people invest in gold?

I realize that this question might be viewed as provocative by some, but my intention is to ask this as a financial education question. I really do want to understand this ;)

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Perhaps because it is shiny. :-) (Sorry, could not resist) –  Rahul Kumar Jun 19 '10 at 12:55
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The more pertinent question may be: "Why do cotton rectangles with numbers on them have value?" Once you realize these cotton rectangles can be printed ad nauseam you begin to realize the value of gold, silver and other hard assets. –  Muro Dec 28 '10 at 14:05
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10 Answers 10

up vote 33 down vote accepted

Gold's value starts with the fact that its supply is steady and by nature its durable. In other words, the amount of gold traded each year (The Supply and Demand) is small relative to the existing total stock. This acting as a bit of a throttle on its value, as does the high cost of mining. Mines will have yields that control whether it's profitable to run them. A mine may have a $600/oz production cost, in which case it's clear they should run full speed now with gold at $1200, but if it were below $650 or so, it may not be worth it. It also has a history that goes back millenia, it's valued because it always was.... John Maynard Keynes referred to gold as an archaic relic and I tend to agree. You are right, the topic is controversial.

For short periods, gold will provide a decent hedge, but no better than other financial instruments. We are now in an odd time, where the stock market is generally flat to where it was 10 years ago, and both cash or most commodities were a better choice. Look at sufficiently long periods of time, and gold fails. In my history, I graduated college in 1984, and in the summer of 82 played in the commodities market. Gold peaked at $850 or so. Now it's $1200. 50% over 30 years is hardly a storehouse of value now, is it? Yet, I recall Aug 25, 1987 when the Dow peaked at 2750. No, I didn't call the top. But I did talk to a friend advising that I ignore the short term, at 25 with little invested, I only concerned myself with long term plans. The Dow crashed from there, but even today just off 10,000 the return has averaged 5.5% plus dividends. A lengthy tangent, but important to understand.

A gold fan will be able to produce his own observation, citing that some percent of one's holding in gold, adjusted to maintain a balanced allocation would create more positive returns than I claim. For a large enough portfolio that's otherwise well diversified, this may be true, just not something I choose to invest in. Last - if you wish to buy gold, avoid the hard metal. GLD trades as 1/10 oz of gold and has a tiny commission as it trades like a stock. The buy/sell on a 1oz gold piece will cost you 4-6%. That's no way to invest.

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I object to the sentence stating that "the amount of gold in the world (the supply and demand) is small relative to the existing total stock". This does not make sense; are you trying to make a comment on the amount of gold production, or the way in which it is exchanged, or something to that effect? Also, the concepts of "the amount of [x] in the world" and "the supply and demand" are being conflated in a confusing and probably incorrect manner. –  fennec Jun 24 '10 at 20:24
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I thought my wording was clear. The demand (as measured by the use of gold) and the supply (as measured by the new gold being mined) is small compared to the existing gold already mined. What about that observation do you object to? –  JoeTaxpayer Jun 27 '10 at 23:33
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I think it would be clearer as "the turnover of gold every year is small compared to the existing stock." When you say "the amount of gold in the world" like fenec I think you're talking about the existing stock, or maybe the amount on the planet including unmined gold. –  poolie Dec 28 '10 at 1:34
    
@Joe: Can you explain: 'avoid the hard metal'? How should one buy? Like a gold index fund? –  Victor123 Aug 24 '11 at 20:09
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Yes, an ETF, IAU or GLD are most common. When you but an ounce of gold or gold coin the difference between what you pay and what you sell it for is crazy, in my opinion. For ETFs, it's pennies. –  JoeTaxpayer Aug 24 '11 at 21:50
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Because people are willing to trade for it. People are willing to trade for Gold because:

  • It's aesthetically appealing.
  • It's useful (electronic and engineering applications)
  • It's long lasting (it doesn't corrode, or deteriorate appreciably).
  • It has semantic value (because we culturally believe gold is valuable).

The value of gold goes up because the demand for it goes up, while the supply has been basically static (or growing at a low static rate) for a long time. The demand is going up because people see it as a safe place to put their money.

Another reason Gold's value in dollars goes up, is because the value of the item it's traded against (dollars, euros, yen, etc) goes down, while it's own value stays roughly the same.

You point out Gold is not as liquid as cash, but gold (both traded on an exchange, and held physically) is easily sold. There is always someone willing to trade you cash for gold. Compare this to some of the bank stocks during the first part of our current recession. People were not willing to give much of anything for your shares. As the (annoying, misleading) advertisements say, "Gold has never been worth zero".

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"Because people are willing to trade for it." The beginning and end of the entire discussion, C. Other posts here are very good at discussing how we attribute value to it - but not why. As you say - we choose to apply value, therefore it has value. –  gef05 Dec 27 '10 at 18:39
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Gold is a textbook example of high fungibility: one ounce of gold is as good as any other ounce. (At the margin some particular coins can be worth a bit more or less than others, but that's the coin as distinct from the gold it contains.) But gold is not quite as liquid as local currency, in that you normally need to turn it into cash before you can buy milk with it. In this respect it is similar to foreign currency. –  poolie Dec 28 '10 at 1:31
    
+1 for being the only answer to mention that it doesn't corrode - i.e. it's one of the few chemically stable, non-toxic elements. –  hafichuk Dec 12 '11 at 21:10
    
There's a good NPR Planet Money podcast on why gold of all elements has been used as currency: npr.org/blogs/money/2011/02/07/131363098/… –  therefromhere Dec 13 '11 at 8:07
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A lot of people probably don't agree with him, but Warren Buffett has some great quotes on why he doesn't invest in gold:

I will say this about gold. If you took all the gold in the world, it would roughly make a cube 67 feet on a side…Now for that same cube of gold, it would be worth at today’s market prices about $7 trillion dollars – that’s probably about a third of the value of all the stocks in the United States…For $7 trillion dollars…you could have all the farmland in the United States, you could have about seven Exxon Mobils, and you could have a trillion dollars of walking-around money…And if you offered me the choice of looking at some 67 foot cube of gold and looking at it all day, and you know me touching it and fondling it occasionally…Call me crazy, but I’ll take the farmland and the Exxon Mobils.

And his classic quote:

[Gold] gets dug out of the ground in Africa, or someplace. Then we melt it down, dig another hole, bury it again and pay people to stand around guarding it. It has no utility. Anyone watching from Mars would be scratching their head.

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The first quote is true, but Buffett's interpretation of that fact makes him look... stupid. Yes, you would rather have the farmland and the Exxon Mobils, because those things are actually useful. Gold is useful because it stores value and can be used as a means of exchange (yes, plus some industrial stuff). The 67foot cube in itself is almost useless, but it is incredible how that small thing will get you all those Exxon Mobils. That's why its good. –  Illidanek Jun 9 at 17:10
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I think the primary reason it is so pricey now is that it is an inflation hedge, and considering how shaky the economies and out of control the spending is in many countries right now, people are running to it as a safe harbor. The increased demand raises the price as it does with any asset.

This brings us to the titular question. Why does gold have value? The same reason anything has value. There is someone out there who wants it enough to trade something else of value to get it.

It is in the news so much because it is so high right now, which unfortunately is going to cause a lot of people to foolishly invest in it at likely the worst possible time.

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+1 When virtually any commodity/investment is consistently in the headlines, it's too late to buy, it's time to sell! –  bstpierre Aug 31 '10 at 13:18
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Gold has value because for the most of the history of mankind's use of money, Gold and Silver have repeatedly been chosen by free markets as the best form of money. Gold is durable, portable, homogeneous, fungible, divisible, rare, and recognizable.

Until 1971, most of the world's currencies were backed by Gold. In 1971, the US government defaulted on its obligation to redeem US Dollars (by which most other currencies were backed) in Gold, as agreed to by the Bretton Woods agreement of 1944. We didn't choose to go off the Gold Standard, we had no choice - Foreign Central Banks were demanding redeption in Gold, and the US didn't have enough - we inflated too much.

I think that the current swell of interest in Gold is due to the recent massive increase in the Federal Reserve's balance sheet, plus the fast growing National debt, plus a looming Social Security / Medicare crisis. People are looking for protection of their savings, and they wish to "opt-out" of the government bail-outs, government deficits, government run health-care, and government money printing. They are looking for a currency that doesn't have a counter-party.

"Gold is money and nothing else" - JP Morgan

"In the absence of the gold standard, there is no way to protect savings from confiscation through inflation. There is no safe store of value. If there were, the government would have to make its holding illegal, as was done in the case of gold. If everyone decided, for example, to convert all his bank deposits to silver or copper or any other good, and thereafter declined to accept checks as payment for goods, bank deposits would lose their purchasing power and government-created bank credit would be worthless as a claim on goods. The financial policy of the welfare state requires that there be no way for the owners of wealth to protect themselves.

This is the shabby secret of the welfare statists' tirades against gold. Deficit spending is simply a scheme for the confiscation of wealth. Gold stands in the way of this insidious process. It stands as a protector of property rights. If one grasps this, one has no difficulty in understanding the statists' antagonism toward the gold standard." - Alan Greenspan

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Ask a late 19th century US farmer about the wonders of the Gold standard. Inflation isn't unique to the current system. –  duffbeer703 Sep 6 '10 at 1:23
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The free silver movement (which is what I believe you are referring to.) was about increasing inflation.....not limiting it. –  Pablitorun Dec 1 '11 at 17:53
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"Everything is worth what its purchaser will pay for it." --Publilius Syrus.

Gold has value because people want to buy it. Electronics manufacturers like the fact that it's conductive. Jewellers like that its shiny. Glenn Beck likes that he's selling it and his audience will buy it.

Proponents of gold claim that it has "real" value, as opposed to fiat currency (which has no commodity backing). Opponents of gold claim that all wealth is illusory, and that gold has no more inherent value than the paper we use now. I'm inclined to agree with the latter (money is only money because we agree that it is, and the underlying material is meaningless), however the issue is hotly debated.

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... proponents then reply that if wealth may be illusory, gold has no less inherent value than paper, and you might as well hedge your bets. :-) –  poolie Dec 29 '10 at 6:12
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To start with gold has value because it is scarce, durable, attractive and can be made into jewellery. But that does not explain its current value. In the current economic climate, it is difficult for many investors to get a positive return on conventional investments such as equities or bonds. I theorise that, in such conditions, investors decide to park their money in gold simply because there are few other good options. This in itself drives the price of gold up, making it a better investment and causing a speculative boom. As you will see here, here, and here the gold price is negatively correlated with stock market indices.

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I use to play marbles at school. Marbles were like gold the more you had the richer you were. They were a scarce commodity only a few in circulation. Once I secured a wealth of marbles I realized they were of little real value. They were only of illusilory value. As long as we all were decieved into believe they had value they I was rich. Sure marble could be used to make marble floors ;) they were lovely to look at, and every one wanted them. Then one day, I discovered the emperor had no clothes. Wow, the day that everyone sees the true value of gold, what a stock market crash that will be. I tried to avoid gold as much as possible, but this is hard to do in todays stock market. My solace is that we will all be in the same golden (Titanic) boat, only I hope to limit my exposure as much as possible. Anyone want a gold watch for a slice of bread?

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I'll give you a whole loaf of bread for your gold watch. –  Muro Dec 28 '10 at 13:27
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Here is a blog from someone who lived through the banking collapse in Argentina in 2001. The Argentine peso lost 75% of its value. Gold retained its value. Banking holidays continue to occur in Argentina 9 years after the initial crisis. Here are some relevant posts: (ferfal.blogspot.com/2008/01/…, ferfal.blogspot.com/2009/08/royal-scam.html) –  Muro Dec 28 '10 at 17:02
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"It has semantic value (because we culturally believe gold is valuable). "

There is a very important point here. Gold and many other coin metals.

This "semantic value" is enshrined in law through the special tax status of coin metals. You can buy a kilo of gold and not pay sales tax. You can't buy a kilo of iron or tin and do the same. This is the important part because investors shouldn't care about semantics.

I read that the taxable status varies by state or nation, so you need to be very careful. It's possible to evade taxes without realizing it. It also doesn't necessarily exempt you from the form of gold. An ingot should be tax exempt. A collector's coin may or may not be, depending on your local laws and the difference between the value of the weight of the gold, and the value of the form of the coin.

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Gold can be thought of to have value in one of two ways; (1) as a means and (2) as an end.

Means takes the shape of currency. In this form, we value gold in the same way we value the dollar, it allows us to purchase things we want. As a medium of exchange, gold has no definitive value and is only assigned one during the process of an exchange. For example, I would be valuing one ingot of gold to be worth a dog if I traded a dog for one ingot of gold. The value of gold in this sense is subjective as each person decides for themselves what gold is worth during the transaction.

Gold as an end is valued for its own sake. A good example of this is a jeweler who purchases gold directly because of the intrinsic property(s) gold possesses. This is closer to the "true value" of gold than using it as a means, but virtually no one in our society views gold in this manor because virtually no one can use gold in this manor. "You know what I could use right now, a block of gold." - said no one ever.
But even if you are one of the select few who value gold for its own sake, this is usually done because gold provides a function. For example, if people no longer want to ware jewelry, then a jeweler will likely have to find a new line of work where he would likely no longer view gold as valuable as an ends.

To sum up, gold has a perceived value for most people and an "intrinsic value" to a select few (for the time being).

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