Why does the value of gold go up when gold itself doesn't produce anything? Why do people invest in gold?
Your perception, that the value of gold goes up in the long run, is based on the price of gold measured in your favorite paper currency, for example the US Dollar.
An increasing price of gold means that in the visible gold market, market participants are willing to exchange more paper currency units for the same amount of gold.
There are many possible reasons for this:
- more people want gold
- paper currency units are printed out of thin air, chasing for the same (or very slowly growing) amount of gold.
- High Frequency Trading (HFT) programs that gain from price movements and not primarily from the price itself.
- decreased productivity of an economy.
While HFT became extremely important for the short term price movements, I will continue with long term effects, excluding HFT.
So when - as a simple thought experiment - the amount of available paper currency units (US $ or whatever) doubles, and the amount of goods and services in an economy stay the same, you can expect that the price of everything in this economy will double, including gold.
You might perceive that the value of gold doubled. It did not. It stayed the same. The number of printed dollars doubled. The value of gold is still the same, its price doubled.
Does the amount of paper currency units grow over time? Yes:
In this answer my term "paper currency units" includes dollars that exist only as digits in bank accounts and "printing currency" includes creating those digits in bank accounts out of thin air.
So the first answer: gold holds its value while the value of paper currency units shrinks over time. So gold enables you to pass wealth to the next generation (while hiding it from your government).
That gold does not produce anything is not entirely true. For those of us mortals who have only a few ounces, it is true. But those who have tons can lease it out and earn interest.
(in practice it is leased out multiple times, so multiple that gain. You might call this fraud, and rightfully so. But we are talking about tons of gold. Nobody who controls tons of physical gold goes to jail yet).
Let's talk about Fear.
You see, the perceived value of gold increases as more paper currency is printed.
And markets price in expected future developments.
So the value of gold rises, if a sufficient number of wealthy people fear the the government(s) will print too much paper currency.
So the price of gold not only reflects the amount of paper currency, it is also a measurement of distrust in government(s).
Now you might say something is wrong with my argument.
The chart mentioned above shows that we have now (mid 2015) 5 times as much printed currency units than we had 2008.
So the price of gold should be 5 times as high as 2008, assuming the amount of distrust in governments stayed the same.
There must be more effects (or I might be completely wrong. You decide). But here is one more effect:
As the price of gold is a measurement of distrust in governments (and especially the US government since the US Dollar is perceived as the reserve currency), the US government and associated organizations are extremely interested in low gold prices to prove trust.
So people familiar with the topic believe that the price of gold (and silver) is massively manipulated to the downside using high frequency trading and shorts in the futures markets by US government and wall street banks to disprove distrust.
And wall street banks gain huge amounts of paper currency units by manipulating the price, mostly to the downside.
Others say that countries like china and russia are also interested in low gold prices because they want to buy as much physical gold as possible. Knowing of the value that is not reflected by the price at the moment.
Is there one more source of distrust in governments?
Yes. Since 1971, all paper currencies are debt.
They receive their value by the trust that those with debt are willing and able to pay back their debt.
If this trust is lost, the downward manipulation (if you think that such a thing exists) of the gold and silver prices in the futures markets might fail some day. If this is the case (some say when this is the case). you might see movements in gold and silver prices that bring them back to equilibrium with the amount of printed paper currencies.
In times of the roman empire you got a good toga and a pair of handmade shoes for an ounce of gold. In our days, you get a nice suite and a good pair of shoes for an ounce of gold. In the mean time, the value of each paper currency in the history of each country went to zero and the US $ lost 98% of its initial value.
As long as there is not enough distrust, more paper currency is made in equity markets and bond markets on average. (Be aware that you earn that currency only after you were able to sell at this price, not while you hold it)