Gold has been a standard of wealth for centuries. Prosperous nations dating back to 3000 B.C. have viewed it as a source of riches or form of currency. So, what makes gold valuable? On the surface, this question appears elementary, yet finding a succinct answer can be a challenge.
First, value is a relative term, meaning different things to different people. Subsequently, determining the value of gold depends largely on a person’s perspective. However, regardless of your background or opinions toward gold, there are three primary drivers of its value. Let’s break them down and shed some light on why bullion has a storied reputation synonymous with prosperity.
Utility
In the modern era, the industrial usage of gold is limited. Although gold is a superior conductor of heat and electricity, its high market price forces manufacturers to integrate more cost-effective metals into operations. However, for jewelers and artisans, gold is renowned for its utility.
In the physical sense, gold features several characteristics that make it especially coveted:
- It’s malleable. Gold exhibits extreme malleability. In fact, a single ounce can be flattened into a sheet measuring five square meters.
- It’s ductile. Aside from platinum, gold is the most ductile metal. One ounce of gold is capable of being spun into nearly five miles of wire.
- It’s aesthetically pleasing. The only metal featuring a yellowish hue, gold is immune to corrosion. It will not rust or tarnish and has no odor or taste.
The applications of gold leaf and thread are exceedingly attractive to craftspeople of all kinds. In addition to decoration, it also serves many purposes in dentistry, electronics, and medicine. Without question, one of the underpinnings of gold’s value is tactile utility.
Scarcity
As with all commodities, the concept of scarcity is capable of driving asset prices through the roof. Disruptions to the supply chain can create unexpected shortages and spike values in short order. In the case of gold, its very nature ensures that it’s always in limited supply.
Unlike crops — or even diamond — gold is not a naturally occurring element. Its mere presence on Earth is the result of an extended meteor bombardment 200 million years after the planet was formed. Due to the fact that no new gold is being made and production is limited to what we can find and extract, scarcity is guaranteed.
While market prices may periodically ebb and flow, gold is relatively hard to come by. Due to this fact, it has always maintained a tangible value.
Human Perception
Traditions often set powerful precedents. Human perception of gold as a form of wealth and prosperity is certainly a longstanding one, traceable to early civilization. Whether being the backbone of monetary systems such as Bretton Woods or a tool for portfolio diversification, bullion has always been held in high regard by the world of finance.
As the old saying goes, “gold has never been worthless.” In many ways, this piece of conventional wisdom is the basis for bullion being a tried and true safe-haven asset. Accordingly, many institutions and governments maintain large gold reserves as an insurance policy against trying economic times:
- United States: The U.S. is estimated to maintain gold reserves measuring 3,371 metric tons.
- International Monetary Fund: The IMF holds around 2,814 metric tons of gold at various international locales.
- The People’s Bank of China: The PBoC actively pursues bullion as a store of wealth, reportedly holding 1,853 metric tons.
In many ways, gold’s reputation as being a safe-haven asset is the single largest driver of its value.
Getting Started in Gold Futures
In addition to buying and holding physical bullion, gold futures offer active traders a wide variety of opportunities. From defensive hedging to speculative endeavors, gold futures can aid in the achievement of almost any financial goal.
For more information on how gold can become a valued part of your plan for the markets, schedule a free consultation with a member of the Daniels Trading team today.
