Gold is a precious metal that has held its intrinsic value for thousands of years. Investors, financial institutions, and central banks have been accumulating gold for many years as a hedge against inflation.
The timeless asset has been a good diversifier for many portfolios. Here’s a closer look at what makes gold so valuable.
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Why is gold so valuable? Physical and chemical properties
Gold isn’t the only precious metal. Investors can also buy silver, platinum, and palladium, which are also precious metals. You can also broaden your search to copper, iron, steel, bronze, and other metals.
However, investors continue to prioritize gold over those assets. Here are some of the reasons gold has retained its value so well for thousands of years.
Scarcity and rarity
Gold’s rarity comes from how difficult it is to produce and how close most of the world’s gold is to the Earth’s core. There’s an estimated 1.6 quadrillion tons of gold in the core, but this high supply doesn’t matter since it’s inaccessible.
You can still find gold in the Earth’s crust, but it isn’t as plentiful as other precious metals. This distinction makes it harder to find more gold, and its rarity results in higher prices.
Durability and non-tarnish
Gold looks charming to the eye, and that charm can last for multiple generations if you take care of the precious metal. That’s because its properties make it resistant to rust, tarnish, and corrosion.
This durability makes for better jewelry, but it also gives gold more uses in various industries. For instance, gold is often used in satellites due to its durability. The precious metal protects satellites from corrosion against ultraviolet lights.
Malleability and ductility
Malleability refers to a precious metal’s ability to reshape under pressure. Gold happens to be highly malleable, which means it can handle a lot of pressure without splitting or cracking.
Gold’s ductility is also an advantage, as it can be stretched into thin wires without breaking. This distinction makes gold essential for electric circuits. It also happens to have high conductivity, which is a material’s ability to transfer heat or electricity. These factors make gold a staple in many electronic products that rely on semiconductors.
Why was gold so valuable? Historical significance
Gold has held value for thousands of years, and the catalysts that made gold valuable then are still intact today. These are reasons gold retained its intrinsic value thousands of years ago.
Ancient civilizations viewed it as a symbol of wealth
Gold has been a symbol of wealth and power since Ancient Egypt. Gold was used in jewelry, but it was also used to adorn the coffins of Egypt’s elite.
Gold also became a recognized medium of exchange in 1,500 BC. This distinction increased the circulation of gold and further emphasized gold as a symbol of wealth. Gold coins were first printed in modern-day Turkey in 600 BC.
Monetary systems
While ancient civilizations used gold as a medium of exchange, it didn’t stop there. The United States used gold in its monetary system for almost 200 years before President Nixon ended the gold standard. Many European and Asian countries also incorporated gold into their monetary systems for centuries.
Even though gold doesn’t have the same weight in the monetary system as it did in the past, it’s still valuable. Central banks worldwide continue to buy gold to minimize inflation’s impact on their currency reserves.
Cultural symbolism
Gold has been used in religious ceremonies for thousands of years. Ancient Greeks and Romans both valued the precious metal based on their mythologies and Biblical references. The Romans were the first to use golden rings as symbols of engagement.
The Middle Ages was also a good time for gold. Nobles used the precious metal to display their wealth and the precious metal was also tied to the church.
Why is gold worth so much? Economic functions
Many people use gold to display luxury, wealth, and power, but that’s not the only reason gold is worth so much. It has several economic functions that make it irreplaceable.
Store of value
Investors gravitate toward assets that have intrinsic value and can appreciate over time. Gold is a store of value because of how civilizations have valued it for thousands of years. It also holds great value today due to its applications in multiple industries.
Gold is also known to perform well during instability, and many investors treat it as a hedge against uncertainty. The asset’s ability to perform well in these environments is part of the reason why it attracts many older investors approaching retirement.
Hedge against inflation
Gold’s ability to hold intrinsic value makes it a useful hedge against inflation. Most people use fiat currency to buy gold, and if those currencies lose value, gold automatically becomes more expensive.
Fiat currencies lose value when governments print more money. Most countries have some type of debt, and those balances will continue to grow with interest. The result is a decrease in each dollar’s purchasing power. Gold still has its intrinsic value, so it will take more dollars to buy the same amount of precious metals.
Safe haven asset
When markets are bullish, many investors turn to stocks. However, during periods of economic uncertainty, some investors shift toward gold as a hedge. Geopolitical tensions, rising government spending, and financial crises can contribute to inflation, making gold a more attractive asset.
While gold has historically performed well in certain downturns, it is not a guaranteed safe haven in every market decline. For example, during the Great Recession of 2008, the S&P 500 dropped by 38.5%, while gold posted a modest gain of 2.6%. However, in 2013, when the S&P 500 posted a total return of 32.39%, gold prices declined by approximately 27.79%, demonstrating that gold does not always move inversely to equities.
Investors should view gold as a potential hedge, but not a perfect inverse of the stock market. It tends to perform well during inflationary periods and economic crises, but its price can also fluctuate alongside investor sentiment and broader market trends. A more detailed look at historical performance trends, such as in the chart below, provides better insight into how gold and the stock market interact over time.
Gold isn’t the only precious metal that investors accumulate, but it is the most valuable. Here’s how gold compares with two other precious metals on investors’ radars.
Why is gold more valuable than silver?
Gold is primarily more valuable than silver due to its rarity. Although silver is used in more industries and greater quantities, it’s also easier to find.
The United States Geological Survey estimates that 244,000 metric tons of gold have been discovered. Meanwhile, an estimated 1.74 million metric tons of silver have been unearthed. Gold’s lower supply and intrinsic value have helped it command a higher price than silver.
However, silver can outperform gold if the economy continues to gain momentum. Silver derives more of its value from industrial use than gold, which gets most of its price movement from jewelry and its status as a storage of value. Silver has outperformed gold over the past year.
Is gold more valuable than platinum?
Gold and platinum are used in similar industries: jewelry, industrial, and automotive. However, the key difference is that inventors view gold as a storage of value that acts as a hedge against inflation. Central banks aren’t lining up to buy platinum in the way they buy gold.
Platinum is even rarer than gold. If platinum had the same economic viability as silver, it could perhaps challenge the price of gold, but that is not the case.
Platinum’s long-term performance doesn’t help. Platinum futures are down by about 4% over the past five years and are only up by 7% over the past year. Gold has comfortably outperformed those gains, making it more desirable for investors than platinum.
Why is gold so valuable to humans? Modern applications
Gold is an essential resource for many industries, and it also has properties that make it desirable among investors. These are some of the reasons gold holds value to this day.
Industrial uses
Gold is used in various industries and has become critical for several products and services. It’s used in electronics, dentistry, aerospace, and other sectors. When these sectors perform well, the demand for gold increases.
Investments
Investors accumulate gold bars, gold coins, ETFs, mining stocks, and other assets that give them exposure to the precious metal. Gold has produced solid returns in the long run, highlighted by an annualized 8.3% return over the past decade.
Tech innovations
Gold also finds itself at the center of many tech innovations. It’s used in semiconductors, which form the backbone of many tech products and services.
You will also find gold in the medical industry. Gold salts can help treat arthritis and act as an anti-inflammatory agent.
Why is gold so expensive?
Gold is an expensive resource due to supply and demand. Consumer demand remains high for the precious metal due to jewelry and its status as a store of value. Depreciating fiat currencies boost gold’s demand, as many investors view it as an inflation hedge.
Precious metals are also expensive because they’re one of the few assets with a good record during economic and geopolitical uncertainty. Some investors reduce their exposure to stocks and real estate and put the capital into gold during uncertain times.
Gold can perform well when stocks and real estate valuations tumble. It tends to have a low correlation with the stock market, but the correlation varies over time. Gold is also less volatile than the stock market based on iShare’s Gold Trust (IAU)’s 0.27 beta. Finally, gold’s importance to multiple high-growth industries suggests that it will command a high price in the years to come.
How to invest in gold
Investing in gold can diversify your portfolio and hedge against economic uncertainty. Common ways to invest include purchasing physical gold (such as coins or bars), gold ETFs, or setting up a gold IRA. Check out our guides to investing in gold for retirement and the best places to buy gold online.
For those looking to buy physical gold, American Hartford Gold is our top-rated dealer. It offers a wide selection of gold coins and bars, many eligible for precious metals IRAs, and provides excellent customer service. The company even ships metals to your chosen storage facility, and its satisfaction guarantee ensures peace of mind.
Explore our resources to determine which gold investment strategy fits your needs.
Considerations about whether to invest in gold will vary by investor, depending on many personal and financial factors. However, we prefer liquidity when reviewing whether gold may make sense to add to someone’s portfolio. The goal of adding the asset class will vary greatly based on personal circumstances and the current economic market. Like any investment, there are advantageous times to owning gold, and there may be times it’s more suitable to own in a liquid exchange-traded fund (ETF).
