The history of man’s relationship with gold dates back many millennia with its golden colour immediately catching the eye. Over time it evolved from a desirable decorative asset to a currency used the world over.
While gold no longer underpins the world’s currencies, it retains its investment appeal as an asset class that investors are encouraged to own a stake of to diversify their portfolio with the daily price of the metal closely monitored.
But what is it that has led to gold’s enduring appeal lasting for thousands of years and why is it deemed a precious metal?
Why is gold so valuable?
A key reason for gold’s value is the finite amount of supply of the metal. It is estimated that just over 200,000 tons of gold have been mined over the course of history, the bulk of which has been in the last 70 years, according to the World Gold Council.
Ever since it first caught the eye of man, its shine and colour have given gold considerable decorative appeal and this is reflected in the fact that almost half of this mined gold has been made into jewellery.
This love of gold is true across the world with the metal even associated with the gods. In South America, the Incas and other Andean communities considered gold to be “the sweat of the sun”. In Ancient Egypt, where gold is thought to have first been discovered, the people thought the metal was the flesh of the sun god Ra.
In India, gold is considered to be auspicious, particularly among the Hindu and Jain communities, with the metal used to adorn gods and to celebrate births and marriages. Gold symbolises wealth and prosperity with India one of the largest buyers of the metal today.
As well as its decorative qualities and association with the gods, the metal also possesses a unique blend of chemical qualities that add to its value. Crucially, it is unreactive with other elements so retains its same lustre and quality over centuries. It doesn’t tarnish or corrode over time, it isn’t toxic while its strength makes it tough to break.
Gold also has a relatively low melting point that enabled the early communities that first discovered it to work the metal into items such as jewellery. For other elements, the high temperatures needed to melt them have only recently made them accessible.
In recent times, these qualities have seen it used in a wide range of technological and scientific applications, including in tests for diseases including coronavirus, in astronauts’ visors as well as in the circuit board of iPhones.
Why is gold so expensive?
Gold’s value is only derived from what we as humans place on it. Yet this long-lasting appeal for this golden, shiny metal allied to its widespread adoption as a currency and then more recently as a key component in certain industries has resulted in the price of an ounce of gold topping $2,000 an ounce at times.
The relative rarity of gold is a key factor in its high price. Yet there is more to gold’s price than purely fundamental supply and demand economics.
Silver, which shares many of the qualities of gold, has an annual production of about 1 billion ounces compared with about 150 million ounces for gold. However, rather than trade at a multiple of about 8 times greater than silver, which this supply difference would imply, gold trades for between 75 times to 90 times the price of silver.
This is down to the huge investment market that surrounds gold with the amount of gold traded daily far outweighing the total physical supply of the metal.
Gold as an investment
Gold’s investment case is built on its lack of correlation with other asset classes and its proven ability to hold its value over centuries. The finite amount of supply, in contrast to fiat currencies controlled by central banks who can print more money as needed, has led to gold to be considered a good hedge against inflation.
For many decades, many of the world’s currencies were backed against gold, with the central banks required to have the equivalent amount of gold for each dollar or other currency in circulation. This was known as the Gold Standard and while governments moved away from this in the 1970s, the central banks continue to hoard vast quantities of gold, amounting to about 35,000 tons, or about a fifth of the amount of gold ever mined.
At times of crisis, be that war or economic slowdown, investors have often fled to “safe-haven” assets such as gold with an ounce of physical gold more attractive while the share of an individual stock or indeed the broader index is plunging.
While global equities, and the individual companies they are comprised of, typically move on the same drivers such as economic data, gold’s relatively small industrial usage means it is driven more by sentiment than hard numbers. This lack of correlation to other asset classes is a key reason why investors typically consider holding between 5 and 10 per cent of their portfolio in gold. When other assets are plunging, gold can be relied upon to continue ticking over steadily in the background, preserving a chunk of an investor’s wealth.
In summary, gold’s value and preciousness is almost entirely down to the desirability humans have placed upon it. But with this attraction having passed down from the Ancient Egyptians through to modern-day India, the chances of that appeal dwindling any time soon seem remote.
Rupert is a Market Analyst for Kinesis Money, responsible for updating the community with insights and analysis on the gold and silver markets. He brings with him a breadth of experience in writing about energy and commodities having worked as an oil markets reporter and then precious metals reporter during the seven years he worked at Bloomberg News.
As well as market analysis, Rupert writes longer-form thought leadership pieces on topics ranging from carbon markets, the growth of renewable energy and the challenges of avoiding greenwash while investing sustainably.
This publication is for informational purposes only and is not intended to be a solicitation, offering or recommendation of any security, commodity, derivative, investment management service or advisory service and is not commodity trading advice. This publication does not intend to provide investment, tax or legal advice on either a general or specific basis.