The history of man’s relationship with gold dates back many millennia. Even today, its golden colour immediately captures our attention. Though initially thought of as more of a decorative item, it has been a globally used currency.
While gold no longer backs the world’s currencies, imbedding them with value, this most precious of metals has retained its investment appeal.
For one, gold is an asset class investors seek to diversify their portfolio and protect against market turbulence. People from all countries monitor the daily gold price to keep track of their investments because of its importance.
But why is gold a precious metal? We explore the value of the rare metal, why investing in gold is worthwhile, and why all across the world people long for this most valuable of metals.
Gold has value
Gold is a precious metal because its scarcity defines its worth.
In traditional investors’ minds, few assets rank higher than gold. It’s even more valuable than some of the very hard-to-find rare metals high-tech companies use on their production lines.
For example, one troy ounce of gold is worth nearly 60 times more than terbium, a vital element in low-energy light bulbs and mercury lamps.
The World Gold Council estimates that humanity has only been able to mine 200,000 tons of gold, most of it in the past 70 years.
Before recorded time, the shimmer of pure gold gave it considerable decorative appeal. Nearly half of all mined gold became jewellery.
People around the world revere this most valuable metal. It goes beyond simply for monetary means, as in South America, the Incas and other Andean communities believed that gold was “the sweat of the sun.” Ancient Egyptians believed gold was the flesh of the sun god Ra.
In India, Hindus and Jain communities mark births and marriages with gold as it symbolizes wealth and prosperity. Today, India remains one of the world’s largest markets for gold bullion and gold coins.
Its appeal is not just decorative, as gold’s unique chemical properties add to its value. The corrosion-resistant nature of gold makes it a sought-after metal. It doesn’t tarnish or degrade in contact with other elements so retains its same luster and quality over centuries.
The fact that it doesn’t have a high melting point, makes gold more malleable than other noble metals. It was this discovery that encouraged early civilizations to create beautiful jewellery from gold.
Beyond its value as a precious metal, gold has practical applications in a wide variety of industries. Its high economic value comes also from market demand.
Gold’s dense metal properties and ability to withstand high temperatures make it an ideal material. Catalytic converts and electrical contacts rely on gold, for example.
The cost of gold
Gold’s enduring allure, combined with its use in various industries, has occasionally pushed the price of an ounce of gold past $2,000.
The relative rarity of gold is a key pricing factor. But supply and demand don’t tell the whole story.
Silver has an annual production of about 1 billion ounces compared with about 150 million ounces of gold. That doesn’t mean that gold costs eight times as much as silver as the supply differential would suggest.
In fact, gold trades at between 75 times to 90 times the price of silver.
Countries like South Africa, the United States, Russia, and Canada are among the top producers of gold. In North America, both the United States and Canada have extensive gold mining operations that contribute a lot to the global gold supply.
The gold market is massive. To give an example, 90 tonnes of gold is around 5% of the gold mined in the world every year. 90 tonnes of gold is worth about US$5.6 billion at today’s prices, more than the GDP of some countries like the Maldives or Bhutan.
Prices also go up because of investor demand. The market for gold is huge. In fact, the amount of gold traded every day far outweighs the total physical supply of the metal.
Investing in gold
People invest in this most expensive metal because of its proven ability to hold its value over centuries. This has led many to consider gold a good hedge against inflation.
As Douglas Turner, Kinesis’ Head of Content, explains:
“Gold remains important, both culturally, or as a hedge against uncertainty, despite the current economic recovery and steady price lifts.”
There is often much less trust for fiat currencies like the dollar, Euro, and sterling than there is for gold.
That’s because central banks control fiat currencies and they can print as much money as they want when they want. Bankers can magic money out of thin air, it seems to many, which must affect its value, they think.
For centuries, gold-backed and provided the value behind many of the world’s currencies. Central banks had to have the equivalent amount of gold for each dollar or other currency in circulation.
This was the Gold Standard that governments moved away from in the 1970s. Despite this and meanwhile, central banks continue to hoard vast quantities of gold.
They currently hold about 35,000 tons or about a fifth of the amount of gold ever mined.
At times of crisis like war or recession, investors often flee to “safe-haven” assets like gold. Many consider holding an ounce of gold safer than holding individual stocks or tracking the broader index when it’s plunging.
What drives gold is different too. The share prices of companies listed on the stock market change to reflect good or bad economic data. Gold’s relatively small industrial usage means it is driven more by sentiment than hard numbers.
This lack of correlation with the wider economy and other asset classes makes gold attractive to investors. That’s why many hold between 5 and 10 percent of their portfolio in this precious metal.
When other asset prices fall, investors rely on gold to tick over steadily in the background, protecting the value of their portfolios.
The value of gold and how precious we consider it to be is because of its inherent desirability. This has been with us from Ancient Egyptian times and the chances of that appeal dwindling any time soon seem remote.
Make time for this valuable metal in your portfolio and find out how gold provides backing to a new wave of cryptocurrencies.
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.