Why is Gold Worth so Much?
I have been asked this question a few times recently. Just now we are seeing gold that is topping $1200 an ounce, and of course the optimists are hoping for $1250, or even $1500! But we know that we cannot eat this shiny metal, it does not appear to cure cancer, and we certainly cannot burn it for heat. Is the value of gold a leftover from some more primitive times when it was valuable because it was shiny and scarce?
Well, keep in mind that paper money is only valuable because we all agree it is. I guess we could burn it for warmth, but it would take a lot of dollar bills to keep us warm this winter. Hey, it takes a lot of dollar bills to pay the utility company anyway.
Gold Demand
Gold does have some industrial applications, but most of the demand seems to come from jewelry. We Americans like gold jewelry, but most of us could live without it. But in the far east, gold jewelry is more ingrained in the culture, and that demand is huge. Even though we don’t really think we need gold, people from other cultures do not regard it the same way.
Gold is Rare
I read an article that said all of the gold ever found could fit into a 150 foot square. I cannot authenticate that particular statistic, but is does provide an interesting visual image. Imagine a square about the size of 3 average sized home lots on each side. Now imagine that square is coverd in gold. It seems like a lot, but not when you try to divvy it up between all of the people on earth!
Gold is Money
For 5,000 years, civilizations have considered gold as money. Our US currency is not backed by gold, but the federal government. And yet we still do have stocks of gold.
You have to learn to think about the price of gold like this. It isn’t that the price of gold really varies so much. What fluctuates is the value of the currency (i.e. the dollar). Many people believe that gold holds its value.
This is a very general example, but consider a $20 gold coin. In 1880, when a $20 gold coin had that value, a worker might earn that much in 2 weeks. Now that same 1 ounce coin is still about 2 weeks wages at the value of $1,200. This example is not exact, and is easier to do with silver.
So What Makes Gold Valuable?
Just like paper money, gold has value because the market says it does. Beyond that, it is used in industry some, and it a traditional precious metal used for jewelry.
Related posts:
