What is the True Value of Gold?

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Yes, I Am Cheap has an interesting post about the true value of gold. In this article, the author asserts that gold is only worth “what the next person will pay for it. Unlike medicine, or technology, or services – which possess within themselves a measure of value that is nearly impossible to alter – gold is just, well, gold.”

Not to disparage the site at all — Yes, I Am Cheap shares a lot of powerful, well-written and motivational stories — but on this case, the author is only covering one side of the story. She is not considering just how valuable gold has been in protecting wealth, as well as in the development of trade, exchange, and free markets, all things that have vastly improved the human condition and can only be sustained for the long term with honest money.

Why does gold have any value at all?

It makes more sense if we look at gold as the true people’s currency, rather than as some exotic form of investment.

• Gold protects against the decline in value of other currencies.
• Central banks are increasingly investing in gold. Big bankers may be greedy and repugnant at times, but they aren’t stupid.
• What about political risk and uncertainty? The U.S. dollar is also only worth what the next person will pay for it. The U.S. government can attempt to enforce some value via taxation, but it can’t force this on the entire world.

Gold has always been historically chosen by the people, and it emerged as the best choice of money until violent intervention by the government ended that practice.

Gold is money.

This is worth repeating again: Gold is money, and it is money that is not backed by a matching debt. Unlike fiat currencies, the use of gold does not require a central bank to monopolize the control of money and increase the supply at a geometric rate. Gold is not a stock, bond, or other income-producing investment. Neither is a U.S. dollar, for that matter. Gold is money.

What are the properties of good money?

Durability

Gold is almost impossible to destroy. You’d basically have to throw it into a volcano, or dissolve it in aqua regia and then pour it into the ocean in order to get rid of it.

Fungibility

Fungibility means that each unit of a good can be substituted with every other unit. Gold is an element of the universe, so any quantity of raw gold is the same as any other quantity. It doesn’t deteriorate over time, and it is malleable so it is very easy to pound or pour out new gold coins from raw material.

Scarcity

Just like gold cannot be easily destroyed, it also cannot be easily created. There are deposits still waiting to be tapped, to be sure, but part of this value is already capitalized in the current price of gold. Unlike a group of elite central bankers, owners of gold cannot redistribute wealth to themselves by creating new gold money and watering down the value of everyone else’s money.

Unless humans discover a way to collect gold atoms for free from the world’s oceans, current owners are safe from the types of inflation that only a central bank could create.

Gold is protection.

In all fairness, a lot of unscrupulous companies are taking advantage of small time investors by making them pay rip-off prices to acquire some gold, and some people are “chasing” gold in the hopes of receiving outsize returns. Yes, I Am Cheap is right to ward off against these practices.

Gold is not a “get rich, quick” scheme, and only a fool would buy gold believing in that. It is, however, a great way to diversify against sovereign risk, make a statement against the ruling party and big government, and to protect your family from loss.