You can’t eat gold, you can’t easily trade it for butter, and its really heavy. So why do people hoard gold and silver, especially in the physical form?
As an avid gold and silver collector for many years I found that most people do not understand the intrinsic value of metals. So lets start with the value of Metal. The value of precious metals is incredibly simple to understand, and is one of the reasons why precious metals are so often used as money. In fact, gold has been used as money for over 2500 years, from 700 B.C. up until today.
The simplicity of the value lies in its tangible form: its purity and weight. That is it. If you have 2 ounces of 99.9% pure gold coin, you know it is twice as valuable as 1 ounce of 99.9% pure gold coin. Like wise, if you have an ounce of 99.9% pure gold coin, you know its worth twice as much as a 1 ounce 50% pure gold coin.
But how can you know if your gold is pure? For minted coins, the reputation of the mint helps to insure the gold is pure. As for other gold (jewelry, etc.) the density, as in weight to volume, is unique to the element.
This unique feature makes it incredibly accurate in prohibiting counterfeit gold. Not to say it never happens, but gold is extremely heavy, and hard to “fake.” There are a few other chemical and machine-based test used to measure purity, but those are generally only used by the refineries.
So, purity x weight = gold’s value. The concepts required to value precious metals are pretty simple to understand. But why are they valued.
The answer to that lies in the fact that it contains no counter party risk. Most financial instruments like bonds, Treasuries, bank accounts all require another human being doing their job and doing it well in order for those instruments to have value.
For example Government treasuries require that a government be fiscally conservative for along time in order to have value. As the people of Greece found out the market has a breaking point. If the government spends considerably more that it takes in revenue then eventually there will be no one willing to lend that government money with an expectation of that government being able to pay it back.
That is what happened to Greece in 2008. They still have not recovered fro that debacle. As a result the once valuable and liquid Greek treasury bonds are now not so valuable and not as liquid.
Same is true for bank accounts. We have all heard the expressions “safe as banks.” Well as the citizens of Cyprus discovered the banks are not so safe. If a bank is poorly run and gets itself into financial troubles then there is a very real chance that the depositors can lose their money.
This is why gold is valuable. If you hold an ounce of gold there are no other humans required to make it have value. It is valuable in and of itself and cannot have its value destroyed by mismanagement. It has no counter party risk and as such remains one of the safest forms of wealth storage around.
Contributing Author: Jarrod Dennis CEO of Success Council. An educational firm specializing in economics and investment.