Other than looking pretty, and acting as a former currency, gold is seemingly uninteresting, with no intrinsic value other than the value humans have attached it. While used in electronics and micro chips, its application for this function is small. For every 10,000 smartphones there is about 10 troy ounces of gold in them. If gold is trading at $1,500 per ounce, that is about $1.50 worth of gold in each smartphone. So if not out of necessity, why has gold always had value? The reason lies in our psychology as well as gold's rather boring qualities.

Why Gold Has Always Had Value

Our ancestors were faced with coming up with a currency, or medium exchange, that was easier to implement than a barter system. A coin is one such medium of exchange. Out of all the metals on the periodic table of elements, gold is the logical choice. Elements other than metals can be ruled out, since a gaseous or liquid currency is not very practical--personal portability is a major hurdle.

This leaves metals like iron, copper, lead, silver, gold, palladium, platinum and aluminum.

Iron, lead and copper are prone to corrosion over time so would not be a good store of value, which is required of coin. Maintaining the metals to keep them from corroding is labor intensive. Aluminum feels very light and unsubstantial, not ideal for our ancestors seeking a coin-metal that invokes feelings of security and value.

Metals such as platinum or palladium, "noble metals," are reasonable choices because they are mostly non-reactive to other elements (little corrosion), but are too rare to create enough coins to circulate. A metal must be somewhat rare so that not everyone is producing coins, but available enough so a reasonable number of coins can be created to allow commerce.

This leaves gold and silver. Gold doesn't corrode and can be melted over a flame, making it easy to work with and stamp as a coin. Finally, gold has a unique and beautiful color, unlike other elements. The atoms in gold are heavier, and the electrons move faster, creating absorption of some light; a process which took Einstein's theory of relativity to figure out.

Gold, Psychology and Society

If the modern paper-money economy were to collapse, gold may not have an immediate use as panic sets in and people fight for their needs. Yet, humans are group beings, and prefer company (on varying levels) over complete independence. It is easier to work in groups than attempt to live off the land on our own. This human traits forces us back to a barter system and finding ways of working together, which leads back to finding a way to exchange good and services easily and efficiently. Gold is the logical choice. If disaster strikes, gold is the metal we will revert to if paper-money, and the system that supports it, no longer exists. It is one of the only substances on earth with the qualities for the job.

Even if a gold has no intrinsic value to the person holding it (he or she can't eat it or drink it), if an agreement is made that turns metal into coins which can be used for easy exchange of goods, that coin takes on a value. Because others believe it has value, you do to, and because they think you value it, they value it too.

The Bottom Line

From a elemental perspective, gold is the most logical choice for a coin, or medium of exchange for goods and services. It is abundant enough to create coins, but rare enough that not everyone can make them. It doesn't corrode, providing a sustainable store of value, and humans are physically attracted to its color and feel. Societies, and now economies, have placed value on gold, thus perpetuating its worth. It is the metal we fall back on when other forms of currency don't work, which means it always has some value as insurance against tough times.

Related Articles
  1. Markets

    The 4 Biggest Russian Mining Companies

    Discover information about the metals and mining industry in Russia, along with information on some of the largest Russian mining companies.
  2. Technical Indicators

    Key Financial Ratios to Analyze the Mining Industry

    Discover some the most important financial ratios used by investors and analysts to evaluate companies in the metals and mining industry.
  3. Chart Advisor

    Traders Step Back to Assess Commodities Damage

    Traders are turning to these exchange-traded notes and exchange-traded funds to analyze key commodities and determine what could be coming next.
  4. Mutual Funds & ETFs

    ETF Analysis: iShares Gold Trust

    Learn about the SPDR Gold Shares ETF, how it tracks the price of gold, and what type of investors may want to hold shares in their portfolios.
  5. Investing News

    Oil or Gold: Which Will Recover First?

    Not sure where oil and gold are headed? The answer is complex.
  6. Investing

    Using Fibonacci to Analyze Gold

    Use Fibonacci studies to analyze gold by picking out hidden harmonic levels that can provide major support or resistance.
  7. Stock Analysis

    The 5 Biggest Canadian Mining Companies

    Learn about the largest Canadian mining companies by market capitalization, including potash production, gold production and other rare minerals.
  8. Economics

    China Looking to Deleverage its Existing Debt

    Learn about a possible debt bubble developing in China, and how the Chinese government may be selling assets to deleverage some of this debt.
  9. Mutual Funds & ETFs

    3 Fixed Income ETFs in the Gold Sector

    Find out more about the top ETFs that track the gold sector, such as the SPDR Gold Shares ETF, the PowerShares DB Gold ETF and the iShares Gold Trust ETF.
  10. Investing

    Deflate Inflation with These 9 Assets

    Now might not be the right time, but investing in these assets may eventually prove to be good hedges against inflation.
RELATED TERMS
  1. Benchmark Crude Oil

    Benchmark crude oil is crude oil that serves as a pricing reference, ...
  2. Christmas tree (oil and gas)

    A vertical assembly of mechanical elements used in oil exploration ...
  3. FPSO (Floating Production Storage ...

    Acronym for Floating Production Storage and Offloading. FPSO ...
  4. Day rate (oil drilling)

    In oil production, a day rate is the amount a drilling contractor ...
  5. Houseable

    A piece of art that is able to fit inside a regular-sized living ...
  6. Reverse Gold ETF

    Exchange traded funds that are designed to trade in a direction ...
RELATED FAQS
  1. What techniques can be used for hedging exposure to the electronics sector?

    Hedging exposure to the electronics sector offers an investor a way to insulate his portfolio from losses during periods ... Read Full Answer >>
  2. What techniques are most useful for hedging exposure to the banking sector?

    The banking sector moves in the same direction as the broader market, but its volatility is much lower. The sector's stability ... Read Full Answer >>
  3. Is credit a form of fiat money?

    To understand why credit is a form of fiat money, one must first understand what money is. At its most basic level, money ... Read Full Answer >>
  4. Why should you invest in tangible assets?

    Savers who deliberately buy tangible assets for investment purposes value their tangible goods as a form of value diversification ... Read Full Answer >>
  5. Is fiat money more prone to inflation than commodity money?

    The value of fiat money is based largely on public faith in the issuer. Commodity money's value is based on the material ... Read Full Answer >>
  6. Is all paper money fiat money?

    The majority of currency on paper is considered fiat money. Fiat money is money that can be used as tender but does not have ... Read Full Answer >>

You May Also Like

Trading Center
×

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!