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. Economics

    4 Countries Pleading for Higher Commodity Prices

    Discover what countries are struggling the most from the price collapse in commodities and what these countries require to return to economic growth.
  2. Stock Analysis

    The Top 5 Gold Penny Stocks for 2016

    Discover five penny stock gold miners that are well-positioned to profit in 2016, providing opportunities for investors to make significant gains.
  3. Stock Analysis

    Glencore Vs. Noble Group

    Read about the differences between Glencore and Noble Group, two companies in the commodities business. Learn about accounting accusations facing Noble Group.
  4. Chart Advisor

    Watch This ETF For Signs Of A Reversal (BCX)

    Trying to determine if the commodity markets are ready for a bounce? Take a look at the analysis of this ETF to find out if now is the time to buy.
  5. Investing Basics

    The Importance of Commodity Pricing in Understanding Inflation

    Commodity prices are believed to be a leading indicator of inflation, but does it always hold?
  6. Stock Analysis

    The Top 5 Small Cap Gold Stocks for 2016 (KGC, SBGL)

    Learn about the factors that led to gold's underperformance, factors that may lead a gold rally and five micro-cap gold stocks to consider.
  7. Fundamental Analysis

    Performance Review: Commodities in 2015

    Learn how commodities took a big hit in 2015 with a huge variance in performances. Discover how the major commodities performed over the year.
  8. Stock Analysis

    The Top 5 Micro-Cap Gold Stocks for 2016 (PGLC)

    Discover five micro-cap gold miners that are well-positioned for a positive year in 2016, even if gold prices remain under pressure.
  9. Stock Analysis

    The Biggest Risks of Investing in SandRidge Stock

    Learn about the significant risks of investing in SandRidge. Read how the company may not be able to service its substantial debt load.
  10. Economics

    Will Silver Recover in 2016? (SLV, GLD, JJC)

    The end of the silver downtrend is likely to coincide with similar recoveries in gold, iron and copper.
RELATED FAQS
  1. Which mutual funds made money in 2008?

    Out of the 2,800 mutual funds that Morningstar, Inc., the leading provider of independent investment research in North America, ... Read Full Answer >>
  2. Do hedge funds invest in commodities?

    There are several hedge funds that invest in commodities. Many hedge funds have broad macroeconomic strategies and invest ... Read Full Answer >>
  3. 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 >>
  4. 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 >>
  5. 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 >>
  6. 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 >>
Hot Definitions
  1. Black Swan

    An event or occurrence that deviates beyond what is normally expected of a situation and that would be extremely difficult ...
  2. Inverted Yield Curve

    An interest rate environment in which long-term debt instruments have a lower yield than short-term debt instruments of the ...
  3. Socially Responsible Investment - SRI

    An investment that is considered socially responsible because of the nature of the business the company conducts. Common ...
  4. Presidential Election Cycle (Theory)

    A theory developed by Yale Hirsch that states that U.S. stock markets are weakest in the year following the election of a ...
  5. Super Bowl Indicator

    An indicator based on the belief that a Super Bowl win for a team from the old AFL (AFC division) foretells a decline in ...
Trading Center