Gold is on a major run. It now stands close to $2,000 per ounce. The media talks about the price increase being driven by governments taking on more and more debt and therefore reducing the value of their paper money. But why gold? Why has gold been used as a form of money for thousands of years?
Gold has a couple unique characteristics. First, it can be melted and purified at relatively low temperatures. This means that ancient people could separate it into a ‘pure’ form. It is soft enough that it can be hammered or shaped or stamped to identify it or make it into a useful form, but not so soft that it deforms easily. It is rare, but not too rare. There are many other less abundant elements. It is the only metal that has the ‘gold color’. Lots of metals are silvery, but no other pure element has the same color. It wasn’t until later that ‘gold colored’ alloys like brass and bronze were created. But there is one other really important factor. It is inert, it doesn’t react or rust or discolor over time. Unlike most other metals, gold stays a golden color basically forever.
Gold In Ancient Times
Ancient golden coins might be a little dirty or less brilliant, but often that is caused by other elements, such as silver and copper that are in the coin. Museums are full of gold jewelry and sculptures made of gold that look pretty much the same as they did when they were made. A similar iron item would be rusted brown. A copper item would be oxidized green, and a silver item might be tarnished black. So if I was an ancient traveler, the golden coin in my pocket will not change and will be easily recognized by all merchants.
But why does it still have the same value in modern times? Do people think we will go back to using gold coins to buy bread and milk? I guess some people do. Some mints even sell sheets of gold scored into 1/100th ounce pieces which seem ideal to buy your groceries.
Today, the value of Dollars, Euros, Yen or Yuan are based on the confidence we have in the backing country to manage its finances well, accept these payments for goods, and not lose value. Gold seems to have value all around the world and seems to be a safe store of value when governments are in crisis or there is a lot of uncertainty.
COVID, political unrest and high debt seem to have created a lot of uncertainty.