Most investors have a conceptual understanding of gold’s value. However, many people still wonder: Why is gold so expensive? After all, this yellow metal has very minimal practical applications when compared to more functional precious metals such as silver. Yet, gold prices far outpace the values of other investment-grade metals.
In reality, gold’s value is the result of a millennia-long human fascination that has overseen the evolution of a shiny metal into one of society’s most enduring and valuable assets. Understanding the history of gold’s value can shed some light on its current price and future evaluations.
Early significance among humans
For thousands of years, humans have imbued gold with tremendous symbolic, cultural, and religious significance. A combination of gold’s aesthetic luster, durability, malleability, and rarity made it a popular choice for societies throughout time. The ancient Egyptians and Aztecs considered gold a byproduct of the gods. This link between gold and divinity is echoed by various ancient civilizations worldwide.
In its earliest uses, gold was used for decoration on jewelry, artifacts, ornaments, and buildings. Typically, only the most affluent and highest-ranking members of society had access to gold, further cementing its association with wealth and prestige. This deep-rooted connection between humanity and gold laid the foundations for this metal’s eventual rise as the preeminent force in economics.
Use as a medium of exchange and currency
Gold’s connotation with wealth, status, and power made it the perfect medium of exchange for burgeoning economies. It was highly coveted and widely recognized among members of early civilizations. The earliest examples of gold used as a store of value and means of trade date back to Ancient Mesopotamia, Egypt, and the Indus Valley Civilization around 3,000 to 2,500 BCE.
It would be another several hundred years until gold was used in official currency. The Kingdom of Lydia is famous for minting the first gold coin in 630 BCE. These early coins were created with an alloy of gold and silver, owing to gold’s malleability. Eventually, neighboring and succeeding civilizations followed suit, spreading the use of gold in government-issued currency across the globe.
Advantageous properties and characteristics
The preference for gold as a principal component in currency isn’t exclusively explained by its aesthetic appeal and association with wealth. Gold also exhibits several unique characteristics that make it a practical choice for coinage:
- Durability – Resistant to various forms of corrosion including tarnishing and rust.
- Malleability – Easily shaped into coins of various fractional sizes without breaking or cracking
- Portability – A high value-to-weight ratio makes it a practical form of daily currency
- Scarcity – Exists in relatively scarce amounts which underpins its value and status as a store of wealth
These properties helped cement gold’s use in the production of currency throughout the development of civilizations.
Gold standardization in economies
When modern economies began issuing paper forms of currency, governments looked to gold to provide a solid foundation of value. This tether between bills and the yellow metal led to the establishment of the gold standard. The United Kingdom was the first country to formalize a tie between its paper currency and this precious metal in 1821, followed by the United States and other major world economies throughout the 20th century. The economic cost of World War II led to the global abandonment of the gold standard, but the resulting Bretton-Woods Agreement still tied the US dollar, as the world reserve currency, to gold.
👉 Further Reading: A Return to the Gold Standard?
Ongoing demand from fait failures
The transition to a fiat economy and the dissolution of the gold standard didn’t diminish the importance of gold in the global economy. Despite the move away from a gold-backed currency, governments worldwide have continued to accumulate and maintain substantial gold reserves to support their currencies, which have become increasingly devalued over time. Far from offering a viable replacement, the shortcomings of paper currency systems have only underscored gold’s enduring value as a cornerstone of economic stability.
Since the 1930s, the US dollar has lost 99% of its value against gold. The economic consequences of an untethered currency and limitless government spending have driven central banks to buy up record amounts of gold over the past few years. The gold standard and the Bretton Woods Agreement played a pivotal role in solidifying gold’s significance, acceptance, and utility on the global economic stage. The momentum created by these frameworks has carried on long after their demise.
Limited industrial demand
Ironically, gold’s low industrial demand when compared to silver or palladium contributes to its strong price action. While high industrial demand consumes a significant portion of other precious metals’ availability, the gold supply is protected by its limited application. The overwhelming majority of gold ever mined remains in an accessible form and can always be recycled into different forms. This results in greater price stability and steady demand. In contrast, more industrially dependent metals experience greater demand inconsistencies and price volatility, harming their reputation as reliable stores of value.
Natural supply constraints
The relatively inelastic global gold supply is one of the primary reasons it’s so expensive. If gold resources were abundant, the saturated market would lead to significantly lower prices. Not only is the natural supply of gold limited, but the process of exploring, mining, and manufacturing gold is costly and time-consuming. This results in a fixed supply of gold which contributes to stable price movement.
On the flip side, gold demand has been steadily increasing for years as central banks and retail investors diversify with precious metals in the face of waning economic conditions. The combination of a static supply and a growing demand results in higher gold prices as the market adjusts to these dynamics, further reinforcing gold’s value as a hedge against inflation and economic uncertainty.
View as a safe haven asset
Gold’s premium value isn’t only driven by demand at the global or national level. For centuries, everyday investors have viewed gold as a safe-haven asset, providing a backstop against the volatility of paper currency and paper-backed assets such as stocks, bonds, and ETFs. Historically, gold prices maintain their strength and even increase in value as the rest of the economy slides. The widespread view of gold as a hedge against economic pressures results in steady demand which strengthens prices and reinforces its status as a stable asset. This positive feedback loop strengthens gold’s well-earned reputation
Why gold is never too expensive.
Seeing the impressive spot price of gold can lead some budget-conscious investors to assume this asset is out of their reach. However, gold’s divisibility ensures it’s never too expensive for any investor to own. This metal’s malleability allows it to be broken down into various fractional sizes which is anything smaller than the traditional one troy ounce size. The resulting spectrum of gold coins, bars, and other physical products provides various entry points for investors below the current spot price of gold.
If you’re eager to make the most out of your gold investment, claim a FREE copy of our Precious Metals Investment Guide. It covers everything you need to know about diversifying your portfolio with gold, silver, and other precious metals.