Why does gold have value?
Gold's value starts with the fact that its supply is steady and by nature it's durable. In other words, the amount of gold traded each year (The Supply and Demand) is small relative to the existing total stock. This acting as a bit of a throttle on its value, as does the high cost of mining. Mines will have yields that control whether it's profitable to run them. A mine may have a $600/oz production cost, in which case it's clear they should run full speed now with gold at $1200, but if it were below $650 or so, it may not be worth it. It also has a history that goes back millennia, it's valued because it always was. John Maynard Keynes referred to gold as an archaic relic and I tend to agree. You are right, the topic is controversial. For short periods, gold will provide a decent hedge, but no better than other financial instruments. We are now in an odd time, where the stock market is generally flat to where it was 10 years ago, and both cash or most commodities were a better choice.  Look at sufficiently long periods of time, and gold fails. In my history, I graduated college in 1984, and in the summer of 82 played in the commodities market. Gold peaked at $850 or so. Now it's $1200. 50% over 30 years is hardly a storehouse of value now, is it? Yet, I recall Aug 25, 1987 when the Dow peaked at 2750. No, I didn't call the top. But I did talk to a friend advising that I ignore the short term, at 25 with little invested, I only concerned myself with long term plans. The Dow crashed from there, but even today just over 18,000 the return has averaged 7.07% plus dividends. A lengthy tangent, but important to understand. A gold fan will be able to produce his own observation, citing that some percent of one's holding in gold, adjusted to maintain a balanced allocation would create more positive returns than I claim. For a large enough portfolio that's otherwise well diversified, this may be true, just not something I choose to invest in. Last - if you wish to buy gold, avoid the hard metal. GLD trades as 1/10 oz of gold and has a tiny commission as it trades like a stock. The buy/sell on a 1oz gold piece will cost you 4-6%. That's no way to invest. Update - 29 years after that lunch in 1987, the Dow was at 18448, a return of 6.78% CAGR plus dividends. Another 6 years since this question was asked and Gold hasn't moved, $1175, and 6 years' worth of fees, 2.4% if you buy the GLD ETF. From the '82 high of $850 to now (34 years), the return has a CAGR of .96%/yr or .56% after fees. To be fair, I picked a relative high, that $850. But I did the same choosing the pre-crash 2750 high on the Dow. "Because people are willing to trade for it.  People are willing to trade for Gold because: The value of gold goes up because the demand for it goes up, while the supply has been basically static (or growing at a low static rate) for a long time.  The demand is going up because people see it as a safe place to put their money.   Another reason Gold's value in dollars goes up, is because the value of the item it's traded against (dollars, euros, yen, etc) goes down, while its own value stays roughly the same. You point out Gold is not as liquid as cash, but gold (both traded on an exchange, and held physically) is easily sold.  There is always someone willing to trade you cash for gold.  Compare this to some of the bank stocks during the first part of our current recession.  People were not willing to give much of anything for your shares.  As the (annoying, misleading) advertisements say, ""Gold has never been worth zero""." A lot of people probably don't agree with him, but Warren Buffett has some great quotes on why he doesn't invest in gold: I will say this about gold. If you took all the gold in the world, it   would roughly make a cube 67 feet on a side…Now for that same cube of   gold, it would be worth at today’s market prices about $7 trillion   dollars – that’s probably about a third of the value of all the stocks   in the United States…For $7 trillion dollars…you could have all the   farmland in the United States, you could have about seven Exxon   Mobils, and you could have a trillion dollars of walking-around   money…And if you offered me the choice of looking at some 67 foot cube   of gold and looking at it all day, and you know me touching it and   fondling it occasionally…Call me crazy, but I’ll take the farmland and   the Exxon Mobils. And his classic quote: [Gold] gets dug out of the ground in Africa, or someplace. Then we   melt it down, dig another hole, bury it again and pay people to stand   around guarding it. It has no utility. Anyone watching from Mars would   be scratching their head. I think the primary reason it is so pricey now is that it is an inflation hedge, and considering how shaky the economies and out of control the spending is in many countries right now, people are running to it as a safe harbor. The increased demand raises the price as it does with any asset.  This brings us to the titular question. Why does gold have value? The same reason anything has value. There is someone out there who wants it enough to trade something else of value to get it.  It is in the news so much because it is so high right now, which unfortunately is going to cause a lot of people to foolishly invest in it at likely the worst possible time. "Gold has value because for the most of the history of mankind's use of money, Gold and Silver have repeatedly been chosen by free markets as the best form of money. Gold is durable, portable, homogeneous, fungible, divisible, rare, and recognizable.   Until 1971, most of the world's currencies were backed by Gold.  In 1971, the US government defaulted on its obligation to redeem US Dollars (by which most other currencies were backed) in Gold, as agreed to by the Bretton Woods agreement of 1944.  We didn't choose to go off the Gold Standard, we had no choice - Foreign Central Banks were demanding redeption in Gold, and the US didn't have enough - we inflated too much.   I think that the current swell of interest in Gold is due to the recent massive increase in the Federal Reserve's balance sheet, plus the fast growing National debt, plus a looming Social Security / Medicare crisis.  People are looking for protection of their savings, and they wish to ""opt-out"" of the government bail-outs, government deficits, government run health-care, and government money printing.  They are looking for a currency that doesn't have a counter-party. ""Gold is money and nothing else"" - JP Morgan ""In the absence of the gold standard, there is no way to protect savings from confiscation through inflation. There is no safe store of value. If there were, the government would have to make its holding illegal, as was done in the case of gold. If everyone decided, for example, to convert all his bank deposits to silver or copper or any other good, and thereafter declined to accept checks as payment for goods, bank deposits would lose their purchasing power and government-created bank credit would be worthless as a claim on goods. The financial policy of the welfare state requires that there be no way for the owners of wealth to protect themselves. This is the shabby secret of the welfare statists' tirades against gold. Deficit spending is simply a scheme for the confiscation of wealth. Gold stands in the way of this insidious process. It stands as a protector of property rights. If one grasps this, one has no difficulty in understanding the statists' antagonism toward the gold standard."" - Alan Greenspan" "Everything is worth what its purchaser will pay for it. --Publilius Syrus. Gold has value because people want to buy it.  Electronics manufacturers like the fact that it's conductive.  Jewellers like that its shiny.  Glenn Beck likes that he's selling it and his audience will buy it. Proponents of gold claim that it has ""real"" value, as opposed to fiat currency (which has no commodity backing).  Opponents of gold claim that all wealth is illusory, and that gold has no more inherent value than the paper we use now.  I'm inclined to agree with the latter (money is only money because we agree that it is, and the underlying material is meaningless), however the issue is hotly debated." To start with gold has value because it is scarce, durable, attractive and can be made into jewellery. But that does not explain its current value. In the current economic climate, it is difficult for many investors to get a positive return on conventional investments such as equities or bonds. I theorise that, in such conditions, investors decide to park their money in gold simply because there are few other good options. This in itself drives the price of gold up, making it a better investment and causing a speculative boom. As you will see here, here, and here the gold price is negatively correlated with stock market indices. I use to play marbles at school. Marbles were like gold the more you had the richer you were. They were a scarce commodity only a few in circulation. Once I secured a wealth of marbles I realized they were of little real value. They were only of illusory value. As long as we all were deceived into believe they had value they I was rich. Sure marble could be used to make marble floors ;) they were lovely to look at, and every one wanted them. Then one day, I discovered the emperor had no clothes. Wow, the day that everyone sees the true value of gold, what a stock market crash that will be. I tried to avoid gold as much as possible, but this is hard to do in todays stock market. My solace is that we will all be in the same golden (Titanic) boat, only I hope to limit my exposure as much as possible. Anyone want a gold watch for a slice of bread? "It has semantic value (because we culturally believe gold is valuable).  There is a very important point here.  Gold and many other coin metals. This ""semantic value"" is enshrined in law through the special tax status of coin metals.  You can buy a kilo of gold and not pay sales tax.  You can't buy a kilo of iron or tin and do the same.  This is the important part because investors shouldn't care about semantics. I read that the taxable status varies by state or nation, so you need to be very careful.  It's possible to evade taxes without realizing it.  It also doesn't necessarily exempt you from the form of gold.  An ingot should be tax exempt.  A collector's coin may or may not be, depending on your local laws and the difference between the value of the weight of the gold, and the value of the form of the coin." "Why does the value of gold go up when gold itself doesn't produce anything? Why do people invest in gold? Your perception, that the value of gold goes up in the long run, is based on the price of gold measured in your favorite paper currency, for example the US Dollar. An increasing price of gold means that in the visible gold market, market participants are willing to exchange more paper currency units for the same amount of gold. There are many possible reasons for this: While HFT became extremely important for the short term price movements, I will continue with long term effects, excluding HFT. So when - as a simple thought experiment - the amount of available paper currency units (US $ or whatever) doubles, and the amount of goods and services in an economy stay the same, you can expect that the price of everything in this economy will double, including gold. You might perceive that the value of gold doubled. It did not. It stayed the same. The number of printed dollars doubled. The value of gold is still the same, its price doubled. Does the amount of paper currency units grow over time? Yes: https://research.stlouisfed.org/fred2/series/BASE/ In this answer my term ""paper currency units"" includes dollars that exist only as digits in bank accounts and ""printing currency"" includes creating those digits in bank accounts out of thin air. So the first answer: gold holds its value while the value of paper currency units shrinks over time. So gold enables you to pass wealth to the next generation (while hiding it from your government). That gold does not produce anything is not entirely true. For those of us mortals who have only a few ounces, it is true. But those who have tons can lease it out and earn interest.  (in practice it is leased out multiple times, so multiple that gain. You might call this fraud, and rightfully so. But we are talking about tons of gold. Nobody who controls tons of physical gold goes to jail yet).  Let's talk about Fear. You see, the perceived value of gold increases as more paper currency is printed.  And markets price in expected future developments. So the value of gold rises, if a sufficient number of wealthy people fear the the government(s) will print too much paper currency.  Second Answer: So the price of gold not only reflects the amount of paper currency, it is also a measurement of distrust in government(s). Now you might say something is wrong with my argument. The chart mentioned above shows that we have now (mid 2015) 5 times as much printed currency units than we had 2008.  So the price of gold should be 5 times as high as 2008, assuming the amount of distrust in governments stayed the same. There must be more effects (or I might be completely wrong. You decide). But here is one more effect: As the price of gold is a measurement of distrust in governments (and especially the US government since the US Dollar is perceived as the reserve currency), the US government and associated organizations are extremely interested in low gold prices to prove trust. So people familiar with the topic believe that the price of gold (and silver) is massively manipulated to the downside using high frequency trading and shorts in the futures markets by US government and wall street banks to disprove distrust. And wall street banks gain huge amounts of paper currency units by manipulating the price, mostly to the downside. Others say that countries like china and russia are also interested in low gold prices because they want to buy as much physical gold as possible. Knowing of the value that is not reflected by the price at the moment. Is there one more source of distrust in governments? Yes. Since 1971, all paper currencies are debt.  They receive their value by the trust that those with debt are willing and able to pay back their debt. If this trust is lost, the downward manipulation (if you think that such a thing exists) of the gold and silver prices in the futures markets might fail some day. If this is the case (some say when this is the case). you might see movements in gold and silver prices that bring them back to equilibrium with the amount of printed paper currencies. In times of the roman empire you got a good toga and a pair of handmade shoes for an ounce of gold. In our days, you get a nice suite and a good pair of shoes for an ounce of gold. In the mean time, the value of each paper currency in the history of each country went to zero and the US $ lost 98% of its initial value. As long as there is not enough distrust, more paper currency is made in equity markets and bond markets on average. (Be aware that you earn that currency only after you were able to sell at this price, not while you hold it) Gerd" "Most of the answers here reflect a misunderstanding of what gold actually is from a financial perspective.  I'll answer your question by asking two questions, and I do challenge you to stop and think about what we mean when we say ""cash"" or ""unit of exchange"" because without understanding those, you will completely miss this answer. In 1971, the DXY was 110.  For people who don't know, the DXY is the US Dollar Index - it weighs the strength of the US Dollar relative to other currencies.  Hey look, it's a pretty graph of the DXY's history. In 1971, gold was $35 an ounce. The DXY is 97 today. Gold is $1170 an ounce today. Now the questions: If shares of Company A in 1971 were $10 a share, but now are $100 a share and some of this is because the company has grown, but some of it is because of inflation and the DXY losing value, what would the value of the company be if it was held in grams of gold and not dollars? Benjamin Graham, who influenced Warren Buffett, is a ""supposed"" critic of gold, yet what percent of his life were we not on a gold standard?  In his day, the dollar was backed by gold - why would you buy gold if every dollar represented gold. Finally, consider how many US Dollars exist, and how few metric tonnes of gold exist (165,000).  Even Paul Volcker admitted that a new gold standard would be impossible because the value of gold, if we did it today, would put gold in the $5000-$10000 range - which is absurd: To get on a gold standard technically now, an old fashioned gold   standard, and you had to replace all the dollars out there in foreign   hands with gold, God the price, you buy gold, because the price of   gold would have to be enormous. So, you're all left hoping the Federal Reserve figures how to get us all out of this mess without causing trouble, otherwise, let me just kindly say, you WILL realize the value of gold then. As the old saying goes, ""A fool and his money are soon parted.""  I could be wrong, but I'd say that those who've been buying gold since 1971 for their ""cash holdings"" (not index funds) aren't the suckers." "Gold has very useful physical properties for some engineering applications.  Even tiny amounts of gold can substantially improve products, so it can be worthwhile to pay high prices per ounce for gold.  For example: Gold can be ""beaten"" or electroplated to produce very thin shiny coatings.  Entire roofs (of famous buildings) have been covered with ""gold leaf"", at a cost that was small compared to the supporting structure. A very thin layer of electroplated gold provides better protection against corrosion than a much thicker layer of electroplated nickel.  Even if gold costs thousands of times more per ounce than nickel, it is cheaper to use gold as an anti-corrosion layer than nickel (for use in military-grade naval electronics). A thin layer of electroplated gold greatly increases the electrical current-carrying capacity of a thin copper wire." "Gold can be thought of to have value in one of two ways; (1) as a means and (2) as an end.  Means takes the shape of currency. In this form, we value gold in the same way we value the dollar, it allows us to purchase things we want. As a medium of exchange, gold has no definitive value and is only assigned one during the process of an exchange. For example, I would be valuing one ingot of gold to be worth a dog if I traded a dog for one ingot of gold. The value of gold in this sense is subjective as each person decides for themselves what gold is worth during the transaction. Gold as an end is valued for its own sake. A good example of this is a jeweler who purchases gold directly because of the intrinsic property(s) gold possesses. This is closer to the ""true value"" of gold than using it as a means, but virtually no one in our society views gold in this manor because virtually no one can use gold in this manor. ""You know what I could use right now, a block of gold."" - said no one ever.  But even if you are one of the select few who value gold for its own sake, this is usually done because gold provides a function. For example, if people no longer want to ware jewelry, then a jeweler will likely have to find a new line of work where he would likely no longer view gold as valuable as an ends. To sum up, gold has a perceived value for most people and an ""intrinsic value"" to a select few (for the time being)."
"&gt; If a penny worth of copper is worth 1.8 cents and I choose to make it into a a coin with a value of 1 cent then my opportunity cost is .8 cents.  No, not at all. A coin represents value, it is not value (in terms of its denomination). A coin does however have value as facilitator of exchange of value, but that is in principle unrelated to that coin's denomination. So the value of a 1 cent coin (as a facility of exchange) is unknown. It is however easy to make the case that this unknown is very low, or even negative.  &gt; A gold coin back before fiat currencies was worth its weight in gold.  Gold is just very slightly different in this regard, and substantially the same. It is used to represent value, and has very low intrinsic value. It's just a naturally limited resource instead of an ""artificially"" limited one such as fiat currency. This would be immediately evident if by some freak act of nature there was an abundance of gold raining down on everyone tomorrow. Nobody would become rich (just some unfortunate people overloaded with gold assets would become poor). Gold teeth and jewelry would become cheaper, though I imagine the latter would go out of fashion quite quickly.  &gt; When I make the spending power less than the value the purpose of a fiat currency breaks down.  Not at all, there's in principle no relationship between ""value"" and denomination. You just need means of exchange that are cost-effective and practical. Single cents are becoming impractical and basically useless, and this would be just as true even if they cost .0001 cents each to produce." "It's not a ponzi scheme, and it does create value. I think you are confusing ""creating value"" and ""producing something"". The stock market does create value, but not in the same way as Toyota creates value by making a car. The stock market does not produce anything. The main way money enters the stock market is through investors investing and taking money out.   The only other cash flow is in through dividends and out when businesses go public.  &  The stock market goes up only when more people invest in it. Although the stock market keeps tabs on Businesses, the profits of Businesses do not actually flow into the Stock Market. Earnings are the in-flow that you are missing here. Business profits DO flow back into the stock market through earnings and dividends. Think about a private company: if it has $100,000 in profits for the year then the company keeps $100,000, but if that same company is publicly traded with  100,000 shares outstanding then, all else being equal, each of those shares went up by $1. When you buy stock, it is claimed that you own a small portion of the company. This statement has no backing, as you cannot exchange your stock for the company's assets. You can't go to an Apple store and try to pay with a stock certificate, but that doesn't mean the certificate doesn't have value. Using your agriculture example, you wouldn't be able to pay with a basket of tomatoes either. You wouldn't even be able to pay with a lump of gold! We used to do that. It was called the barter system.  Companies also do buy shares back from the market using company cash. Although they usually do it through clearing-houses that are capable of moving blocks of 1,000 shares at a time." "Suppose you have a bar of gold and are hungry. I buy the gold from you for cash, which you then use to buy food, clothes and generally support yourself.  Would it be fair to say that I paid for your food, clothes etc? I don't think so - I think *you* paid for them, in gold. I facilitated the exchange of gold into money, and without me or someone like me around to provide liquidity for your gold, you'd still be hungry. But fundamentally, it was the gold that was valuable.  Now, suppose there is a lack of liquidity in gold - there's a shortage of gold buyers. I take advantage of this distortion to offer to buy your gold for half its free market value. You don't want to accept this deal, but since your only alternative is starvation, you accept.  I say this is wrong, not because of socialism, but because of capitalism. The efficiency of capitalism arises from the price system of value. Goods and services command a fair market price, and buyers and sellers have access to both liquidity and good information about the relative value of things. When distortions are allowed to interfere with free market pricing - as inevitably happens under lassiez-faire capitalism - this efficiency is lost. Good government regulation is necessary to keep markets free and efficient, and this is good for everyone.  So what does this have to do with David Siegel?  First, nothing in my example above changes when you substitute ""labor"" for ""gold."" If I am hungry but I have a skill, and I sell you some of my labor for cash, then use the cash to buy food, *you did not give me the food*. You did not ""pay for my food,"" you did not ""make it possible for me to get food,"" or anything of the sort. *I paid for it myself*, by trading labor for cash in exactly the same way that you could trade gold for cash.  Second, the price system of value allows you to earn a ""normal profit,"" which means sufficient profit for resources to remain within an industry. But ""excess profit"" harms market efficiency and thus the price system. This is pure capitalist theory, straight from Adam Smith; it is nothing to do with socialism or communism. It is quite clear that David Siegel is taking excess profit. This is no different from the sort of profiteering I described when there's only one gold dealer in town. It is parasitic behavior according to *capitalist* theory.  And finally, David Siegel is the guy who invented high-pressure selling of timeshares by inviting familes to a ""free"" vacation, trapping them in a room, and basically holding them hostage until they sign on the dotted line. His business is near-criminal. You can argue that drug kingpins also create thousands of jobs - that doesn't make them good people, or their actions beneficial to society. I already thought David Siegel was a parasite on society before I ever heard of his opinion on Obama. And quite frankly, I'm shocked and appalled that people are actually defending him." "There are three aspects of what to value gold over. It doesn't easily chemically react with anything, so it stays pure over a long period of time (vs, say a bar of iron or a bar of butter).  So it's valuable so far as it doesn't rot. It is shiny, and there is the historical allure of having a bag of shiny, jingly gold coins. Other people will give you other items of perceived value in exchange for it. I believe it was Warren Buffett who stated his opinion on gold - paraphrased such: ""You pay people to dig it out of the ground, you pay people to purify it and pour into forms, you pay people to verify the number of nine's purity in it, you pay people to build a secure building to store it in, and you pay people to stand around and guard it.  Where is the value in that?""" I can see a long-term existence for it. I doubt it will replace national currencies but I also think there is some value. Gold is purely speculative as well but it's thrived for a very long time. I see this as basically a digital version of gold. Just tried to buy lunch with some gold dust. They said they only take US dollars.  Gold is really no different than fiat paper/digital or even cryptocurrencies. Outside of the industrial uses for it, of which there are many but not so many that it would use up all the gold that's been mined shy of just using up all the gold that's been mined to use up all the gold that's been mined, its value is also based on perception and perceived value.. ..no different than anything else someone wants and is willing to do x in order to get it.  When push comes to shove, other things contain way more value than gold, and gold is just *a* medium with which to exchange those things for.. But, again, only because people agree for it *to* be a medium they're willing to accept.  Again, you can't eat, drink, fuck, shelter, etc yourself with gold, you can only get food, drink, sex with it.. ..if the other party is willing to accept it which, today, wasn't the case.  https://www.coindesk.com/gold-investor-john-hathaway-cryptocurrencies-garbage/ The answer is that other than a small number of applications (the approx. 10% of gold production that goes to 'industrial uses') gold does not have intrinsic value beyond being pretty and rare (and useful for making jewelry.)  There are a number of 'industrial' applications and uses for gold (see other answers for a list) but the volume consumed this way is fairly small, especially relative to the capacity to mine new gold and reclaim existing gold. If you removed investment, and jewelry usage (especially culturally driven jewelry usage) then there's no way the remaining uses for industry and dentistry could sustain the price levels we currently see for gold.  Furthermore, and perhaps more importantly, the best data I can find for this shows the total number of tons consumed for industrial uses has been shrinking for several years now, and that was prior to recent price increases, so it is difficult to tie that reduced demand to increasing prices.  And one might postulate in a 'collapsed society' you seem to be referring to in your question, that a lot of the recent industrial demand (e.g. the '50 cents of gold in each cellphone') could quite possibly disappear entirely.   The argument many people use for gold having value is usually 'been used as money for thousands of years'.  But this confuses gold having a value of its own with the reasons why something makes a useful currency.  Gold has a large number of characteristics that make it an ideal currency, and of all the elements available it is perhaps the best physical element to serve as a currency. BUT just as with a dollar bill, just because it is a good currency, does NOT give it an intrinsic value. Any currency is only worth what someone will trade you for it.  The value is set by the economy etc., not the medium used as a currency.   So yes, people will probably always use gold as money, but that doesn't make the money worth anything, it's just a medium of exchange. Incidentally two other things should be noted.  The first is that you have a problem when the medium itself used for a currency becomes worth more than the face value.  Hence why we stopped using silver in coins, and there were concerns over pennies due to the price of copper. This leads to the second point, which is that currently, gold is TOO RARE to suffice as a world currency, hence why all countries went off the gold standard years ago.  The size of national and global economies was growing faster than the supply of gold, and hence it was becoming impossible to have enough gold to back all the currencies (inflation concerns aside). Regarding investing in gold vs. stocks, I don't think I could say it better than Warren Buffett: You could take all the gold that's   ever been mined, and it would fill a   cube 67 feet in each direction. For   what that's worth at current gold   prices, you could buy all -- not some   -- all of the farmland in the United States. Plus, you could buy 10 Exxon   Mobils, plus have $1 trillion of   walking-around money. Or you could   have a big cube of metal. Which would   you take? Which is going to produce   more value?