Why is gold expensive? In august of 2020 the price of gold reached the highest point in history. An ounce of gold was worth more than $2000. This metal has been known and loved since „the dawn of time“. But never before had gold been so valuable… It’s natural to ask: why? What is that special quality that makes gold such an important part of the world’s economy?
Gold isn’t the rarest metal in the world. Not even the most expensive one. It’s not the metal most used in industrial and technological processes. What is its “secret” then? The short answer is: “Gold is valuable because people had agreed gold is valuable”. The same goes for “fiat” money. Its value depends on a social agreement that money has value. So everybody knows that the funds he or she receives as payment can be exchanged for, in an example, a car or some food in the store. The store owner will use the same cash to fill its shelves and pay his workers. And this circle continues as long as the belief in the value of money is perpetuated. If store owners stopped believing money has any value, if they decided that they’d only accept nuggets of gold or bitcoin as payment, the colored paper we have in our wallets would turn worthless in a second.
Why is gold expensive?
And gold is considered one of the oldest examples of money in our history. That long tradition is one of the reasons gold is still very valuable today. Since the time of the first civilizations, this metal had been extremely sought and appreciated. In part, it is thanks to its unique properties. Iron, led, copper and aluminum corrode in time. In other words, they turn to rust. That is makes them harder to use as coins made to keep a constant value. Precious metals are mostly unaffected by the weather. However, platinum and palladium have been extremely rare throughout history, it would have been an impossible task to base a thriving economy on their value. That is not the situation with gold. Its presence in nature is big enough to make as much coins as an early civilization needed. But, at the same time, gold is rare enough to make this process complicated and exclusive.
Beside as money, gold has been often used as a decorative metal, thanks to its properties. Resistance to weather conditions and ease with which it could have been molded into shapes made gold the first choice for jewelry, but also an important industrial metal in later time.
The “cult” of gold lasts more than five thousand years. In that long period gold has become a symbol of value and luxury. But also as an asset of value-storing. There are many well-known comparisons of the value of gold and money. For example, one such comparisons states that a well-made toga in ancient Rome was valued the same amount of gold you would have to spend today to get a tailor made suit. Also, an average automobile made by Ford is valued today, in gold, roughly the same that model T was valued 110 years ago. In US dollars, the price has gone up more than a hundred times. In other words, dollar has lost more than 99 percent of its value over the years, due to inflation. However, the worth of gold stayed the same.
Is gold going to get even more expensive?
Another special quality of gold is the diversity of its use. Around 50 per cent of gold bought in a year is bought as an investment. Meaning: as coins and bars used as a safe-haven in the market. The other 50 per cent makes for jewelry and industrial use. So, even if gold stopped being popular as an safe-haven investment, it would still be sought after in the market.
Finally, the value of a gold coin or bar can never be zero. Stocks and bonds, even cryptocurrency, can become worthless. Gold cannot. It has not only the value of use, but also the cost of production. The cost of mining an ounce of gold is around $1000. If the price of gold dropped below that level, the production would be halted. Which would lead to the shortage of gold in the market. That, in turn, would make the price of gold rise.
This is the short answer on the question why is gold expensive. But, even more important question for all the investors is: will it be even more expensive? Bank of America claims it has the answer. And, the answer is: yes. In their predictions, an ounce of gold should be worth more than $3000 by the end of the next year. That is 50 percent more than gold is worth today. In other words, gold has a rich past. But also a bright future.