Gold as a Store of Value and its Characteristics

Thursday, April 29, 2010

Gold is a chemical element with the symbol Au (Latin: aurum, "shining dawn") and an atomic number of 79. Gold (pronounced /ˈɡoʊld/). It has been a highly sought-after precious metal for coinage, jewelry, and other arts since the beginning of recorded history. The metal occurs as nuggets or grains in rocks, in veins and in alluvial deposits. Gold is dense, soft, shiny and the most malleable and ductile pure metal known. Pure gold has a bright yellow color and luster traditionally considered attractive, which it maintains without oxidizing in air or water. Gold is one of the coinage metals and has served as a symbol of wealth and a store of value throughout history. Gold standards have provided a basis for monetary policies. It also has been linked to a variety of symbolisms and ideologies.

Gold bars
Characteristics of Gold

Gold is one of the rarest substances found on earth, even though is it literally everywhere around us, in the ground and even in our oceans. It is so rare, in fact, that all the gold ever refined, about 125,000 tonnes, would cover a football pitch (soccer field) to a depth of less than 52 inches (1.29m)! In your mind’s eye, that may seem like a lot of gold, but it is less than two thirds of an ounce for every person alive today.

Seawater contains incredible quantities of gold, but its recovery is not yet feasible with current technology. While some gold is found in nugget form, the vast majority of it occurs as minute grains, locked into mineral deposits far beneath the earth’s surface. In a rich mine, several tonnes of ore may need to be extracted and processed to yield one ounce of gold. It is an expensive and risky proposition, and its difficulty makes future recovery unlikely to keep up with demand.

Gold is one of the most durable substances we know – it has been recovered from ancient tombs and the ocean floor where it lay for millenia, and yet its enduring beauty is untainted. It does not rust, tarnish or corrode; air, water, salt and most acids do not affect it. It can be melted and cooled, drawn into fine wire, pounded into leaf, minted into coins, irradiated, and deposited as plating, and its value does not diminish.

Pure gold is so malleable, one ounce can be hammered into a foil sheet several atoms thick, but covering 100 square feet! It is so ductile, that same ounce can be drawn into a fine wire 50 miles long!

Although gold is too soft to be of structural use, it is readily combined with other metals into a variety of workable alloys with a broad spectrum of color variations. This makes it ideal for decorative jewelry, as well as many modern industries from dentistry to electronics. Demand for industrial gold continues to increase, and is already outpacing new production.

Gold as Commodity
The unique and useful properties of gold, as well as its rarity and increasing demand, make it an attractive commodity investment.

Investors may choose to invest in gold directly, or in one or more of the diverse cross-section of companies producing the commodity, from mining companies and refiners to fabricators of finished products. However, stock in such a company is no guarantee of a secure investment; companies come and go, but the commodity maintains value. There is also a huge international market in gold futures and options, which the industry uses to hedge their price risk. Increasingly, gold futures and options can be found in investors' portfolios.

Gold is known as the “crisis commodity” because during periods of political, social, or financial upheaval, the price of gold tends to rise in response to the same factors which cause other investments to degrade.

Gold as Currency
Throughout history, gold has been used as an exchange of value for goods and services. Due to its dense valuation, a small coin could be worth a large amount of food, clothing or other essential commodities. It is highly portable, encouraging its widespread use. It is divisible into arbitrary quanties whose values scale linearly with their mass, allowing the minting of uniform standard denominations.

Unfortunately, in most economies, gold was so highly valued that the minimum unit of useful currency was represented by a vanishingly small quantity of gold. Monetary systems therefore often developed token coinage, backed by the value of gold, but whose materials were less valuable – silver, copper, iron, leather, and paper are a few examples.

Using cheap tokens as money works well to a point – and that is the point where governments issue more money than they have gold reserves. A common practice in empires from the Ancient Greeks, Romans, and Chinese, right up though modern times, governments cannot seem to resist the temptation of issuing undervalued currency to stimulate a slowing (or dying) economy. However, it must be noted that even the complete collapse of a token economy only tends to enhance the value of gold, for those who possess it.

Gold as Store of Value
Due to the density of its valuation and its durability, gold is an ideal store of value. At current market prices of more $600 per ounce, several million dollars worth is easily stored on a small (but sturdy) shelf. The main problem with gold storage is security, and only the most secure vaults in the world are up to the task.

The price of gold naturally fluctuates over time when valued against a particular currency. Economic conditions, fiduciary policies, political changes, wars, natural disasters, and even terrorist attacks may affect gold prices on the world markets.

But it is more accurate to observe that it is the world’s paper economies that fluctuate wildly when valued against gold. Paper has no instrinsic value – it is a token, which usually symbolizes value of some quantity of gold held in reserve. But that value is only symbolic – it is actually worth only what it can be exchanged for in good and services. During cycles of hyperinflation, the value of paper currency can practically disappear as prices spiral out of control. Unlike paper currency, gold will never lose its intrinsic value.


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