KJohnson asked in Social ScienceEconomics · 10 years ago

Why does gold have value?

I've heard that paper money only has value because we believe it has value, and that because it's not backed by gold and silver anymore, paper money doesn't have any "real" objective value. But why is gold valuable? Is it just because it's rare?

Other than making pretty, shiny things, what does gold actually do? Where is it's value? "Gold conducts electricity, does not tarnish, is very easy to work, can be drawn into wire," etc.

But if it weren't actually being used for those purposes, if instead it were sitting in banks, backing money, I don't see what value would actually have. It seems that gold only has value because we say it has value. Is there something I'm missing? Why is gold valuable?

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  • 10 years ago
    Favorite Answer

    You are correct: gold only has value because we say it has value. It's basic supply and demand. I guess your question is about why the demand.

    Paper money is not a commodity; it is only a tool used in conducting transactions. As long as people have faith in its ability (and convenience) to satisfy the functions of money, there is no reason whatsoever to have it backed by anything else. Anything else, including gold and silver, would be arbitrary, as long as the government and economy remain relatively stable.

    Gold, on the other hand, is a commodity. Supply and demand set its "value". It is a precious metal, so the supply is limited. Demand is based on much more than just "making pretty, shiny things", though. Other factors in the demand for gold: many people want to own gold as a hedge against inflation (although in recent years more people have lost money than made money by doing so). Many people, although not enough to ruin an economy that relies on paper money, still don't trust having a currency that is not backed by gold. However irrational this may be, it is big enough in terms of the amount of gold on the market to influence its demand, and thus its price. And of course, with all precious metals, many people look at gold as a long term investment, similar to art work.

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  • 4 years ago

    Anything can be used as a currency: beans, salt, gold, silver, minerals, rocks, etc. I don't necessarily bash the U.S dollar. I believe you are confused on what it is a lot of us are saying. We want to end the Fed, and we want to do so for many reasons. The Fed tampers with interest rates. Unless you are a socialist, I believe you agree that government setting prices isn't a good thing. Why should this be different? An interest rate is the price of money. The Fed should not be in this business. What pisses me off about the Fed is that it can directly manipulate the amount of money with a printing press. With gold or some other commodity you can't. So while the same quantity/value ratio exists with gold and any other currency, tangible currencies have a fixed supply. They force a government to be prudent with its money. No waste, no huge stimuli without going over the budget, no huge debt that is thrown onto future generations, no unnecessary war, no more lost liberty. I would support the dollar if it had a fixed supply and if there was no Federal Reserve to screw things up.

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  • Anonymous
    10 years ago

    Good question. The issue has been dealt with by the classical economists. First, paper money is not a good,but a medium of exchange guaranteed by the state. The FED will function as a last resort. On the contrary, gold is a good, or a commodity which we can buy and sell in the future market. The utility of gold is very low, but the marginal utility is very high because there is not enough gold for everyone. That makes gold valuable.

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  • ?
    Lv 7
    10 years ago

    You've got 95% of the answer. Paper money has no value because it has nothing to back it. The element you are missing is "Demand". Yep, Gold is pretty and makes pretty things, that's why people want it. Gold is heavy, and it would be unreasonable to try to carry gold around with you to make your everyday purchases. For convenience, we carry paper that promises the payment of gold upon request of the bearer...or at least that's the way it once was in this country. Originally, every US dollar had an equal amount of Gold to back it, stored for our convenience by the US Government at the vault in Fort Knox, Kentucky. Later in history, the US Government began to back the US dollar with an equal value in Silver. ( Our bills were called Silver Certificates ) Still later, and into the present day we find that the Government has printed more "certificates" than it has gold or silver to pay out if they were all to come due at the same time. Gold and Silver were, and are very desire able commodities. People want them. Instead of owningtheir own stockpiles of gold and silver, the citizens trade "certificates" which promise to pay upon demand just as if the precious metals were on hand. The Government printed even more "Certificates", Then, when the Nation was required to pay it's bills, it drew from the "Reserves" in Fort Knox. The gold and silver stockpiles once hhelotas a gguaranteefor our money (certificates) continued to dwindle. The Government in it's wisdom, continued to print paper certificate for which there was no backing in precious metals. Over the decades, the citizens gave less and less attention to the stockpiles, and continued to deal with each other in good faith..with the paper ccertificatesthat were issued under the sole authority of the US Government. We rely on the certificates to this day, just as if they were backed, which of course, they are not. Do the cerificates have value? Yes, because we believe they do. We trade them for things we need and collect them when we provide things and services to others. Thus, the US dollar is valuable, inspite of the fact that is only a piece of paper, because we want it. We depend on it, and we all accept it, and we all expect to provide it as payment for goods and services. In Truth, the US Dollar is a piece of paper whose only real value is the Paper and ink which printed it. It is demanded as wages, payment, and is accepted by all as "Legal Tender", which of course, it no longer is...

    • Michael5 years agoReport

      Plus another reason the US dollar is valuable is because of the Petrodollar

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  • 10 years ago

    First, because it's a rare metal. Nature only made so much of it.

    Second, people want it. I bet you own some gold jewelry. If someone made the same jewelry, in exactly the same design, out of iron or aluminum or something else, you probably wouldn't like it as much.

    Finally, it's something mankind has sought after for centuries. Ancient kings wanted it. It's been recognized as a valuable thing for so long that it's practically in our genes by now.

    You're right in saying that if its only value is that it would make good wiring for your house, or a good frying pan, we wouldn't care about it that much. But the truth is, we all care about it. A lot. We'd all love to have some. And no matter what happens to our currency, whether it's devalued or whatever, there will always be people around who will gladly accept gold in exchange for goods or services.

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  • 10 years ago

    You have answered most of your question there. Gold is one of the world's precious metals. Due to its rare properties it has been deemed to have value, just like Diamonds if you will.

    The problem with Diamond, is that it cannot be used in economic transactions as easily as gold. Diamonds are even rarer by nature and are mined rough and cannot be cut and shaped as easily as gold.

    Throughout history, civilizations have used gold coins in transactions until paper money became available. As you have said paper money is not backed by gold or silver and the price of gold has shot up immensely in the past 50 years as the value of paper money goes down.

    Paper money is backed by the national debt of that country which banks loan money to. The banks then go and make interest on these debts and buy or take over real resources with real assets like gold in this case. As the value of fiat (currency) paper loses value, gold gains value.

    Another possible reason could be the global shift in creating artificial scarcities as to increase it's market value.

    Hope that helped!

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  • 10 years ago

    Gold NEVER loses its color whether if it was fire or anything it cant be distroyed, its rare, that includes silver and diamond and other stuff. oh and some people in B.C, like i think in Babylon first came up with the system of value in money. They would use money to trade with other rivers for food, because they didn't have greate climate to grow crops to eat so they needed to trade food. And they didn't have anything to trade with.

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  • Yuvraj
    Lv 4
    10 years ago

    gold is universal and no one seems to lose faith in gold, therefore it is considered valuable. if something is perceived as valuable, and people entrust their financial security into it, anything can be as valuable as gold. gold simply has a huge history behind it, and it is still carried on today.

    perception.

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  • 10 years ago

    my theory: any service, products, metals, things,inventions, roads, boats, sistems, teachings, books, concepts, etc. etc.,have VALUE and needs to be represented with numbers and those numbers represent units of VALUE and they equal money, so everything that has VALUE has to reflected with paper money and this money doesn't have to be backed with gold because paper money already represent VALUE and this money needs to be in circulation

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  • 4 years ago

    Hell if I know. If the apocalypse ever happened, beef bouillon will have more value than gold bullion.

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