Gold

Part III of The Value of Financial Products and Assets

Previous Parts

• Introduction
• Part I - The Value of Short-Term Savings Products
• Part II - The Value of Long-Term Savings Products and Assets

Compared to the other financial products and assets discussed so far in this series, there seems to be a mystery as to why we value gold as much as we do. To be clear, we aren’t looking at gold as a form of money. Gold has some attributes that we’ll touch on later that allowed it to be a form of money, but our discussion here revolves around gold as an investable asset.

 Again, the questions we are interested in are: are there some inherent features or attributes about gold that we value? Is there a function or purpose that gold serves which adds value? Or is gold valuable just because we agreed that it is of value (i.e. is it a social construct?).

It’s important to note that metals have played a significant role in human evolution. Among the many metals that are of value and useful to us, Gold stands out in its uniqueness. Gold as an element has a variety of distinctive features which make it stand out. These features, which include its color, malleability, ductility, non-corrosiveness, and electrical conductivity allow it to have many use cases, including industrial and aesthetic use cases. The interesting aspect of gold, however, is that gold has some allure beyond its aesthetic and industrial use cases – it is a symbolic metal that represents power, prestige, and social status. The point here is that among most if not all metals, Gold stands out as a metal in its material elements, physical attributes, and symbolic standing. With that, let’s dig deeper into the valuable attributes of gold.

Industrial and Aesthetic Value

First off, the inherent elements of gold make it a material that can be used for industrial use cases. Similar to other commodities and metals, gold is used as a component in a lot of our technology, medicines, and other products. This point illustrates that while gold is a precious metal, it does hold some characteristics similar to base metals and the commodities discussed in Part II. Due to its industrial use case and inherent attributes, gold has instrumental and intrinsic value. Without gold, some of the products we use won’t be available. Nonetheless, the value of gold is not only based on its industrial utility and usage.

Gold’s uniqueness is also in its aesthetic physical properties. Beauty and aesthetics are values that humans seek and appreciate. Beauty found in nature or produced by people is considered an intrinsic good and of intrinsic value. While one can argue that beauty is subjective, the point here is that aesthetics and beauty is valuable and sought after. In fact, beauty is a value in William Frankena’s list of intrinsic values and goods (see Intrinsic vs. Extrinsic Value). To link the value of beauty and aesthetics with our discussion, gold’s color and durability, coupled with its malleability and ductility, allows it to function as a metal for the making of jewelry and decorative use cases. Gold holds unique aesthetic features, which naturally made it a sought-after metal for the making of jewelry and other aesthetic goods. Given gold’s aesthetic features, gold holds intrinsic and instrumental value. Intrinsic value since it holds aesthetic features in and of itself as a metal, and instrumental in the sense that it is a metal that can be shaped to produce aesthetic goods such as jewelry.  

To develop the above point further, when one sees a piece of gold, be it as bullion or as a piece of jewelry, one values it for what it is detached from what it can be traded or exchanged for, and independent of its price in the market. When one gifts someone a gold bracelet, for example, the value in that gift (apart from the gesture and intention) is the golden bracelet in and of itself and its aesthetic appeal independent of gold’s price in the market. If gold’s price when the bracelet was gifted was either $10 or $2.5k, the bracelet still holds value regardless of the price because it is a physical object that has appealing aesthetic features coupled with the wearable use case. The point here is that gold is valuable in and of itself as a unique object with aesthetic features. In other words, the price of gold isn’t what gives it its value. 

Social Construct

Gold’s industrial use case, physical features, and aesthetic appeal are not the sole attributes that make it highly valuable though. Social construct, it can be argued, contributed to Gold being viewed as valuable. According to Erica Schoenberger, some pre-historic people might not have been as fond of gold as later civilizations; rather, gold seems to have become highly valuable with the emergence of hierarchical and class-based society (see Why is gold valuable? Nature, social power and the value of things). Gold, in those hierarchical and class-based societies, became a symbol of power and status, which lent it its value. That said, gold’s physical and aesthetic attributes might have played a role in it becoming a symbol of power and wealth. For example, gold was used to construct emblems or items such as crowns and other decorative items that were typically worn or held by powerful figures in communities. It might be the hard work allotted to mining gold and its physical attributes that made it be used as a decorative material for high-status figures, and given those use cases, gold might have emerged as a status symbol. While the aesthetics and difficulty of mining gold might have been the reason why people chose it to be the material of choice for the making of decorative items for kings, queens, and powerful figures, it nonetheless is regarded as highly valuable due to the perception we have of gold as being worn and owned by powerful figures, which in large part is a social construct. Again, the perception of gold having value might have been formed by the fact that powerful icons happened to wear or hold items made of gold as a representation of power, and so the perception of gold through history became connected with power and status due to that fact.

A note on Gold’s scarcity must be made. It is often argued that gold has become a symbol of power, wealth, and status due to its scarcity. That said, it is important to highlight that gold is not as scarce as is usually touted and is not the scarcest precious metal out there. There are other metals that are more scarce and more laborious to extract. However, the scarcity around gold is also, to a certain degree, socially produced. As Schoenberger illustrates, gold has always been made scarce by intervention. Gold’s supply at times was expanded for specific use cases, and at times constrained or restricted to maintain its scarcity. This manipulation of the supply of gold played a role in maintaining its allure as an asset representing power and status. The fact that it is somewhat scarce, but not as scarce, is why gold was used for coinage for example – it has an element of scarcity to maintain some value, but also has some discoverable supply that can be used to increase the money supply when needed (to reiterate, we aren’t looking at gold as a money, but this is an example to illustrate the point regarding its scarcity). Furthermore, Schoenberger illustrates how most of the gold mined is eventually locked up in vaults underground and withdrawn from circulation, which contributes to its scarcity, or more accurately, its artificial scarcity. The artificial scarcity around gold plays a role in its appeal and value. While gold is somewhat scarce in nature and requires immense amount of work to mine, its scarcity is mostly socially produced to maintain power dynamics as will be discussed below. Furthermore, the scarcity of gold isn’t the sole contributor to what makes gold valuable. It is the scarcity coupled with its aesthetics, industrial use case, and the social construct of its value which all play a role in making it an asset of value.

Power Dynamics

Given the roots of gold in hierarchical society and the symbolism of power it possessed due to the possession of gold by powerful figures, the ownership and management of gold seems to have developed into an asset representing and managing power relations. In fact, the emergence of the gold standard has played a significant part in the perception of gold as a symbol or asset that represents power, status, and wealth, especially on the international field amongst nation-states and empires. Due to the role that gold played as a symbol of power and wealth throughout history, even if by chance or political construction, it can be argued that one of the main functions of gold is to represent, manage, and maintain power dynamics on the political field – both domestically and internationally. With the role of gold revolving around power dynamics, gold played a role as a store of value and a reserve asset for countries and central banks. In that sense, gold acts as a means to maintain economic and power relations within local social orders and international affairs. This was specifically the case during the gold standard, but the relic of that system is still maintained, even if just symbolically.

While gold has aesthetics and industrial use cases that lend it its intrinsic and instrumental value, its accumulation by central authorities seems to have been driven by political ambition for the management of power dynamics and relations. Gold's symbolic representation of power and prestige and its use case as a physical asset for the management of power relations has significantly contributed to its perception as a valuable asset and sought after investment.

The takeaway from this is that while gold has industrial and aesthetic use cases, which lend it its instrumental and intrinsic value, it is also an asset that has been socially constructed to represent and manage power dynamics and relations.

Overall, gold’s value is linked to its industrial and technological use case; its aesthetic and physical appeal which make it valuable in and of itself detached from its market price; and most importantly, its socially constructed function as an asset that represents power, status, and wealth. While it can be argued that its socially constructed value is mainly due to its physical and aesthetics features, it seems that the intervention of ruling classes, figures, and groups played a major role in contributing to the narrative of the prestigious value of gold throughout history as a symbol of power and status.