the gold rush of 2008

Is gold actually worth something? I know that it’s over $1000 per ounce and it’s a hot new speculative item. But in the true sense of “worth,” does gold actually have any worth?

Gold has been used since earliest human history as a form of currency. Gold’s recognition as a currency predates written records, so it is impossible to know when the first hunter-gatherer actually traded a hunk of shiny yellow rock for his buddy Mog’s antelope livers. It’s a mystery to me why this exchange occurred, except possibly that gold (being a soft metal) was easy to work into arrow points or something of that nature. Nonetheless, it was probably one of the earliest symbols of value: this rock represents ten bear hides or the effort required to get those ten bear hides. It allowed people to start setting equivalent prices that before they only figured out through barter: ten bear hides equals eight spear poles, and so on.

We still use gold today for non-currency purposes. It is used in dentistry and consumer electronics and makes a bizarre appearance as little flakes in Goldschlager (yes, that is actually gold). The US, for most of its history, used gold to set the value of a dollar (so a symbol of value, the dollar, actually represented another symbol of value, gold). That meant that theoretically if you got fed up with the inconvenience of paper money you could walk into a bank and demand 6.2 ounces of gold nuggets. Gold was used to set exchange rates for different currencies, too – a dollar equaled 1/124th of that 6.2 ounces, and a ruble equaled 1/278th (I am making numbers up, by the way). So the exchange rate meant something.

After World War II, countries decided to allow that system to fluctuate a bit. In 1971, the US broke the system by suspending the convertibility of dollars into gold. You no longer were able to say “this dollar represents 1/25th of an ounce of gold.” Instead, the dollar became a completely abstract symbol that has no real worth other than your belief that someone will give you something of value if you give them that dollar in return. Try taking your dollar to a bank and demanding the gold equivalent. The dollar (and all other world currencies) are now more or less based on faith.

So what is gold worth? Does it produce income? Does it become more valuable with time? It is a scarce resource – one day it will run out, like oil. What exactly does an ounce of gold represent? The main marketplace for the quick liquidation of gold is pawn shops. Gold does not appreciate in value, although its price does fluctuate.

So should you invest in gold? Personally I wouldn’t. I (somewhat) understand investing in real estate, because you can build a house and live there. I understand buying shares in Pfizer, because they make medicines people need, and they pay dividends to shareholders from the profits they make. Both of those investments create something of value. Gold is no better or worse a speculation than investing in something like a diamond wedding ring. Maybe that diamond will be worth more someday, maybe less. Same with gold.

I just look at the fact that people invest in Google or pets.com or an interest-only mortgage in an investment pre-construction condo in 2004 and I wonder if I am insane to think that waiting for the price of a thing to go up is just a bad investment. Nothing with a future price of $1000 – and a current price of $100 – is worth more than $100 today. It is not worth $1000. You HOPE it will be. You HOPE the Dow will settle at 36,000 someday, but today it is not. Yet if you buy a business that makes $10 a day, that’s currency that – at least for now – you can exchange for value. Gold may someday be $1000 an ounce, or $12 per ounce, but it’s still going to be a rock that, no matter how big, you couldn’t even use to buy a stick of gum with at your local supermarket.

Creative Commons License photo credit: *hoodrat*