What’s So Special About Gold Anyway?
Gold. While we often refer to it as a store of value, for millennia gold has been synonymous with the very concept of value.
It’s entwined with our conception of money, currency, wealth, power, beauty, and trust.
Found all over the world, gold is one of humanity’s unifiers. People across every culture look at it and see a physical representation of value.
It’s part of religion and culture alike. It’s led otherwise rational people to lose their minds in waves of speculative mania. It has built up civilisations, and destroyed them alike, made some rich, and ruined others.
But why? What’s so special about gold anyway?
Gold’s long history
It’s impossible to say when people first started using gold. It’s thought that thousands of years ago, our ancestors noticed glistening pieces in rivers and streams. Drawn by the unusual colour, they started collecting them.
At some point, they discovered gold was easy to shape and turn into decorative objects. By 4500 BC, it was so valued that people began to bury their dead with gold. The carefully crafted adornments signified status. The more gold in someone’s grave, the more important they were in life.
Knowledge led to reverence. Gold became part of early religions, usually associated with sun gods.
The Incas believed it was the ‘sweat of the gods.’ The Egyptians used gold to fill their pyramids.
By the 6th century BC, the Lydians (who lived in modern-day Turkey) made the first known gold coins. These acted as a uniform medium of exchange, issued by King Croesus. Some coins still survive, with the design of a lion fighting a bull still intact. After the Persians defeated Croesus, the practice spread. (We’ve covered more about the history of currency if you’re interested.)
In recent years, the desire for gold has only grown. While we no longer use it as a medium of exchange, it remains a popular store of value.
So, why are we so obsessed with gold?
The simple answer is that we don’t have a suitable alternative. Gold is the only metal up for the job. Other metals lack the essential properties for a good store of value, and medium of exchange.
Some are too abundant, meaning we’d need huge quantities to have any value. Some are too scarce, meaning we’d need to use minuscule amounts. Some deteriorate too fast when exposed to air or water.. Other metals are too fragile to make coins, or too difficult to extract. And some are toxic to humans.
We’re all familiar with gold. But have you ever paused to think about what an unusual and special material it is?
Gold occurs in every continent except Antarctica. It’s soft and malleable (more so than any other metal).
You can hammer it into a semi-transparent sheet, stretch it out into a wire a tenth as thick as a human hair, or shape it into almost any form. We use it in myriad ways: to make jewellery, in electrical wiring, in phones, as decorative gold leaf, for medical purposes and more. You can’t eat it or use it to keep warm — but that doesn’t mean it’s not useful.
One of gold’s biggest advantages is its toughness. It’s resistant to all but the strongest acids and doesn’t corrode in oxygen or water. The first gold coins, thousands of years old, have survived unscathed. Most of the gold ever mined is still in circulation because it’s so sturdy and no one wants to lose it.
Gold was the natural choice for the first coins
Indeed, you can question if we would even have currency at all without gold. Banknotes originated as ‘receipts’ for precious metal deposits. Over time, people stopped collecting their gold and used the notes as a medium of exchange. Then we transitioned to a trust-based system, where our money is no longer back by gold.
That hasn’t diminished the importance we place on it. Because gold has been part of society for thousands of years and remained a relatively secure store of value, many people place their trust in it. Our currency is no longer backed by gold, but it’s still a popular investment. Despite prices becoming less stable over time, many investors view it as a hedge against inflation and volatility.
Bitcoin: digital gold?
Photo by Andre Francois on Unsplash
It’s long been assumed we would switch back to gold if local currencies collapsed. It would be the logical replacement.
Or rather, gold was the logical alternative. But now we have another option: decentralised cryptocurrencies. Bitcoin has been described as digital gold. Viewed as a store of value, it does have some similar features.
Both have a fixed supply — there’s only a certain amount in existence. Gold is constrained by the amount still yet to be mined. Bitcoin is also finite because there will only ever be 21 million. Bitcoin’s advantage is that we know how much can be in existence, and the supply grows at a consistent, known rate.
As a result of finite supply and growing demand, both Bitcoin and gold are deflationary — meaning their value is increasing over time. That’s why gold is so often described as a hedge against inflation. As the value of local currencies drops over time, gold can balance it out.
There are practical considerations, too. Both gold and cryptocurrencies split into differently sized fractions, depending on what an investor wants to buy. Both are generally interchangeable; any one Bitcoin is equal to any other, any amount of gold is equal to any equivalent amount of the same quality. They’re universal and global.
As a further benefit, both have the ability to act as stores of value and mediums of exchange. Bitcoin has the additional benefit of being digital, so you can move it anywhere in the world within moments.
At Luno, we view the two uses as perfectly harmonious and mutually beneficial. As we’ve seen, gold has been a popular store of value for so long because it’s been the best option. But now we have an even better option.
