Yes, gold has intrinsic value.
But reaching that conclusion is far from simple.
Gold gets its value from people’s perceptions and its application as money.
In the article that follows, we look at the difference between intrinsic and extrinsic value, the history of gold, and the reasons why this yellow metal is so valuable today.
Does Gold Have Intrinsic Value? (EXPLAINED)
What is Intrinsic and Extrinsic Value?
Before looking at the intrinsic value of gold, let us first begin by knowing the difference between intrinsic and extrinsic values.
Intrinsic value is the value that an asset possesses in its own right, in itself, whereas extrinsic value is the value outside of its intrinsic value.
Intrinsic value is a measure of what gold is worth, which one can achieve via an objective calculation instead of utilizing the current trading market price of gold.
When it comes to options, the in-the-money section of an option provides its intrinsic value.
For instance, if a gold call option with a market price (also called the premium) of $150 and a strike price of $1010 trades at $1095, it has an intrinsic value of $85.
In this case, the gold’s extrinsic value is $65, resulting from the difference between the market and intrinsic prices.
History of Gold
Different societies worldwide first discovered gold in streams, making it the first known precious metal to ancient civilizations.
Its natural beauty, brilliance, and malleability made it a popular choice for the early cultures to develop jewelry, ornamentals, and utensils.
Early cultures equated gold with rulers, showing the intrinsic value it had for humans.
Over time, different societies adopted gold into money, with the first gold coin forms dating back to around 1500 B.C.
The ancient Egyptian empire made the yellow metal the first official form of exchange for international trade during this period.
They created a coin weighing 11.3 grams called the Shekel, making it the standard measurement unit in the Middle East.
During the later centuries, the Egyptians began combining alloy gold with other metals to increase durability and add different color pigments.
They used these products to enhance their sculptures using the lost-wax casting method that artists still use today.
The Romans started issuing a gold coin in 50 B.C. called Aureus, derived from the Latin name for gold, Aurum.
Notably, the periodic table of elements uses the chemical symbol of Au for gold, which comes from the word Aurum.
The coin-based currency system began in New England in 1066 A.D. via the first Norman King of England, William the Conqueror of Normandy.
Afterward, Great Britain and modern-day Italy produced their first gold coins in the late 13th century.
The gold coins started in the United States in 1787, with the nation adopting a bi-metallic silver-gold creation in 1792.
The California Gold Rush led to the quick settlement in the American West area in the mid-1800s.
Since 1868 when George Harrison, a South African man, discovered the yellow metal in his backyard, 40% of mined gold worldwide has come from the African country.
Although paper currency is the primary form of money globally, nations today still assign considerable value to gold, resulting in central banks holding gold as part of their foreign currency reserves.
The world’s appreciation of gold’s value makes it a medium of exchange acceptable anywhere globally, with its intrinsic appeal presenting a universal appeal to humans today as in ancient times.
Why is Gold so Valuable Today?
Gold is so valuable today because one can turn it into a system of exchange for goods.
The precious metal may not have immediate physical value to a person holding it since he or she cannot consume it.
However, if the holder transforms it into coins, the gold immediately assumes a value.
In this case, someone believes that gold has value because others do, and since they think that the person values the metal, others will value it as well.
Gold’s sustainability adds to its value since one can conveniently turn to it when facing currency disaster, where a system can no longer support paper money.
Besides this ability as a tangible and quantitative item, gold can simultaneously stimulate a subjective personal experience.
The yellow metal has duplicity that enables it to embody something transient like a host of feelings, deriving its value from human psychology and experience.
Societies and economies continually place worth on gold, perpetuating its value.
The universal acceptance of its value ensures gold can offer financial cover during macro-economical and geopolitical uncertainties.
Additionally, it facilitates portfolio diversification to minimize the overall risk and volatility in investments.
Thus, the yellow metal is ideal for a good investment since gold is also a reliable hedge against inflation while providing deflation protection.
Why Does Gold Have Intrinsic Value?
With many people wrongly following the claim that gold and other precious metals are only valuable to the extent that society trusts them, it is essential to answer the question of many gold enthusiasts, “Does gold have intrinsic value?”
Understanding other commodities is the first place to begin to address this question.
Most commodities possess an obvious intrinsic value, such as oil, grain, and lumber.
Although these commodities have intrinsic value because of people’s faith in them, their demonstrable utility also adds to their value.
People can conveniently turn grain into food, lumber into furniture and buildings, and convert oil into fuel for transportation.
When dealing with gold, it derives its intrinsic value from people’s perception and its efficacy as a form of money.
Yes, this shiny metal is famous for its use in ornamentation and jewel crafting, and society has primarily desired it for these reasons.
Nonetheless, other precious items like pearls also make lovely accessories, yet many more people value gold jewelry over them.
As such, gold’s intrinsic value does not only come from society’s view of it.
Gold’s value also comes from its ability to transform into a medium of exchange.
Its nature as a precious metal makes it a commodity ideal for people to utilize as money.
Money does not just refer to banknotes and coins we use in daily transactions.
Someone can use anything as money and trade it for something else. For example, wedding traditions include offering cattle as part of the bride price in certain parts of the world.
In these instances, families use cattle as money during the wedding customs.
However, such items have some disadvantages that make them impractical as money.
Cattle are not ideal for savings, since they eventually die.
Other products pose similar problems where they are very useful for specific reasons but poor as money in the long term.
In contrast, gold is a perfect choice to use as money because it has various advantageous characteristics.
First, its durability ensures one does not have to panic about rust and rotting issues, delivering a sustainable store of value.
Second, it is combinable and divisible, unlike other precious items like diamonds.
Third, it is homogenous, meaning each ounce is the same as every other, unlike other products such as cakes and seashells.
Lastly, gold is a scarce metal, unlike readily available grain.
The metal is plentiful enough to produce coins, but is scarce enough so that not everyone can create them.
Therefore, the Earth’s circumstantial geological composition and its natural properties give gold its intrinsic value.
The modus operandi since the 1970s is paper currencies such as the U.S. Dollar, which may leave you wondering how gold can maintain its value against them.
Governments can continually print the currencies according to their needs, while one cannot do that for gold.
This primary difference shows the intrinsic value of the yellow metal against paper currencies.
Gold’s reliability in good and tough times, such as when other currency types do not work, ensures the metal will always have its intrinsic value.