Throughout history – with only rare exceptions, like the years since 1971 when the U.S. dollar dropped all links to gold – few people perceived gold as an investment or a speculation. It was simply money – cash in its most basic form. It was a medium of exchange and a store of value. People did not accumulate gold because it could make them wealthy, but because it was a convenient, liquid way to keep the wealth they had.
Gold has not been viewed in this way in recent years, because the government suppressed its price. Meanwhile, the government's inflated currency ballooned the price of everything but gold for decades, until 1971. Then, when U.S. government gold sales could no longer keep the price fixed at $35 per ounce, the metal's price shot up to regain a natural relationship to the prices of other goods. In those days, gold was an ideal speculation with minimal risk but a huge upside. Moreover, most people wouldn't discover gold until the early birds needed someone to sell to.
Gold has been in a free market for more than three decades now – the frenzy of the '70s, which took the metal from $35 per ounce to more than $800 per ounce, has disappeared. And enough time has now passed for gold to not only find a new equilibrium, but again to become underpriced.
Any discussion of gold always comes back to certain basic questions: Why is gold money? Why is gold valuable? Why does gold give rise to all kinds of controversy not associated with, say, platinum or lead?
The answers? Over thousands of years, in billions of transactions by millions of people, many commodities have been used as money: stones, salt, cattle and seashells among them. But wherever gold was available, it tended to displace other media of exchange. Like any successful money, gold never needed to be decreed "legal tender" by a government – it was recognized as the most desirable money by common consent because of its unique properties.
Certain materials have proven especially well suited for certain uses. Aluminum is good for airplanes, bricks for construction, paper for books, and gold for money. If bricks were used for airplanes and aluminum for books, the results would be as sub-optimal as when paper is used for money.
In fact, the properties required of money were first described by Aristotle in the 5th century B.C.:
- It's durable. It won't evaporate, mildew, rust, crumble, break or rot. Gold, more than any other solid element, is chemically inert. This is why foodstuffs, oil or artwork can't be used as money.
- It is divisible. One ounce of gold – whether bullion, coin or dust – is worth exactly 1/100th of 100 ounces. When a diamond is split, its value may be destroyed. You can't make change for a piece of land.
- It is convenient. Gold allows its owner physically to carry the wealth of a lifetime with him. Real estate stays where it is. An equivalent value of copper, lead, zinc, silver and most other metals would be far too heavy.
- It is consistent. Only one grade exists for 24-carat gold so there is no danger of owning 24-carat gold varying in quality. Twenty-four carat gold (pure gold) is the same in every time and place since gold is a natural element, unlike gems, artwork, land, grain or other commodities.
- It has intrinsic value. Gold finds new industrial uses each year. Of all the metals, it is the most malleable (able to be hammered into sheets less than 5 millionths of an inch thick), most ductile (a single ounce can be drawn into a strand 35 miles long) and the least reactive (it can stand indefinite immersion in seawater, does not tarnish in air and can withstand almost any acid). Next to silver, it's the most conductive of heat and electricity and the most reflective of light.
One important point was not listed by Aristotle, however. Most likely, that's because he lived before the creation of paper and banking. Gold cannot be created by government. Gold can, of course, be debased with impurities or falsified in weight – and governments strapped for revenue have tried those tricks. But a trader can protect himself with a pair of scales or a vial of acid, although a familiar and trustworthy hallmark on a coin saves him that trouble. Unlike currency, gold cannot lose value because of government mismanagement.
But isn't that all academic, since gold isn't presently used as money anywhere in the world? I think not. Even though the concept still receives little discussion, and none in "official" circles, gold is likely in the foreseeable future to reassume its traditional role as money worldwide. When that happens, its purchasing power is likely to be much higher than it is at the moment. Much higher.