Why gold?
By: Manuel Ho
Tags: Investing, Cryptocurrency, Gold, Bitcoin, Saving

The desire for gold is not for the gold itself. It is for the means of freedom and benefit. Ralph Waldo Emerson.

Discussions about gold as an investment and store of wealth are back to the frontline. Why is this happening, especially now in the golden age of bitcoins and blockchain-based tokens?

Gold as a store of value

To answer that question I’m going to first dispel one myth: gold has intrinsic value. No, it doesn’t. More precisely, it has some value but not nearly enough to make up for what you and me pay for it. Yes, it’s beautiful. People (especially of the female kind) tend to like it. Its properties don’t change with time, it’s inert to all body chemistry and it’s great at letting electrons pass through it. As a result it’s used in the electronics industry, medical devices, dentistry, etc… But, bottom line, what we pay for each ounce of it is several times more than what we should pay if it was merely used to manufacture jewelry, tooth fillings and everything else else that gold is used in.

Let’s be clear. Gold is valuable because most people all around the world have agreed that it’s a great device to act as store of value, for example as a currency. And they did this thousands of years ago. Why? Mostly because of 2 reasons: 1) gold is very hard to find, which means no one can easily and artificially increase the available quantity of it and 2) gold’s properties and appearance don’t change with time.

Gold has been accepted as a store of value for a very long time

It has not always been like that. Although gold has been mined since Ancient times, it’s not until 700 B.C. that we see the first records of gold being used as a currency by Lydian merchants. But once they did the standard quickly caught on. First among the Persians and Greeks.Then with the Romans, Chinese and until everyone across the entire Eurasian continent took gold (and some other precious metals) as currency for trading within and between countries. This created the 3rd reason why gold became the store-of-value of choice: it’s widely accepted across the world — and it has been for a long time.

Gold vs. money

However, gold does not make the best currency to have around. It’s expensive to store, move and acquire in small quantities. It’s soft so it doesn’t wear well when used often. It’s easy to fake and difficult to check for authenticity. More importantly, its value goes up and down for reasons that are outside of governments’ control, blocking countries for doing what they want to do and making economic and social problems even worse when times are bad. As a result, and making a long and compelling story very short, governments searched and found — in the shape of fiat money — better devices to fulfil the purpose of currencies.

Fiat money is of course what all of us use as currency these days. It has tremendous advantages. And despite what many people say, we will never go back to the days when every dollar was backed by gold. However, fiat money is only as strong as the trust that we have in the country that backs it up. When that trust goes…the market reverts to what it knows best — gold!

The effect is dramatic even for the most trustworthy countries. The graph below shows what has happened to the USD. And if this can happen to the USD then what to say of other currencies?

So, going back to the first question “Why gold?” The first part of the answer is: “because it protects your savings when things go really bad!”. Granted, this most people know.

Gold vs. affordability

The second, more subtle part, is that this knowledge is useless to the overwhelming majority of us because, until now, only “the 1%” (top income earners) could afford to buy and sell gold at prices that makes it worthwhile. The problem of gold is that it’s an expensive commodity to handle. At smaller quantities, say 1g, we’ll pay 20% more than the current price of gold, aka the spot price, to buy it. And when we want to cash out we’ll probably have to take a hit of c. 5–15% on the spot price. This means that, for small quantities, gold would have to go up by 25% just to break even!

Thankfully some banks, bullion vault providers and start-ups like HelloGold have devised ways to buy, own and sell gold in smaller quantities at prices that make sense. At HelloGold one can even own gold starting with as little as RM1 (US$0.25!) at a 4% spread, i.e. lower than the spread that many money changers charge.

Gold vs. cryptocurrencies

The third part, for the more forward thinking readers, is: “Why gold and not bitcoins or other cryptocurrencies that provide even better scarcity, value transparency and homogeneity properties?”. It’s a really interesting question. There are some technical reasons why gold still has the edge. For example the stock of gold is much more stable than the stock of bitcoins. This is because the gold that is mined every year is less than the volume of bitcoins that are created in the same time period as a percentage of total stock available.

Gold is about true, widespread universal acceptance

However my take, as a true marketer, is that the fundamental reason why gold is the better asset is that it has been marketed and accepted as a store of value for more than two thousand years. It’s embedded in the culture and psyche of all the global civilisations. And it survived (and even thrived on) wars, depression, famine and technological upheaval. Nothing can beat that for acceptance. Which is why the debate is increasingly moving to merging the advantages of the blockchain-based tokens and physical gold - more here.

No excuses to not own gold

The conclusion is simple: we should all put some of our savings in gold. Not because of gold itself but because gold enables freedom and independence from the occasional crises that jolt the existing political and economic order. In the past only the wealthy could afford to buy this type of “insurance”. Not anymore. These days we can all afford to save in gold through apps such as HelloGold, bank’s (fully allocated) gold backed accounts and, in the near future, gold-backed cryptocurrencies. Looking at the current global imbalances, I’d say better do it sooner than later.