April 7

Why Gold Has Intrinsic Value For Investors

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Gold and silver are probably the first assets one thinks of when hearing the term intrinsic value. Yet the why of this value differs from how the term is generally used in finance. You might hear it used similarly in regards to things like other commodities and tangible assets.

To somewhat roughly summarize things, intrinsic and extrinsic value in options markets generally have to do with price spreads and premiums. Gold sort of fits that bill… but not really. Understanding what people mean when they refer to precious metals as intrinsically valuable requires us to go all the way back to the definitions of money. Particularly, of the sound kind.

What is money, really?

Gold investors tend to get up in arms over this issue, and perhaps rightly so. In the anything-goes era of modern economics, we’ve been made to believe that banknotes are money. People have come to equate IOUs with money. And from this confusion and mislabeling stems a lack of understanding how gold and silver tie into the financial system.

Originally, banknotes were simply meant to be a more convenient method of exchange compared to the sort of clunky gold and silver coins, as well as those from other alloys. They were never meant to replace gold and silver, and they most certainly weren’t meant to rise to the status of money. The official version is that people found banknotes so convenient that they ended up shoving aside gold and other metals.

One can easily come up with another version, one that involves central banks and other financial institutions promoting these instruments and weaning people off of bullion. And why wouldn’t they? Paper money can be printed to a nation’s desire and gives it immense freedom to manipulate the wealth of its citizens. As the U.S. deficit of more than $1 trillion can attest, it gives a nation plenty of freedom to manipulate its own wealth, too.

Yet for as much as gold and silver have moved away from the status of money, they’ve stuck to that spot closely. And this is where gold’s intrinsic value comes into play.

Gold and sentiment – a match made in heaven

For a market that is often cited to have some of the best natural properties out there, gold is still ruled primarily by sentiment. An everyday example of this are the somewhat wild price fluctuations whenever there is a crisis event, known as the safe-haven trade. People get spooked and pour into gold for safety. Are they thinking clearly? Maybe. In reality, buying during these times is driven more by sentiment than a fundamental assessment of the precious metal.The gold intrinsic value is gauged the same way. If we’re going to exaggerate a little, we can say that the shiny metal has immediate physical value because people believe it does. We can even go a step further and say it has market value only because of that, but then we have to make the same concession for every other asset. The more analyses of gold’s intrinsic value you look up, the more you’ll run into a recurring theme of people stating that they “feel” as if gold is valuable. Sentiment is obviously a powerful driver, and while it’s far from the only price mover in the gold market, it’s one that can never be overlooked.Anyone who touts gold is quick to point out the metal’s monetary role throughout history. They probably won’t be too shy to mention how much worse things have gotten since the introduction of free-floating money. More than anything, this is an appeal to sentiment.Were we going to get far without mentioning Bitcoin? The so-called digital gold has earned its moniker. Bitcoin is indeed similar to gold for many reasons, perhaps starting with the whole “it’s worth what people think it’s worth” thing.Gold purists will lament this point all day long, but there is little arguing it. Less than a decade ago, Bitcoin was close to worthless because people didn’t yet see a use case. More importantly, perhaps, it didn’t have the centuries of backing that gold has, so skepticism and doubts were common. Now, with one Bitcoin comfortably exceeding the price of an ounce of gold, how can we argue that Bitcoin doesn’t have intrinsic value?I don’t doubt that there are some gold bugs among those who decry Bitcoin is worthless. They don’t need to look very far to see the same criticism apply to gold, even in bullion form. As the metal’s detractors are quick to point out, gold mostly just sits there. It sees little use in any manufacturing and doesn’t breathe the kind of life that stock and even bond markets do. Does that make it worthless? Of course not. After all, any one thing is as valuable as someone is willing to pay for it. It doesn’t even have to make sense to be worth as much. If there is a buyer willing to offer a sum of money for something, that sum is the something’s price tag. That’s the best way to encapsulate gold’s intrinsic value.

Gold jewelry, silver in manufacturing – important?

These two factors are something you’ll very often hear mentioned during any pro-precious metals analysis. If we’re being really honest, they’re more than a little overrated when it comes to having a role in the prices of these assets.Yes, the jewelry sector is huge and gold and silver jewelry are tremendously popular and have been for ages. Yes, plenty of silver is used in industry and silver is difficult to mine. But let’s ask a simple question: if gold jewelry went out of fashion and silver was almost entirely removed from the manufacturing sector, would it break the market? Probably not. While gold and silver always had utilitarian purposes, and plenty of them, it’s not like there was a solar panels industry a century ago.So while precious metals’ use in manufacturing is a selling point and definitely plays a role in the markets, it really mostly exists to further bolster that important thing we mentioned: sentiment. Basel III agreement notwithstanding, the disconnection between the physical and paper gold market is such that jewelers and solar panel manufacturers don’t really move the price of these assets. The paper gold and silver markets dictate the price, and they’re about as removed from manufacturing fundamentals as you might imagine.When push comes to shove, both of these sectors exist primarily to make investors in gold and, to a lesser extent other precious metals, feel better about their bullion holdings. As hard as it is to believe given the percentage allocation of sectors, any non-investment use case is mainly a pillar of support for the assets’ real role: wealth preservation, safety and peace of mind.

Evaluating an asset’s worth

Value and worth can be used interchangeably, as can value and intrinsic value for the purposes of this conversation. Once we’ve established that, we can move onto some pointers that will help us determine whether gold or any other asset has value. Here are some questions to be asked:

  • What is the asset’s history?

  • How many people view the asset as valuable?

  • Can the asset be easily sold?

  • Is it more difficult to buy the asset than it is to sell it?

  • Does the asset have buyers worldwide?

  • How has the asset’s price moved over time?

Gold fills out this questionnaire with pleasure. Storied history, universally accepted, sold within an hour but hard to get due to premiums and an extremely stable and appreciating price. I’ll try to avoid making this a Bitcoin analysis… but still, it’s worth mentioning that Bitcoin likewise fills out this questionnaire nicely, which is one of the reasons it has taken off the way it has.

In the case of gold, though, it hasn’t had to develop in the same manner that Bitcoin has. It’s been used as money for as long as there was any kind of organized bartering and goods exchange. 

This really hammers home why precious metals are called value investments over and over again. It might seem as if everything is priced in fiat currencies, but in reality, it’s gold that determines the value of any given fiat currency on any given day.

The mere existence of the gold/silver ratio further attests to the metals’ obvious intrinsic value. Any time gold takes more than 55 ounces of silver to buy, silver is considered undervalued because that’s the historical average. Not everyone is a fan of this particular gauge, but the truth is that silver invariably plays catch-up any time the ratio balloons to historic highs of 80 or more, such as right now. It’s yet another example of why the metals almost demand to be priced accurately and highly.

Are we going back to gold and silver as money?

If gold and silver have so much fundamental value and are cherished by everyone, why haven’t they crept back into the mainstream financial system? Actually, they never left. Some nations don’t mind openly touting gold’s importance, but if you’ve only been following the Federal Reserve minutes, you might wonder if gold is still a thing. 

And what is happening in the background? Officially, the U.S. sits almost cartoonishly ahead of other nations in terms of sovereign gold holdings, with more than 8,000 tons compared to the runner-up’s 2,000 something tons.

Why are nations accumulating thousands of tons of something that has very little utility on the obverse? “Intrinsic value” springs to mind as an answer pretty quick. Sovereign heads know that gold is still in the background of virtually every process in mainstream finance. 

Gold prices serve as a constant measure of how badly nations are messing up their economies and ruining people’s well-being with a fixed and unnecessary inflation rate. If a real global crisis was to hit, the kind that re-evaluates sovereign clout, it would primarily be a question of what nation owns the most bullion.

With the U.S. doing what it has done with the multi-trillion dollar stimulus over the past few years, and with nations around the world experiencing high inflation, calls for a return to the gold standard grow ever louder. 

The sickness in fiat currencies is far too deep for something like that, unfortunately. But that people and even nation heads are desiring something like that tells you how fundamentally valuable gold and silver are. In the words of one J.P Morgan:

“Money is gold, and nothing else.”


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