Why Are Gold and Silver Valuable Assets?
Unpack the enduring factors that establish gold and silver as consistently valuable assets across diverse contexts.
Gold and silver have long captivated human interest for their inherent worth. Their unique position in global commerce and finance stems from distinct physical attributes and evolving societal roles.
Unique Physical Qualities
The enduring value of gold and silver stems from their physical and chemical properties. Both metals possess remarkable durability, resisting corrosion, tarnish, and decay. Gold is highly inert, meaning it does not react with most elements. Silver, while more susceptible to tarnishing from sulfur-containing gases, remains relatively stable compared to many other metals.
Their malleability and ductility allow them to be easily shaped into various forms. This characteristic made them ideal for early coinage, jewelry, and intricate decorative items. Both gold and silver are excellent conductors of electricity and heat, essential in contemporary technology. Gold is particularly dense, while silver is the most electrically conductive of all metals.
Historical Role as Money
For millennia, gold and silver served as foundational elements of monetary systems. Their physical qualities, such as durability, divisibility, and portability, made them superior to other commodities in early barter systems. The Egyptians began using gold-bearing shekels around 1500 B.C., with silver coins appearing centuries later.
The evolution from raw metal to standardized coinage facilitated broader commerce. Coins minted from gold and silver became universally accepted mediums of exchange. Their inherent value and non-perishable nature made them reliable stores of wealth, preserving purchasing power. The Coinage Act of 1792 in the United States established a bimetallic standard, defining the dollar’s value in terms of both gold and silver.
Diverse Modern Uses
Gold and silver have extensive utility in modern industries beyond their historical monetary functions. Their aesthetic appeal and workability make them prominent in jewelry and artistic creations. In the electronics sector, both metals are valued for their conductivity and corrosion resistance. Gold is used in connectors, switches, and circuit boards for devices like smartphones and computers. Silver, the most conductive element, is used in high-performance electronics and photovoltaic cells for solar panels, contributing to renewable energy solutions.
Both metals also play roles in medicine and dentistry due to their biocompatibility. Gold is used in dental fillings, some medical implants, and advanced cancer treatments. Silver’s antimicrobial properties lead to its use in medical equipment, bandages, and wound dressings to prevent infections. Furthermore, gold and silver serve as industrial catalysts, accelerating chemical reactions in manufacturing processes, such as the production of plastics.
Value in Financial Markets
Gold and silver hold significant positions as investment assets in modern financial markets. They are regarded as safe haven assets, as investors turn to them during periods of economic uncertainty, geopolitical instability, or market volatility. Their intrinsic value is not tied to the performance of an economy or a specific company, providing security when traditional assets like stocks and bonds falter. During the 2008 financial crisis and the COVID-19 economic shock, gold prices saw substantial increases, demonstrating this protective quality.
These metals also act as a hedge against inflation, preserving purchasing power when fiat currencies lose value. Central banks globally recognize gold as a strategic asset, with many increasing their gold reserves, underlining its role as a store of value and a diversifier. This ongoing accumulation by central banks represents a shift in global reserve management.
Investors can gain exposure to gold and silver through various vehicles, including physical bullion (coins and bars), exchange-traded funds (ETFs), mining stocks, and futures contracts. Physical gold and silver, held over a year, are classified by the IRS as collectibles, subject to a maximum long-term capital gains tax rate of 28%. Short-term gains (one year or less) are taxed at ordinary income rates. This contrasts with lower long-term capital gains rates for many other securities.
Gold and silver ETFs, which track the price of the underlying metals, provide a convenient way to invest without physical storage. These ETFs have annual expense ratios of 0.09% to 0.40% for gold and 0.20% to 0.50% for silver. Some ETFs holding physical metal may be taxed at the collectibles rate, while others, or those investing in mining stocks, fall under standard capital gains rules. The bid-ask spread, the difference between buying and selling prices, is another cost for physical bullion, often 0.10% to 1.5% or more depending on the dealer and product. These metals offer portfolio diversification due to their low correlation with traditional assets, reducing overall portfolio risk.