In this episode, Everett discuss what makes gold valuable. For thousands of years, gold has functioned as a store of wealth that sees its value climb in times of economic or societal unrest. Listen in as he covers the many different factors that affect gold's value including jewelry, supply/demand, its chemical makeup, the gold standard, the US Governments Gold Reserves and much more.

This is Breaking The Dollar the podcast that dismantles some of the biggest misconceptions about money. Presented by Gainesville Coins.

Hello and welcome back to Breaking The Dollar. I'm your host Everett Millman and on this episode we're going to be taking a look at something that I have a lot of experience with and that is gold.

It's interesting to me that even though gold is so widespread and universal and everyone has seen it and encountered it, knows what it is, usually it's still pretty unclear I think to most people how gold fits into the financial system.

They understand that it's pretty and it looks good for decorations and jewelry and that is a real economic use of gold.

It's not to say it has no value if it's used as jewelry, but there's this other side to the story that I think we often overlook and it's partly because you've probably been told by someone you know in the financial news, maybe on CNBC or Fox business or one of the mainstream financial news outlets that gold is really just a pet rock. When they do talk about it, they tend to make fun of it.

There are some drawbacks to owning gold from a purely bottom line standpoint of how's your portfolio doing?

Gold doesn't offer a dividend, so that means unlike certain stocks or other securities, it doesn't pay you money just for owning it. There is a lot of gold bashing that goes that goes on in the media. That almost seems to me like a rite of passage for any typical Wall Street guy you see on TV if they want to sound smart. One of the easiest things they can do is start talking crap about gold.

And again, maybe I'm a little bit biased because I think there are a ton of benefits to gold.

I think it's highly overlooked and kind of under owned as far as an investment goes, but like I said, I'm willing to admit there are some drawbacks to it. But to understand why this is the case or maybe to understand why the negative sentiment that most people in finance have about gold, to understand why that is misplaced, we have to take a step back.

Part of what I hope is going to be a running theme of this show is we need to question some assumptions we make about what are we talking about.

So in a broader context, I think Breaking The Dollar should be a kind of exploration of anything related to money or finance that comes under that label.

As you know, conventional wisdom or you know, a prior assumption about the way things work, you're always going to have to make certain assumptions when you deal with complex topics and theories.

But they should be good assumptions.

You should have a very good reason for making that assumption and it's good to do a nice healthy checkup every so often.

And just question your assumptions.

I don't think we do that with gold enough.

It's just easy to write it off as it's a big heavy shiny rock doesn't do anything for you. It's not as sexy as algorithm driven AI stock advisor.

But putting all that aside, we need to question our assumptions about why gold is valuable in the first place.

So as I said earlier, there is underlying value to the fact that gold is so popular.

About half of gold demand each year is eaten up by the jewelry sector worldwide. And this is especially true in countries that are known for buying a lot of gold. And I'm looking at China and India.

Unlike the Western world where we tend to think of investment gold in the form of coins and bars and that our jewelry for practical purposes is usually far less pure. 18 carat is about the highest you really ever see in the retail jewelry market. A lot of times it's, it's far less than that. 14 carat, 10 carat, etc.

That is not pure enough for gold to be considered investment grade. You really can't include it in any sort of formal portfolio if it's not extremely pure.

If it's not a gold coin or a gold bar that meets those standards and jewelry, like I said, partly for practical purposes, partly because they can make more money off of it this way, it doesn't hardly ever meet those standards in the West.

If you go to China or India, on the other hand, a lot of their quote unquote investment in gold or gold that they hold in their family is like an heirloom or a form of savings and you know, passing on wealth to your kids, it's in the form of jewelry.

They just make sure that theirs is highly pure, in many cases 24 karats. That's the highest purity get of gold before it just becomes mush.

That's one of those strange properties of gold or I shouldn't say strange, but unique properties of gold is that it is so soft when it isn't in pure form. You might not even recognize it as a metal because it is so soft, which isn't particularly good if you want to wear that jewelry, right?

You can't have your necklace bending and coming deformed and distorted because of you know, simple forces in nature or simple handling.

You need jewelry to be a little more durable than that.

So that's the practical side of why they use these less pure alloys for jewelry.

But in general, the 24 karat jewelry in China and often in India it's not really handled. It is kept under glass, so to speak. It's preserved the same way you would any investment gold, although I guess it kind of does sound fun now that I think about it.

Most people I know who buy gold coins or buy gold bars as an investment, they don't sit around and play with them. You know?

I mean maybe there is kind of an aesthetic side to that that could be fun, but that's not commonplace.

Put it somewhere safe and then you don't have to worry about it.

So that's definitely a difference in the jewelry market between the Far East and the West.

But that doesn't tell us a whole lot about why gold is valuable as an investment and not as jewelry.

I've spoken about the purity here. If you have jewelry that is pure, that's 24 carats. And for everyone, just a quick kind of refresher for how the karat system works.

It's basically a fraction out of 24 so 18 karat gold is the same as saying 75% pure gold. The other 25% can be any other metal. It doesn't matter. It's still 18 karat gold. 24 karat thus means that it is essentially a hundred percent pure. 99.9% is 24 karat.

So from the practical side, you're not going to wear that as jewelry.

Okay. So if you're not wearing it, why is gold worth anything?

And I did say we had to step back.

There's a fascinating history about where the use of gold as money comes from and why gold was seen as valuable and these certain advantages it has as a currency.

But let me just, before I get into that, let me address something that I don't think is commonly known even by people who are somewhat involved in the gold trade or the golden and silver investment business.

And that's the vast potential for industrial and electronic use of gold.

So every electronic device out there that has any kind of sophistication, whether it's your smartphone or your desktop computer, your laptop, they all include gold in the motherboard.

There are many gold components on those computer chips and although it's used in very small amounts, it is an essential component that has to do with golds special properties when it comes to conducting electricity.

I'm not a hundred percent clear on why silver isn't actually better for this use because silver is a better conductor of heat and electricity than gold, but I think it has to do with Gold's resistance to corrosion. You can use it in very tiny amounts and get the same kind of performance as far as the electronic aspect is concerned, without the chance of it corroding or breaking down.

So that's why it's more useful to use gold in that application than silver.

That's not the only place that you see gold though. That's a big one.

I don't think everybody's kind of aware that your iPhone would not work if there was no gold. If they did find another way and perhaps with a substitution, it wouldn't be as good and it would probably cost you more money to be honest, for less a functionality.

So gold is essential in electronics and also essential in certain industrial applications, as far as chemical reactions in certain industrial processes that you can't do it without gold or at least not efficiently.

And again, this is something that over the years I've seen some different research on.

I'm by no means particularly well versed in how and why it works, but the key point is that gold is a special metal unlike any other because of certain physical and chemical properties it has and it is indispensable in a lot of industries and sectors that we rely on every day without even thinking about.

So again, that's part of why in the modern day, even though we don't use gold as money, it still retains this sort of intrinsic value due to its properties as an element.

And I don't want to gloss over without getting too wonky or into the details and specifics. I don't want to gloss over what those properties are. As I said, gold is the most malleable metal, which means it's the easiest to smelt down and form into different shapes or into a very flat foil. Sort of very a flattened kind of surface.

You see those gold leaf, for example, that leaf is really thin because you can hammer gold out into a larger and larger surface area of a thinner and thinner thickness without losing its essential goalness. And by that I mean the gold is uniform across the entire gold leaf for gold foil. I'm sure everyone has seen aluminum foil.

It's pretty thin. It's not as thin as gold leaf. The point being there are other metals you can make into foils, but none of them can do so to the same extent that gold can.

Gold is the best at this.

There are a few other, like I said, properties I'm less familiar with that I know gold possesses, it's use in certain chemical reactions where it can catalyze the reaction going on.

In other words, that you could not in a laboratory do this experiment or create this product the same way unless you had gold, at least a small amount of gold to catalyze or kickstart the chemical reaction.

Now all that sounds good. It sounds very high tech and almost sci fi, but this didn't come out of the blue.

It's not as if gold suddenly became valuable after the invention of the semiconductor or the microchip.

Gold has been seen as valuable for thousands of years, literally as far back basically as recorded writing and human civilization goes.

Unlike many other systems of money that we've had over human history, unlike what we have today, gold was not simply based on trusting one powerful government.

I'm not intentionally being vague. I mean the US Government.

With the dollar, every other country, every other business and consumer in the world has to trust the dollar and the US Government. The issues is that gold didn't develop that way.

It's not like one empire decided we're going to use gold as money and everyone else just had to conform to it.

This was an independent development in different parts of the world that sort of organically and naturally proved it was the best material for money.

It proved to be the most useful and the most universally recognized as valuable.

Part of that is because gold is found not in perfectly equal amounts obviously, but it's found in the earth's crust all over the world. So that means even before ancient civilizations were coming in contact with each other, they had all probably over some span of time, found gold and become familiar with gold.

Secondly, because of gold's high malleability, because of that property, and because of how it occurs in nature, gold can oftentimes be, especially, you know, far, far back in time before more gold deposits have been exploited by large scale mining, gold could be found in rivers.

It's called an alluvial deposit.

You know, the kind of classic image of someone panning for gold.

Literally just stick a pan in a flowing river and you can conceivably collect some little bit of gold.

And that was certainly going on, you know, a hundred years ago, 150 years ago, and even further back, it was the first way that humans, before we had the technology to really start mining for gold, that was the first way we were really getting any of it.

That's sort of blows my mind and I hope it, it strikes you is sort of odd too, that something that we nowadays think of as as so scarce and rare, which relatively speaking it is, could also be so universal and accessible.

And I think that's important in a historical context.

It means that every culture around the world in ancient times pretty much encountered gold on their own without any extreme effort being exerted.

So like I said, it's not as if gold became a, a valuable metal and used for currency just because the ancient Romans figured out the most efficient way to mine it and had the most of it. I mean, they did, the Romans did do that, but the causality has flipped. It's not that the Romans exploited all the gold better than everyone else, and then they made it valuable because of that.

It is because gold was already so sought after.

And so that's why the Romans were incentivized and encouraged to use ingenuity and engineering and these other advantages to get as much gold as possible. There were ups and downs throughout the long span of thousands of years from antiquity to the more modern world.

So of course there were times where other things were tried as money. Maybe something that was more abundant locally, like tobacco or calorie shells is another example.

These things were used as money by different cultures at different times, but none of them had the shelf life of gold literally and figuratively, as gold does not rust or corrode over time. So you don't have to worry about it spoiling.

That's a great property of money like we discussed in a previous episode, but also in a figurative sense that even if different types of money were circulating in different parts of the world, eventually it all tended to come back to gold.

So that's some of the historical background in a broad sense.

The first coins were not made of gold.

The first government or empire, you might want to call it, to come up with the idea of, hey, let's issue our own money so that people can spend it and pay it back to us in taxes, essentially was king Croesus and his son Alyattes in what is today western Turkey. It was the kingdom of Lydia and this was in around the seventh century BC, which now historians say BCE, but you know what I mean.

Ancient times. Before the year zero.

So we're talking about 2,600 plus years ago and it was very successful. The Lydian idea of stamping a little coin with a symbol or with some sort of insignia that meant this is official money of the kingdom. It made it very easy to regulate money coming in.

So instead of the king just hoarding all the money and all right, you guys fend for yourself, you could actually stimulate commerce within your kingdom if you initially issued out the money and then said, okay, now I am willing to take this back.

But they weren't made of gold.

These first coins were made of a natural alloy called Electroneum, which is some roughly equal, not always 50/50, but it is a mix of gold and silver that essentially looks silvery.

So over time they realized that the coins were more durable if they were mixed with copper, but also that the copper changed the color of Electroneum from this pale, mostly silver color to something closer to what we associate with pure gold, that yellow color, the yellow metal.

Then a few decades into Alyattes reign, he decided he could have more control over this process if instead of just using the natural electrum, we refine that electrum into its components. Into gold and make highly pure gold coins that are more standardized.

So that's the very beginnings and origins of gold as money.

Certainly humanity was using gold for artistic and decorative and ceremonial ritual purposes before that time. But that's really, I was gonna say that's only for the artistic and aesthetic side of it, but it is true.

Gold does not spoil. It doesn't corrode.

So if you wanted to make a religious artifact or you wanted to make a piece of artwork that would stand the test of time, quite literally then gold did have a practical use.

And as I said before, it was the easiest to work with so you didn't have to expend as much energy or have as good of technology or a furnace in the ancient world to melt down the gold and work with it.

So the barrier to entry, it was low, in fact, the lowest of any metal.

So I hope you're starting to get the picture that it's not an accident that we started with gold as one of the first forms of money.

And by far the most successful. Not an accident.

There are good reasons owing to those properties that gold has to its distinctive color so that it can be easily recognized. All of these things added up, over thousands of years of history through trial and error and different circumstances to give us a durable system of gold being used as money.

I don't even just mean backing money. I'm not even talking about a gold standard.

We were in almost every part of the world still using physical gold as coins and money up until the 1930s. That's the vast majority of human history, you know, from let's say 650 BCE, two 1933 CE or AD.

That's a really long time.

So whatever it is, even if the particulars of this don't quite resonate with you, the general idea that gold did its job good enough to sustain over all those years.

I will admit there were times, usually some kind of crisis or war time or particular local realities such as, let's pick the American colonies. They didn't have much access to gold, especially before the California gold rush in the middle of the 19th century, before we found gold domestically.

Thee United States had almost no coinage or, or I should say the colonies had no coinage.

So people adapt and they used what they could.

In Virginia, it was often tobacco because that's what they had and it was a commodity that had value. So even if someone wasn't going to use the tobacco themselves they knew that it had sort of a market value so you can always exchange it for something else.

Now that really is only a small step above barter as far as being an efficient system of money, which is why it didn't last.

My point is that for whatever the reasons, like I said, even if you don't really care about the details of why, for whatever reasons, gold has proven that it did last the test of time.

It did sustain that status, not just across time but also across cultures and civilizations.

The next question that sort of begs though is okay, fine gold served this role and it did so admirably but, aren't we more sophisticated than that now?

Haven't we gotten beyond having to use physical money or the idea that the money itself needs to be backed by something physical?

I mean, that's a reasonable question to ask because for most everyone is alive today for either their entire life, for the vast majority of their life, that's the system we've lived on.

But when you put it into that historical context about how long the timeline is and how long gold was used as money and how long we've been on a completely Fiat money system, it's a drop in the bucket.

If you really want to be fair, fiat money has up to now done its job.

Now there's a vigorous debate about how well it's done its job, but nonetheless we still have fiat money and use it, but it's a drop in the bucket on a timescale.

I know this might be hard to believe because we've been using it for essentially let's just pick 1971 as the common date, for less than 50 years.

For less than 50 years.

We have been on this kind of system that's not long enough to know if it is the ideal or even a a sustainable framework.

Gold on the other hand has thousands of years and that's not hyperbole.

That's not an exaggeration.

It's historically factual, but again, today we do not live in that world.

And although I think a lot of you out there might agree with me or be sympathetic to the feeling that the world's getting more precarious and more chaotic and more unpredictable, we live in a pretty, stable seems like too strong of a word, but the world is more stable than you would imagine in a dystopian kind of setting.

You know, the system hasn't collapsed, let's say that's not a ringing endorsement, but it's a point that must be conceded.

The system has not collapsed, yet.

So with that being the case, where does gold fit into the current global financial system?

All that history I just gave you is great and all that stuff about industry and jewelry. Okay fine. You can kind of put all that to the side and say, okay, but why does that make gold a financial asset?

Which I think it is at least by people who invest in it.

And people like me who talk about the benefits, that is sort of an assumption that we make.

It's not a far fetched assumption I don't think, because every major financial institution in the world, whether it's a big central bank or the IMF, they hold thousands of tons of gold.

Like I said, about gold being the first efficient form of money, not being an accident.

That's also not a coincidence.

We're talking about the International Monetary Fund.

It just kind of baffles me that the people who dismiss gold as not being useful or valuable in any financial sense or investment sense, that they can say that with a straight face and then still accept or understand that all of our financial institutions, at least the big ones, the kind of super national ones and the national central banks, almost all of them hold a ton of gold.

That's not cheap.

There is a cost involved in that, and believe me, if any bank, not just the central bank, if any banking institution could take the billions of dollars worth of gold that they have and just put it to some other productive use without losing anything, then they would do it.

Even though I have many criticisms of how the banking system works, and I think there's some injustices and some serious inefficiencies, I don't believe that bankers are stupid.

I don't think that central banks are just holding assets for the fun of it.

There's a reason they have that gold.

So that alone is one sign that even the lay person should kind of look at and say, hum, okay. Gold seems to have a place in the financial system.

It is used as a reserve asset and it's sort of the best one.

What I mean by that is not only does it not spoil, so that means you can stick it in a vault and that gold will be just as good a hundred or a thousand years from now as it was today, but because gold is only used in such small amounts for it's industrial applications, it means that there's no pressing sort of national interest or economic interest in using all of our gold production for industry in the same way.

For instance, copper is, it's not efficient or it wouldn't be effective for us to take a big chunk of copper and set it aside to sit there or to get recycled into coins and bars because we need that copper.

There is massive demand all over the world, all the time in manufacturing and in oil and electronics and all sorts of sectors for copper that it is sort of the bellwether industrial metal in the world.

It's fortunate that gold is not because that means it can be set aside and used for these sort of financial only purposes without any major disruption to the global economy and global trade.

Silver has a slightly less compelling case in this sense because at least half of silver demand really is for industry and it can't just get recycled.

It gets used up and in another episode, I'll address some of these correlated properties that silver has that make it valuable. And some of them are overlapping with cold, but some of them are very different and that is one of them.

So let's circle back to why all of that is important and kind of put a bow on this right here because it's easy to get out in the weeds with these concepts because it's not a day to day thing that you see anymore.

You don't handle gold coins in the course of commerce or business.

Even if we only use paper money, you don't ever go to the bank and ask them, can I have the real goad that this dollar represents four used to represent.

Like I said, some people who are old enough may vaguely remember a time when that was possible, but almost nobody has lived in that world.

Nobody alive now.

And that's how it used to be for much longer than it's been the way it is now, where our money is backed by nothing but trust and promises.

So putting into context what I've repeated about how gold was used as money for so long, for thousands of years, and we've only had our current system for a much relatively shorter time, about 50 years.

This may sound far fetched, but there is reason to believe we may someday be forced to go back to something like a gold standard because obviously it is slightly less convenient if you have to have something physical and real. It is much easier to just print monopoly money or type numbers on a screen digitally, but it's not out of the realm of possibility.

Another recurring theme that I think this podcast will consistently cover is the transition that we're in, in global finance and in the monetary system.

I think there's ample evidence that we're in a transition period, but nobody can say with perfect certainty what's on the other end of that transition or what type of crises and growing pains will be littered along the way.

And so that's part of what makes gold familiar.

It's not as big of a leap of faith because there's so much in the historical record to show that this has been done before and succeeded.

Ironically, you may or may not have heard about this, but the system we have now of Fiat money where it's just based off of government diktat, government tells you the money's worth something.

That has been tried several times in the past because it does seem like a smart innovation.

Have something that represents money but isn't really worth anything itself as money and let people trust it.

That's been tried many times and it has failed often miserably in 100% of the cases.

Not just some of the time.

Not just most of the time.

All the time.

Again, I don't want to fear monger or say that I believe, in the next six months all Fiat currencies are going to crash and we'll go back to a gold standard. That's far fetched.

But to say that in the next 15 to 25 years with some of these major changes toward a more kind of open global system of money that is very much away from the US Dollar as the standard, things could get and likely will get messy.

And in such a scenario, it is often useful to have something stable and familiar.

And I can think of nothing better than gold.

And I am not the only one who thinks this. Far from being only on the fringes.

This idea of returning to some type of a gold standard or a gold backed currency is popping up all over the place, at least outside of the United States.

And there's a reason for that because it directly challenges the supremacy of the Dollar as the global reserve asset.

But it's not, you know, people like me with a podcast who are saying this.

The Malaysian prime minister at a big conference in Tokyo where leaders from across East Asia met to try, and as they do at these international conferences, to try and kind of come up with a consensus about how those countries can work together and balance out their trade and find ways to do things that are multilateral and advantageous for all of them.

In that spirit, the Malaysian prime minister very compellingly suggested that those countries in East Asia, mainly China, Japan, Korea, Malaysia, and the Philippines, that they could all benefit if they moved away from using the Dollar for international transactions and for settling trade if they went to a gold backed regional currency.

It would not replace any of their local currencies, you would still buy your groceries and do all of your shopping with your local currency in Thailand or Vietnam or whatever respective country in the region you chose.

But when those countries trade with one another, they would be using a gold standard.

Again, this is not something on the back channels of Reddit, or at least, I'm sure it is there, but it's not confined to that.

We're having world leaders. We're having people at central banks, especially in Russia and China.

They've had government officials who have openly said that the idea of backing their currency or some sort of neutral international standard currency with gold could be a very good idea and they are serious about it.

Now, once again, take it with a grain of salt.

Thinking an idea is good and having the political will to implement it are two different things.

I don't believe for a second that the United States won't protect the status of the Dollar as the global reserve currency, but again, as we enter this transition, things could change drastically.

The power dynamics between the major economies of the world could change quite a bit.

So I'll leave you with that sort of takeaway, that it's not just random gold bugs with a microphone who are talking about these things.

It's also not a purely academic discussion by monetary economists either.

We're talking about prime ministers, policymakers, politicians, thought leaders.

It's a small but growing group who even if they don't completely support gold as the main vehicle for which to kind of reform the system, they at least all tend to agree that the system.

It's got problems and they need to be addressed at some point. It's inevitable if they are not addressed, we can get another financial crisis, or worse.

So I hope that's some food for thought.

I hope maybe you have a different perspective on whether or not Wall Street is right, that gold is just a pet rock. It's just a, in the words of John Maynard Keynes, the gold standard is merely a barbarous relic that needs to be thrown into the dustbin of history because of how terrible it was.

I hope that you come away realizing that that is actually the tin foil hat stance.

It's fine to say that you don't think it would be feasible for gold to become the reserve currency.

Again, at least formally or officially, that's totally reasonable. You can defend that argument very well.

But to say that it's useless, to say that there's no chance it plays a role in the future of money, and I don't just mean a tiny role, I mean a central role, that's the fringe position.

To suggest that it's worthless, to say that it does nothing, for you to say that it's just a tradition as the former chairman of the Federal Reserve, Ben Bernanki once said, that it's just tradition that the Fed holds all that gold, all that 8,000 tons of gold at Fort Knox and the other bullion depositories.

And that's just a big expensive tradition.

Sounds ridiculous, doesn't it?

Hopefully we've dispelled that myth, because it's a big one.

Before I go, let's get a question from the listeners. I've got one here from Lee in Clearwater and Lee asks,

Are we running out of gold?


So there is some buzz about peak gold, which is the idea that at some point we will have exploited all of the gold, all the important gold deposits in the world, and that gold production will begin to tail off after that.

I mean that is going to happen someday.

At some point we will be quote, unquote running out of gold.

There'd be less gold produced each year and perpetual decline. We're not at that point yet.

You might suggest the gold production has plateaued because each year has been pretty much the same. Every single year there's about 3000 plus tons of gold that is mined, but it's certainly not falling yet and I would caution anyone who is researching or into the whole peak gold thesis, look at how little of the ocean is explored.

Look at how little we know about the depths of the ocean.

Now imagine, although again, the reason the ocean is not explored, is it's harder to explore than land. We do have mining technology now which allows us with ground penetrating radar to see what's beneath the ground before you dig.

Nonetheless, there are certainly undiscovered gold deposits, so I'd hesitate to say that we're running out of gold.

Also you can throw into that equation that a lot of gold gets recycled because it is valuable and easy to melt down. So the above ground gold supply, even if we did start tapering off and we saw slowing production of gold mining each year, there's still plenty of it to go around.

So no, we're not running out yet.

But geologically you could say there are some signs that we are approaching peak gold in the next 25 to 50 years. So interesting question.

Good to know that maybe I should touch a little bit more on on gold mining in another episode. So maybe that's a topic to look for.

I want to thank all of our listeners out there. Thank you so much for tuning in.

Hope you enjoy the show.

Next time we're going to be dabbling in everybody's favorite asset class, the stock market or the equities market.

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Posted In: podcasts
Everett Millman

Everett Millman

Managing Editor | Analyst, Commodities and Finance

Everett has been the head content writer and market analyst at Gainesville Coins since 2013. He has a background in History and is deeply interested in how gold and silver have historically fit into the financial system.

In addition to blogging, Everett's work has been featured in Reuters, CNN Business, Bloomberg Radio, TD Ameritrade Network, CoinWeek, and has been referenced by the Washington Post.