Thursday, August 18, 2011

Why is gold so valuable?

The world of global finance is abuzz these days with dizzying attempts to determine whether the already historically high price of gold is poised for an uptrend or a downtrend. In the immediate aftermath of Standard & Poor’s downgrade of the U.S. credit rating from level AAA to AA+, gold prices soared to even higher record levels on August 9 to reach $1780.

This more than 40% increase in the price of gold over a 12-month period is attributed to investors’ desire to seek a safe haven amid uncertainties in foreign exchange markets in the context of national debt crises in Europe and the United States and concerns about inflation. Yet tracing patterns of levels of gold as a store of value relative to a range of stock indexes, money supply trends, commodity prices, inflation or deflation, monetary policy, political instability, consumer behavior, and other indicators can produce varied interpretations from a likewise wide range of viewpoints. Underlying all scientific attempts to pinpoint the direction in which gold prices are heading is the most important, and most elusive, question as to precisely why gold is valuable. This question becomes even more difficult to answer in a present-day geopolitical and global financial environment that is profoundly transformational on complex levels, a circumstance that leaves scholars, commentators, and policymakers a bit stumped in their attempts at identifying contemporary understandings of value as rooted in sociocultural or economic structures.

The high values ascribed to gold today may be due to the simple fact that humankind has turned to gold for reassurance in uncertain times for centuries. In The Creation and Destruction of Value (2009), Princeton University professor of history and international affairs Harold James stresses the fact that “crises lead to a fundamental uncertainty about what things are worth” and cites a long list of historical occasions on which individuals and investors turned to various material assets, perhaps chief among them gold, as a reaction to economic and political upheaval.

Contemporary market research by such organizations as the World Gold Council confirms the fact that gold prices evolve according to diverse factors and in response to myriad conditions that affect nations across the globe differently. The interplay of these conditions is difficult to predict, yet would seem essential to any tangible prediction of gold price given the dynamic relationship between the price of gold, foreign exchange, money supply, and general trust in sovereign solvency.

If it is so difficult to identify specific, empirical reasons for gold’s value in contemporary society, one might be led to consider if this question is even worth asking? It clearly is. History has shown that times of uncertainty often lead to periods of meaningful, productive scientific and philosophical inquiry into the institutional/political frameworks and human interactions that make the world go ‘round. It is my instinct to turn to an icon in the historical evolution of perceptions of money and value in Western society for answers to this worthwhile question—St. Thomas Aquinas (1225-1274), who provides us with as an artful articulation of man’s relationship to gold as a precious commodity in his discourse on value in the Summa Theologica. As with other commodities, Aquinas notes that gold is perceived to have an intrinsic value tied to its beauty and functionality, yet cautions that this is simply based on human assumptions about what is or is not real when he compares the value of pure gold to gold fabricated by alchemical arts, postulating that if “real gold were to be produced by alchemy, it would not be unlawful to sell it for the genuine article, for nothing prevents art from employing certain natural causes for the production of natural and true effects.”

---Shannon L. Venable, author of Gold: A Cultural Encyclopedia

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