What makes precious metals valuable?
Consider this: When Nike releases limited-edition shoes, the demand for them is sky-high. Now think about signed limited-edition Jordans. That’s big time. People beat down the door to buy those because there are only a few. And they’re expensive, because people are willing to pay a lot for the rare beauties. If Nike decided to manufacture millions of them, they could no longer say they’re limited edition. It’s supply and demand. What Nike does is artificially make people think the shoes are “precious”, simply by making them rare.
What about stuff that’s rare naturally?
The kind of stuff that’s created when stars collide — precious metals. When Earth was young, those precious metals collided with our forming planet and settled here for good. And now we extract them from deep within the earth. Of course, it can also be made in a nuclear reactor — but unless you have an extra one of those lying around, you’re going to have to make do with the naturally occurring kind.
Because precious metals are rare, people have always thought they’re valuable.
Unlike other things that go in and out of style, people have always considered precious metals an indicator of wealth.
It makes sense then that the history of precious metals and money are intertwined:
Humans started out with a barter system (I’ll trade you a sword for a week’s worth of milk from your cow). That worked for a while, until people realized it was dangerous to carry around lots of pointy swords that they couldn’t fit in their pocket, and someone might think a week’s worth of cow’s milk was equal to one and a half swords. Too difficult and very inefficient.
Then, humans slowly shifted to using precious metal coins. It was easier that way, because they were rare enough to be worth something in small amounts, they fit in a pocket, and they could melt them down into fractional pieces.
At some point, humans realized they didn’t have to actually carry around the precious metals at all — they could carry around a piece of paper that said they were good for the gold — “It’s just back in my castle”. Anyone who had the paper could then trade it in for the real money at any time.
That’s how our gold-backed dollar emerged.
In the 1700s, Americans could actually trade in the paper for real gold. The government printed and issued dollars based on the amount of gold we had in our vault. Now, not so much. American dollars are perceived as valuable simply because we have faith in the government that issued them. It’s called a ‘fiat currency’. It means we give value to zeros because the government says “Yeah, they’re real.”
So what’s the big deal with precious metals — specifically gold? Why would someone invest in it? People invest in gold because it has value. Why does it have value? Because it’s always had value. In fact, it’s only in recent history that we started accepting pieces of paper in exchange for goods and services — gold has passed through human hands for millennia.