Why is gold useful? Because it is useless

Teenagers can be quite a handful. Or so I found out over the weekend New Year party.

“So aunty, why do people buy gold?” this 16-year-old asked me.

Now, I may be touching thirty, but calling me “aunty” was a little uncalled for.

“Why don’t you ask your mother?” I replied and turned away.

But this one persisted.

“I did ask her, and she directed me to you, saying, “Ask Chandni aunty. She is a banker and must know these things.”

“The kid was now challenging me,” I thought.

“So why are you asking this question?” I shot back, trying to use the old adage —- can’t convince them, confuse them.

“You know, I have been thinking. People value things that are of use. Now, take the case of silver, which

is also a metal like gold. Silver has varied industrial uses because it is a good conductor of electricity, a very good heat transfer agent, reflector of light and at the same time, it is highly malleable and ductile. Given this, it is used in photography, batteries, and even things like clothing, bandages and toothbrushes, these days. So why is it that gold sells for nearly $1,400 an ounce (1 ounce = 31.1 grams), whereas silver is languishing at $30 an ounce?”

“The kid surely had done his research well, and wouldn’t let go of me easily,” I told myself.

“The same is the case with copper. That metal also has varied industrial uses. And that’s why people value it,” he continued. “But what about gold? It has no industrial use. In fact, it has no other use other than women wearing it to look beautiful. And that too seems to be going out of fashion now. I don’t see you wearing any gold. You seem to prefer diamonds Chandni aunty.”

“Yeah diamonds are more subtle,” I replied.

“Subtle?”

“Never mind.”

“So what about gold?”

“Well, what you have asked is a rather philosophical question. And when was the last time you heard of a lady philosopher?”

I asked, trying to confuse him again. 

“Aunty, if you don’t know the answer you can say so.”

Now this was a direct attack. “Well, to tell you honesty, it is a difficult question. But I will still try and reply.”

“So did you study economics in school?”I asked.

“Yes I did,” pat came the reply.

“So can you tell me what are the functions of money?”

“Well, primarily it is a medium of exchange and store of value.”

“And what would that mean in everyday spoken English, my dear?”

“If I need to buy something, I can buy that using money and that makes it a medium of exchange. And if I need to save for the future, I can deposit that money in a bank or invest that money somewhere and that makes it a store of value.”

“You are right. So money is both a medium of exchange and store of value. That makes the situation a little dangerous.”

“Dangerous? I thought it makes the situation more convenient,” he said.

“Hold on, let me explain. Politicians and central banks around the world, led by Ben Bernanke, the chairman of the Federal Reserve of United States, have been on a money printing spree in order to revive their respective economies. Their idea is that all this money printed will be lent by banks to prospective consumers, who will go out and buy goods and services, and that will in turn help revive companies and in turn the economy. But that is really not happening. The danger here is that if anything is manufactured in excess and dumped on to the market, as is the case here, it is likely to lose its value. Now, as you said, money is also a store of value for people. And people wouldn’t like that to lose value. So what do they do? They use that money to buy gold, whenever they think the value of their money is likely to go down.”

“But why gold? I mean why not onions for that matter? Their price has also been going through the roof.”

“You know, you are pretty funny,” I said, pinching his cheek.

“Don’t do that aunty,” he said, using that dreaded word again.

“Well, onions cannot be stored for a long period of time. They will start to rot and stink in a while. Gold does not rot. It does not stink. And more than anything, it holds its value; it has over the centuries. So, whenever people see the likelihood of the value of their money being destroyed, they buy gold.”

“Makes sense. Wonder why you buy diamonds then.”

“Don’t act smart. The other reason is a little philosophical. As a blogger, FOFOA, recently wrote in a piece titled The Value of Gold, “And because it is not used for many things other than mere hoarding, the act of hoarding gold is not an infringement on the natural rights of others.””

“What was that?”

“Let me explain. If you tried to hoard onions and not gold, that would definitely not go down well with your neighbours, especially in an environment where there is scarcity. The same would be true if you want to buy and hold copper. Industries that use copper won’t like it. The same can be true if you buy and hold some form of grain such as rice or wheat. In a world where nearly 79 million people are being added to the dinner table every year, hoarding grain would definitely not go down well. And that’s why people hoard gold, whenever they feel that there is likelihood of their money losing value.”

“So, you are basically saying that gold is useful because it is useless,” he said.

“Righto,” I replied.

The author works in the financial services industry and can be reached at chandniburman@yahoo.com.
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