Why gold is money: the chemistry, the scarcity and the 5,000-year habit

Start with a cube

The World Gold Council’s running estimate is that about 220,700 tonnes of gold have been mined in all of human history, roughly two-thirds of it since 1950. Melt every piece of it together, every ring, bar, coin, tooth and bank vault, and the cube would be about 22.5 meters on a side. That is a seven-story building, or less than half the width of a football field, and it is all of it: the pharaohs’ share, the Spanish galleons, Fort Knox, the jewelry in every dresser in Michigan. The figure creeps up a little each year with new mining, and the current number is on the source page listed below.

Scarcity you can picture is the first half of the answer to why gold is valuable. The second half is that nearly everything else was tried first and failed.

The elimination round

There are 118 elements. Run them through the tests money has to pass and watch them fall out.

• Gases and liquids. Hydrogen, helium, oxygen, the noble gases, bromine, mercury. You cannot carry a coin of neon.

• Anything that reacts. The alkali metals explode in water, iron rusts, copper turns green, and lead goes gray and poisons you on the way. Silver tarnishes, slowly enough that it very nearly passes, and it is kept back for the gold-silver ratio in a later post.

• Anything that kills you. Arsenic, thallium, and the whole radioactive tail of the table: uranium, plutonium, radium. A currency that decays is a currency with a half-life.

• Anything too common. Aluminum is about 8% of the Earth’s crust and iron is more. A metal that can be had by the ton for the digging cannot carry value in a pocket.

• Anything too rare. Rhodium, osmium, iridium and the rest of the platinum group. Some are scarcer than gold, and that is the problem, because a money nobody can find is not money. They also melt at temperatures (platinum at 1,768 °C) that no charcoal furnace in the ancient world could reach, so they could not have been worked into coin until the 19th century.

What is left is one element, atomic number 79. Its density is 19.32 grams per cubic centimeter, so a sphere the size of a tennis ball, about 157 cubic centimeters, weighs roughly 3 kilograms. It melts at 1,064 °C, comfortably inside the reach of a Bronze Age furnace, and it is soft enough to strike with a hammer and die. It does not rust, tarnish, dissolve or react with anything it meets in ordinary life, and the gold in a tomb sealed 3,000 years ago is as bright as the day it went in. It is also the only metal, apart from copper, with a color of its own. Physicists explain the yellow with relativity, and the eye does not need the explanation.

First coins

Money as metal is older than coins. Egypt weighed gold rings and bars against a standard for centuries before anyone struck a stamp into one. The stamp came from Lydia, in western Anatolia, in the second half of the 7th century BC: lumps of electrum, the natural gold-silver alloy that washed out of the river Pactolus, beaten to a set weight and marked with a lion’s head. Croesus, king of Lydia from about 560 to 546 BC, is credited with the next step, refining the electrum into separate coins of pure gold and pure silver, the first bimetallic coinage.

That is what a coin is, metal of a set weight with a stamp that vouches for it. The stamp is a promise about two things, weight and fineness, made by someone whose name is on it. An assay card makes the same promise today on a serialized bar from an LBMA-listed refiner, the kind the counter carries under gold bars, and the promise has outlasted every change in how it is made.

Why it kept winning

Every paper money that replaced gold began as a claim on it. The American dollar was defined in 1792 as a weight of silver and a weight of gold (the Coinage Act of 1792). The Federal Reserve notes of 1914 were redeemable in gold on demand. The dollar that anchored the world after 1944 was, on paper, a dollar the United States would exchange for gold at $35 an ounce. The paper was trusted because of what stood behind it, and every time the backing was loosened, the loosening was done without much announcement and the name was kept.

The last link was cut on August 15, 1971, when the United States suspended gold convertibility for good. What happened next is the strangest part of the story. The central banks that no longer needed gold for anything kept it, and in recent years have gone back to buying it in quantity. Nobody made them do it. Institutions with every incentive to prefer their own paper chose the metal anyway.

Why it is still money at this counter

Strip away the history and gold is money at this counter for one reason, which is that it can be tested and weighed, and both can be done in front of you in a few minutes. Every piece that crosses the bench gets the same three questions: what it is, how pure it is, and how much it weighs. Answer those and the live spot at the top of this page does the rest of the arithmetic.

That is what “money” means here. A gram of 24-karat gold in Madison Heights is the same gram in Zurich, Dubai or Hong Kong, priced within a few cents of the same number in the same hour, and no one at any of those counters has to take anyone’s word for it. Paper needs a signature to be trusted, and gold needs a scale.

What gold is not

Gold is not an income. A bar in a drawer pays no interest and no dividend, and it costs something to store and insure. Its price in dollars moves, sometimes sharply, and there have been stretches of years when it went nowhere or down, so it is no guarantee either. Whether gold protects against inflation has an honest, complicated answer, and it gets its own post. And nobody at this counter will tell you what it is going to do next, because nobody knows.

What it is, is a unit that no one can print. Of 118 elements one passed every test, and 5,000 years of people who never met each other agreed on it. That was an elimination round before it was a tradition.

The counter’s footnote

The tests are the whole business. A ring, a coin, a bar or a chain comes across the counter, and it is weighed and tested in front of the person who brought it, with the numbers on the screen where both sides can read them. What the counter accepts as gold, and how it’s tested in front of you is written down, and the standard is the same for everyone who walks in. The Lydians stamped a lion on the metal so the next person would not have to weigh it. The counter weighs it anyway.