from
slate.com
Why does the world flock to one precious metal in tough times?
By David Ian Miller Posted Monday, October 13, 2008 - 2:57pm
- In theory, mankind could have picked any precious metal as a security symbol, so why do we seek out gold when everything else is tumbling down?
- "It is very irrational from a business standpoint, because we have so much better technology now for transferring wealth," says the slyly named Douglas Silver, chairman of International Royalty Corporation, a company that buys royalties associated with mining properties. "But it's cultural. It's built into our psyche that when things get ugly, gold will store value."
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- Still, there are some logical reasons behind the value assigned to gold. It's one of the earth's rarest elements-gold makes up about one part per billion of the earth's crust. It is also durable. Gold cannot be destroyed and it won't rust or decay. It's a very good conductor of electricity, and there's a little bit of gold in every computer, cell phone, and airbag, among many other things.
- And gold is easily divisible. Unlike, say, real estate or cattle, you can reliably break it up into smaller quantities. (Try giving someone change for a cow.) Most importantly, unlike hard currency, gold cannot lose its value because of government or corporate mismanagement.
- Coyner says that now, for the first time on an annualized basis, South Africa is not the world's leading gold producer. "Assuming what they're telling us is true," says Coyner. "China is now the world's largest producer of gold."
- That brings us to the demand side of the equation, where the psychological factors surrounding the price of gold really come into play. As noted above, gold has industrial applications. But it's the investment in gold as a hedge against scary economic times-rising inflation, falling currencies, crashing stock markets-that can really juice the numbers. As we saw in the last few months, the price of gold can swing up and down just as wildly as the Dow whipsawing on news of the latest bank implosion or government bailout.
