One complaint often leveled against gold and gemstones is that they have no intrinsic value and are therefore “fads” or “speculations”. A perfect example of this lunacy is an article I recently read titled “Gold Is No More of an Investment than Beanie Babies“. The author, a professor of economics at Pomona College named Gary Smith, unequivocally argues that gold, gems and other valuables aren’t assets because they don’t pay dividends or interest.
All I can say is good grief!
Sometimes economic professors get so caught up in their textbooks and theories that they forget to look out their ivory tower windows into the real world. So let’s try to answer the question of whether or not gold and gemstones have real intrinsic value.
No, gold and gemstones do not produce cashflow, but not every asset does. There are about 4,800 U.S.-listed equities that don’t currently pay a dividend. In addition, there is a type of debt instrument called a zero coupon bond that pays its par value at maturity, but makes absolutely no interest payments until then. Warrants, options and futures also pay no income.
As you can see, demanding that a security pay a stream of cash flows in order to be considered an investment is an excessively restrictive definition. In other words, all things that pay income are investments, but not all investments pay income.
But this doesn’t really definitively answer our question. Lots of things don’t pay interest or dividends, but only a very small proportion of them could convincingly be called investments. Maybe examining the meaning of the word “intrinsic” can help us make a determination.
According to Dictionary.com, the definition of the word intrinsic is: “Belonging to a thing by its very nature: [for example] the intrinsic value of a gold ring.”
We’ll set aside for a moment the fact that the dictionary definition of the word intrinsic specifically references gold.
When critics declare that gold and gemstones have no intrinsic value, what they are really saying is that they have no practical uses. In other words, when stripped of their decorative, monetary or status-enhancing applications, gold and gems (allegedly) possess no industrial usefulness.
First, I will comment that it seems a little unfair to discount their primary strengths. It is like asking what good cotton is if you can’t weave it into fabric. But even with this considerable handicap, gold and gemstones still have a significant number of uses, thus endowing them with substantial intrinsic value.
For starters, gold does pretty much everything copper can do, except better. Other than its exorbitant cost, there is no reason you couldn’t make all the plumbing and electrical wiring in your house out of gold. And it would last pretty much forever, to boot.
Of course, gold has a lot of other uses besides giving copper an inferiority complex.
Almost every cell phone, laptop and desktop computer on the planet contains small amounts of gold, where it is used to plate vital electrical circuitry. This is because gold does not tarnish or corrode, even under the most hostile environmental conditions. It is safe to say that the computing revolution of the past few decades would have been impossible without gold.
Gold is also used in dentistry, where its chemical inertness and durability make it a perfect material for filling cavities.
Even the medical profession has adopted gold for some specialized situations. The gold-based compounds auranofin and sodium aurothiomalate are sometimes used to treat rheumatoid arthritis. In addition, tiny radioactive gold seeds have been implanted into cancerous tumors, helping to shrink them.
Space exploration is another industry that is heavily dependent on gold. It is not only found in the computer components of every satellite and spacecraft, but is also lavishly used in orbital telescopes and space suits. These gold coatings reflect solar radiation, thus helping to regulate temperatures and prevent heat damage.
Glassmaking also relies on gold. A highly prized type of deep red glass called cranberry glass or ruby glass can only be made by dissolving gold salts in a pool of molten glass. High-rise skyscrapers also rely on an ultra-thin coating of gold on their windows to help with climate control.
Much like gold, gemstones often get a bad rap as unnecessary baubles that have no intrinsic value. But this ignores the modern world’s reliance on their unique physical and optical attributes.
First up are diamonds. These covetable gemstones are the unsung all-rounders of the gem world. Diamond’s superior hardness and toughness means that it is perfect as an abrasive or cutting edge.
Diamond drill bits are a mainstay of the oil, gas and mining industries. And construction workers frequently use diamond-impregnated saw blades to quickly and easily cut concrete.
Another, less well-known application is the diamond-scalpel in medicine. Diamond scalpels are used in any situation where an ultra-sharp, long-lasting blade is necessary, like eye surgery.
Perhaps diamond’s most interesting scientific use is the diamond anvil cell. This high-tech tool skillfully exploits the tremendous toughness and near perfect transparency of diamond in order to crush a test sample between two opposing diamonds. This allows for massive pressures and temperatures, similar to those deep within the earth, to be replicated in the laboratory.
Sapphires are another gemstone that has widespread industrial applications. Titanium-sapphire lasers are commonly used in spectroscopy, LIDAR and other research applications.
But sapphire also has more down to earth uses, as well. It is often employed anywhere a small, perfectly clear window of extraordinary toughness is needed. For example, many luxury watches have sapphire crystals to protect their dials. And Apple’s iPhone 7 made news when it was announced that it would ship with a sapphire camera lense.
Even more prosaic gems like garnet and quartz have extensive industrial uses.
Garnet sandpaper has been used as a cheap and reliable tool by woodworkers for many decades. Indeed, it can be employed anywhere that a super-hard abrasive isn’t needed. For more demanding applications, stepping up to aluminum-oxide (which is just another word for sapphire!) sandpaper makes more sense, although it is slightly more expensive.
Quartz possesses an unusual property known as the piezoelectric effect. This means that it turns mechanical pressure into a small electrical impulse and vice-versa. The most practical use for this strange property is in time-keeping. As a result, a tiny quartz crystal resides in the heart of every quartz watch and clock on the planet.
I suppose that the biggest complaint a skeptic could have about the intrinsic value of gemstones is that their industrial roles are typically fulfilled by laboratory-created synthetic gems. But I don’t think this takes anything away from the desirability of naturally mined stones.
To the contrary, naturally mined gems are merely being employed in their highest and best use. Highest and best use is an economics concept that basically states that while an item might have many possible uses, it will tend to be primarily employed for its most valuable purpose. And it will also be bid to a price commensurate with this highest and best use.
The fact is that the highest and best use for gold and gemstones are as jewelry, decoration and money. This might confound and disturb uneducated critics, but thousands of years of human history confirm it.
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