Why Gold Is Sound Money

Last Updated on November 26, 2025

Out of all the physical commodities mankind ever used as money, gold was the pinnacle.

It fulfils all the properties something requires to be considered sound money. It is:

• Scarce: It is hard to bring new supplies of gold to the market.
• Malleable: It can be melted down and shaped into coins or bars.
• Durable: It does not burn, rust or explode.
• Portable: It can be easily transported.
• Divisible: It can be easily divided into smaller units.
• Fungible: One ounce of gold is exactly the same as another ounce of gold regardless of where or when it was produced.

Because it has those properties gold has functioned as an effective store of value, medium of exchange and unit of account for thousands of years.

Gold is currently being challenged by Bitcoin, a digital commodity, for the status of best form of sound money. But nevertheless gold has been and still is sound money.

If you are new to this topic then “How to Invest in Gold for Beginners” is a great place to start.

Gold Is Scarce

One of the key attributes for something to be sound money is that it is scarce.

It cannot be too easy to increase the supply of monetary units otherwise the market will be flooded with new supply, each unit will fall in value and the store of value function will be compromised.

Gold works well as money because it was plentiful enough but not too plentiful.

It is estimated by the World Gold Council that the total amount of gold ever mined is around 212,582 tonnes or approximately a 22m3 cube. This is enough to function well as money but scarce enough to maintain its value over time.

Significant physical effort goes into mining gold and this gets harder and harder each year as the easy to mine gold is extracted and we are left with stuff that is more difficult to access.

Throughout the 20th and 21st centuries, the supply of gold has increased by approximately 1.5% per annum. This is monetary inflation but it is small and predictable. It cannot be influenced by politicians or bankers.

Gold Has A Long Tradition

Humans have used all sorts of commodities as money from feathers to beads to shells to stones.

But gold emerged as the commodity most suited to the function of money and has stayed the best form of money until the recent emergence of Bitcoin.

Gold was first used in a non standardised form. Then governments in the ancient world started to create standardised gold coins to make trade more efficient.

Gold circulated alongside other coins, normally silver, copper or bronze.

Owning gold was a symbol of great wealth and was beyond the reach of the majority of the people. It tended to be used for large and significant transactions.

Prior to the late 19th century most countries were on either a silver or a bimetallic monetary standard. Those with a bimetallic standard defined the ratio between gold and silver.

A significant development in the history of hard money occurred in the late 19th century as wealthy nations abandoned bimetallism and adopted gold as the exclusive monetary standard.

This era, known as the classical gold standard, was the pinnacle of gold’s role as money.

In the 20th century, the gold standard gave way to the fiat era where money was no longer defined as a certain weight in gold. Nevertheless, central banks still hold significant amounts of gold as reserves and these are used to provide stability and confidence in their fiat currencies.

In the fiat era most people don’t think of gold as money but it still is.

This long history and tradition aids in gold’s function as sound money. The fact that it has been used as money for thousands of years across different cultures and civilizations creates a sense of trust and stability which ensures its continued use.

Essentially it has a network effect that has penetrated the entire world and persisted for thousands of years.

Gold’s Limitations As Money

Gold is sound money but that does not mean it is without limitations.

One of its key limitations is divisibility. It can be easily divided into small units e.g. 1/2 ounce or a 1/4 ounce.

But often these smaller units are still so valuable so as to be impractical. Gold packs a lot of value into a small coin, which is an advantage for transport and storage but a disadvantage for small transactions.

Historically, silver resolved this issue by being the day to day money of the masses and holding a smaller amount of value.

This is one of the advantages Bitcoin holds over gold as 1 bitcoin can be divided into 100 million sats.

Another limitation is its portability, in other words its ability to be transported. The fact that gold could pack a lot of value into a small coin or bar is what made it so useful in the ancient world. It was much easier to transport value through gold than something like silver, which would require significantly more mass to transport the same amount of value.

But in the modern world even gold became too challenging to transport in large enough quantities to be efficient for the commercial requirements of the industrial age.

This was one of the key reasons behind the development of fiat money. While fiat is no match for gold in preserving value over time, it is much more effective at moving value across space.

This is another advantage Bitcoin holds over gold. Being a digital commodity, it can move value anywhere in the world far more cheaply than gold.

Conclusion

Gold has been sound money for thousands of years.

It obtained that status primarily because of its scarcity but also because it was durable, portable, divisible and fungible.

Gold is not without limitation and I would argue that Bitcoin is a superior form of sound money.

Nevertheless while it may no longer be the soundest, gold still is sound money.

Image Credits

Bruttium gold coin is in the public domain