So WHY is gold considered money?
By: Bosko Kacarevic
We've all heard that gold is money, but rarely does anyone explain exactly why gold is money.
In my experience I have never seen such a controversial financial topic as in the gold market. It's the only investment that disturbs bankers to the core. We never hear the financial industry down play any other investment as much as gold. We never heard them seriously criticize the Internet craze in the late nineties or the real estate craze in early 2000? But you mention gold to a banker or financial planner and they'll have a fit. WHY? Because they expect gold to produce interest and dividends like other investments, but money is NOT supposed to do this. It's supposed to be a store of value and a medium of exchange. Volatility is also another common criticizm of gold, however gold does not change, rather the currency it's being measured aginst is changing. Historically one ounce of gold will buy the similar amount of goods and services as in any time period.
The late JP Morgan himself said that "gold is money, everything else is credit." So why all the arguments about gold? After all, it has been considered wealth longer than any bank, government or stock market that has ever existed.
So I decided to try and explain why I think gold is money. The best way to start is to define the roll of MONEY. Money, by definition is supposed to act as a medium of exchange and a store of value, so we don't have to return to the cumbersome barter system. In order for a medium of exchange to function successfully it has to be evenly divisible and consistent as a unit of measure, so when compared to other goods and services you have a uniform and consistent base to reference for prices. Gold performs in this regard perfectly because it can be purely refined to exactly one ounce or one kilogram or what ever unit of measure you require. Each unit of gold will be exactly consistent with another, so therefore it is successful in being evenly and consistently measured. Yes of course there are many other metals and materials that can be evenly divisible but none are as rare as gold, or require as much labour and energy to produce. This was reported by the engineering department from Cambridge University and posted on this blog HERE. The fact that gold is RARE, make it valuable, just like a rare diamond or a rare piece of art. This is simple economics 101, supply and demand. Also gold cannot be counterfeit, although many have tried, none have succeeded in the art of alchemy. Besides there are many simple ways to verify a pure gold coin or bar, you just have to take the time to test it. Also, gold cannot be CREATED out of thin air like today's electronic money and credit. The hard labour, technology, and energy going into the discovery and refining of gold is inherently built into it FOREVER and this is why gold ALWAYS has "intrinsic value."
Another important characteristic of MONEY is that it has to be a "store of value." Well, we just explained why gold has value, so what makes it STORABLE? Gold is the only material that can sit at the bottom of the ocean for 1000 years and still maintain it's original form. Gold does not rust, tarnish or corrode like many other metals so it can be easily stored in a vault, underground or at the bottom of the sea. Gold is not consumable like most other commodities so it has no real utility besides jewellery and gold lasts forever so this makes it the perfect form of wealth to be handed down from generation to generation.
After all, Kings and Queens fought Wars to protect their gold and Central Banks around the world keep gold in reserve, WHY NOT YOU!
Below, Jim Rickards talks about some of the global issues surrounding gold as money and why it will continue to be the safe haven asset of choice by millionaire's and billionaire's alike.