Is Gold Money?

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As someone who has been interested in gold for the last forty years, I have always been interested in the definitions which can be applied to gold. Is gold money? It often has been, but it is not at present. I suspect it may become money again. Is gold a commodity? I think the answer to that question is “yes”. Gold used in chemical reactions, or in jewellery, is plainly a commodity which can sometimes be replaced by another commodity.

However, the question I find most interesting is whether gold is a real asset. One of the problems of investment is that there are two variables, reality and liquidity. Land or property are relatively illiquid, but are also real, in that they have a use which does not depend on their value in exchange. Gold is highly liquid, indeed it is more liquid than paper money. In extreme circumstances, paper money can lose all its value, when gold is still acceptable as payment. In 1940, when the French Army was defeated, many French people took to their automobiles to escape the advancing Germans. They found that petrol stations would not accept paper francs, but would sell their petrol in exchange for gold coins.

Gold also remains an acceptable currency in periods of high inflation, when paper money can lose all its value.

What does “reality” mean, when applied to an investment? Obviously we talk about “real estate” to describe the legal possession of property. I think that means property with a permanent character and at least a potential use. In the same way, the traditional theorists of the gold standard would say that gold was a real currency, because it has permanence and a potential non-monetary use.

I accept that reality in an asset is a relative factor. In an ideal world, we would all like to hold our financial needs in a currency with a high degree of permanence, strong alternative uses and high liquidity. We have to make do with currencies which fall short of perfect “reality”, and fall short of perfect liquidity as well. We make do with imperfect currencies because we have no choice.

Gold makes one think about these issues, but it makes one even more uneasy about electronic money. In book publishing, I am well aware of the library demand for archival books which can reasonably be expected to last for centuries, like the printed works of earlier centuries. We need also to have permanent money, which can be relied upon to survive, even it its value may decline over time. The historic value of gold has been astonishingly stable over centuries.

In an extreme example, one could be worried about the issue of money and about its preservation. Mr. Madoff has shown that fraud can reach the unbelievable level of $50 billion. Might there not be still larger frauds, so large as to achieve what the wartime German operation attempted, a complete take over of a targeted currency?

Cybercrime is already operating on a huge scale. Suppose that Al Qaeda, instead of attacking the twin towers, had attacked the electronic systems which record all the monetary holdings of New York. No lives might have been lost, but an electronic pulse might have erased one of the central counting houses of world finance. The world might have been ruined.

Is there not some element of this cybercatastrophe in the present world crisis. Reality may be a variable concept, with nothing 100 per cent real and hardly anything zero per cent. When I was born, in 1928, gold was money, and gold was over 90 per cent real. In 1970, when I was in my forties, money was paper, and even the convertibility into gold of the Bretton Woods Agreement was breaking up. Now money is a largely unidentifiable electronic pulse, itself vulnerable to attack by electronic means. Virtual money has very low reality, much lower than paper.

Surely this is a system which could be blown away because there is nothing in it to gain confidence. Even a return to paper money would raise the level of reality attached to world currencies. There is a problem of raising the reality level of all currencies – a problem which nineteenth century economists solved by convertibility to gold.

William Rees-Mogg
for The Daily Reckoning Australia

William Rees-Mogg
Leading political editor William Rees-Mogg is former editor-in-chief for The Times and a member of the House of Lords. He has been credited with accurately forecasting glasnost and the fall of the Berlin Wall – as well as the 1987 crash. His political commentary appears in The Times every Monday. His financial insights can only be found in the Fleet Street Letter, the UK's longest-running investment newsletter.
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Comments

  1. Some believe ‘Real’ in real estate comes from the word for ‘royal’ : meaning it’s the governments land (royal estate), and you’re just renting it for a period. Stop paying your property taxes to see who really owns the land.

    W/regards to Al Qaeda or other terrorists wiping out electronic records with an attack : while this would be devastating if possible, it would be extremely difficult with the myriads of backup systems and disaster recovery procedures all finance IT systems use. Some of the highest security anywhere is used to protect data centres storing the worlds financial information. It might seem virtual but it is just as real as physical bits of paper, just stored in microscopic bits. Even a direct hit with an airliner on the headquarters of trading companies in 9/11 only interrupted the IT systems for about 10 minutes before the automatic backups kicked in and got things going again. Some systems were out for longer but no a single byte of important data was lost. In the case of electronic money, it really is hard to kill, much harder than physical money which only needs to be destroyed once.

    This concept of electronic persistence should be familiar to anyone who has tried to erase an unwanted piece of information about themselves on the internet.

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  2. I think this is a pretty awful article…the premise of it was fine, but poorly structured, poorly articulated and just not thought out. If you want to see some proper reasons why gold is useful as currency, do a search on the internet, there is some good info out there.

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  3. There are people who are trying to move in this direction. GoldMoney ( nice name ) just released an iPhone app that allows people to pay each other in small amounts of gold and silver. Looks like they are working with an outfit called Concentric Sky.

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  4. …gold is a scarce commodity and as such its quantity does not fluctuate to any great degree…it’s rarity prevents it’s wanton consumption as a component which otherwise could be substituted by other more plentiful substances… it isn’t flammable and it doesn’t rust…and sticks to itself in the thinnest of dimensions when pounded, alas it can be counted upon to remain unchanged in a variety of situations although the real estate from which it is extracted cannot…silver, not so much in all regards…

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  5. The first gold mining company that pays its dividends in actual gold will find its share growth exponential.

    Is that because gold is currency or commodity?

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  6. But here’s what I want to know. Who decides what gold is worth? If the dollar collapses, what’s to keep the value of gold from being manipulated? What if everyone is then told, ‘gold is no longer desirable?’
    If I sound naive, well, it’s because I am. Which is why I am asking.

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  7. But here’s what I want to know. Who decides what gold is worth? What’s to keep the value of gold from being manipulated? What if everyone buys gold, the dollar collapses and then we’re all told, ‘sorry, gold is no longer desirable’?
    If I sound naive, well, it’s because I am. Which is why I’m asking.

    Reply

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