First, let’s make it very clear what gold is not. Gold is NOT:
- an investment
- a hedge
- a barbarous relic
Money has three specific characteristics: medium of exchange, measure of value, store of value.
Lots of things have been used as money during five thousand years of recorded history. Only one has stood the test of time – GOLD. And its role as money was brought about by its practical and convenient use over time. Gold has it own special characteristics which lend themselves to its role as money quite well.
First, it is scarce. Nearly all of the gold that has ever been mined is still available above ground. And production of new gold averages only (approximately) one percent annually of existing supply. Hence, we are not likely (ever) to see any large or unusual changes in existing supply that would affect its value in a substantial way.
Second, it is malleable (workable). One ounce of pure gold can be hammered into a sheet thin enough to cover a football field.
Third, it is indestructible. It does not rust or corrode and it is not consumable.
Fourth, it is beautiful.
A medium of exchange needs to be portable, which gold certainly is. And gold is and has been easily incorporated into recognizable forms and amounts for use within various standards of weight and measure. But what sets gold apart from every other item that has been used as money is its evidence as a store of value.
The best and most relevant example I know of to illustrate gold’s role as a store of value is as follows:
The Federal Reserve Bank of the United States was established in 1913. At that time the U.S. dollar was fully convertible into gold at a rate of twenty ($20.65) dollars to the ounce. You could exchange paper currency of twenty dollars for one ounce of gold in coin form. The coins were minted by the U.S. government. Gold in other forms (dust, flakes, nuggets, etc) also had circulated as money at the same ratio of twenty dollars to the ounce once its purity and weight was established.
Fast forward one hundred years. The U.S. dollar has lost 98% of its purchasing power over the last century. In other words, it takes fifty times as many dollars to buy today what one dollar would buy a hundred years ago. Whereas one ounce of gold will still buy today what it would a hundred years ago.
Astute readers will likely be quick to point out that stocks or real estate have appreciated considerably more in U.S. dollars than gold over that same time period. And they would be correct. But that entirely misses the point of this article. GOLD IS REAL MONEY. The U.S. dollar is a substitute for real money. Stocks and real estate are investments.
When someone states that “gold is too volatile to be used as money” they are being perfectly logical – in reverse. It is the U.S. dollar that is volatile and which continues to depreciate in value. Gold is the constant.