In the comment thread to my last article I made the mistake of puncturing a misconception of many an ardent, if confused, gold investor by asserting without equivocation that gold (AMEX:GLD) is, in fact, not money. I know I made some people angry with that statement. But to clarify I need to set the Way-Back Machine to last century and quote from Ludwig von Mises' The Theory of Money and Credit and Human Action wherein he defines money and credit.
It is the most marketable good which people accept because they want to offer it in later acts of impersonal exchange - Human Action (1949)
Credit transactions are in fact nothing but the exchange of present goods against future goods. - Theory of Money and Credit (1921)
To translate: money is the most liquid commodity. Credit is a promise to pay tomorrow for what I need today. Mises also went on to explain that the creation of more money confers no net benefit - just picking winners and losers based on who created the money. This is because money is not a store of value. Nothing is; not cowrie shells, gold, Bitcoins or Malaysian Ringgit. Money can only compare subjective values.
Let Them Eat Credit
Gold is capable of comparing values. All things are at some level. But all other things do so at a discounted rate versus the current item being used as money, because holding money should not incur any cost. Gold has a discounted price when trying to buy a car with it. That discount is 100%.
Gold is only money in transactions where the transaction is not allowed to take place with legal tender - think Iranian oil and you just won a prize. In that respect gold is money. In Singapore, bullion quality physical gold and silver (AMEX:SLV) trade without taxes or capital gains which puts gold and silver on par with other currencies in the foreign exchange market. Up until recently, one could deposit gold in a Vietnamese bank and get paid interest on your savings. In only very limited circumstances and markets does gold flow as a money - a direct medium of exchange.
We are living through a time where we have credit deflation and monetary inflation. Nothing has changed since Lehman went bust. Asset prices want to deflate and the central banks are trying to prevent that from happening and are printing base money in the hopes that will spur credit inflation. Up until recently it hasn't worked because no one can take on more debt credibly. Why? Simple, too much risk for too little reward because no matter how far down the central banks push interest rates they can't force people to buy a loan they can't afford to pay back. There has been no demand for credit. The central banks are desperate to create that demand for credit. In the past, all they had to do was lower the cost of credit and it would flow. Not now. This is what most gold bears refuse to understand.
And The Fed is now pushing interest rates as low as they possibly can go. And they are printing base money to do so. They will continue to do so and punish savers and pensioners until they buy more mortgages. The plan may even be successful. But at what cost?
There may even be another big rally in U.S. Treasuries (AMEX:TLT) this year. the banks have reported earnings that look like they have room to fill up on Treasuries. The latest TIC Report certainly shows that through November there is no loss of appetite for Bonds-- except for August and December of 2011, right after QE 2 ended and the Chinese sold.
I fully expect to see China dumping and Japan buying to offset in the next two reports. The rest of Asia has stopped buying. Russia and most of the E.U. has stopped as well. The battle lines are being drawn pretty clearly of who is still willing to finance the Fed's dreams of recovery.
So, like it or not, the dollar is still money in the U.S. as well as a lot of other places around the world. The euro (AMEX:FXE) functions in Europe. The baht functions in Thailand. And interest rates where there is a surfeit of debt are still zero.
Feh! Who needs risk assessment anyways!
The Hunger Games
So to repeat, gold is not money. It is a store of wealth. In this way, the Indians and the Vietnamese have it right. It is a means to preserve your wealth when money dies. They have watched their money die many times. The rupee and the dong just went through massive devaluations as demand for those currencies collapsed and other things tried to swoop in to fill the void. In both countries the demand for gold rose sharply and the government attempted to stop it from happening. But gold flowed not to restore the division of labor (medium of exchange) and keep commerce flowing, it did so to perverse the value of savings (wealth and capital preservation).
We in the U.S. have no concept of this. Vietnam is a three-currency economy - the dong, the U.S. dollar and gold- which the State Bank is now attempting to change by edict and mucking with interest rates and inter-bank rules. So watching the relative demand for money change is something alien to many commentators here at Seeking Alpha. Our experience is that the dollar will always have a bid, and not just any bid the biggest bid out there. Will we reject the Dollar in the U.S.? No. It'll happen overseas and some of that inflation we poured into foreign central banks will re-visit our shores, sending the dollar down sharply and dold along with bond yields up.
So many people are not prepared intellectually or financially for that possibility. Even if you aren't a gold bug, you should have some in your portfolio... because, you know, you may be wrong and hedging against your own limited knowledge of the Universe is never a bad strategy. I suggest a physical closed-end fund like the Sprott Physical Gold Trust (NYSE:PHYS) or stuff you can hold in your hand. There are other great investments out there but a good portfolio starts with gold.
Gold isn't money. It's something better than that. It is a form of savings that is protected from either inflation OR deflation because it is a near-zero-discount comparer of value that can be exchanged for any money anywhere in the world. And in an inflationary environment that value will always leak higher over time. The Fed wants inflation. It may risk a massive bubble in bonds to do it. The implications of that should be clear.
Additional disclosure: I own physical Gold and Silver and a more than a few Goats.