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Why use gold as money?

|Includes: SPDR Gold Trust ETF (GLD), IAU

Why use gold as money? If you look up the term “money” you will see it defined as a medium of exchange, and a store of value. Money is the lifeblood of an economy. It is used to facilitate trades without using bartering, which is the foundation of the division of labor and a cornerstone to a higher standard of living.

Government fiat currency currently serves as money throughout the world, but it is far from ideal. At present, it works well as a medium of exchange but it is a poor store of value. A good money (a medium of exchange, and a store of value) has certain characteristics. Aristotle defined these characteristics 4th century BCE, and they are still valid today:

·         Durable: A good money is durable and should not fall apart in your pocket. It should be close to unbreakable. This is why we don’t use fruit as money.

·         Divisible: A good money needs to be convertible into smaller and larger pieces without losing its value, so it can fit a transaction of any size. This is why we don’t use a porcelain vase as money; once half of it is gone it is pretty much worthless.

·         Consistent: A good money always looks the same, each piece looks the same as the next and it's easy to recognize. This is why we don’t use an oil painting as money. Each painting is different even when made by the same artist.

·         Convenient: A good money contains a high concentration of value into a small package and it is highly portable. This is why water is not used as money, even though it is essential for human life. You would need a truck full of water just to buy groceries, and just imagine how much you’d need to buy a larger item like a house.

·         Intrinsically valuable: A good money should be something that many people want or can use. This is vital to money functioning as a medium of exchange. Even though, you may not want to carry a gold ring or bracelet, you know that someone somewhere wants it and will take it in exchange for something else of value. This is why we should not use paper for money.

Gold, and to some lesser extent Silver uniquely well qualified as money. No other substances meet the five characteristics mention above better. Gold’s main use has always been money, not jewelry or technology, despite contrary beliefs. As more and more people start to wake up to the flaws of fiat money, gold will shine even clearer.

The chart below compares a collection of fiat currencies against gold. Even though some have done better than others, they are all significantly down against gold over the last 10 years.

One of the chief reasons for the loss of value among fiat currencies has been excessive money creation and ballooning debts worldwide. While paper money can be created endlessly, gold has a limited supply and thereby retains it rarity and value.

The trend toward depreciating fiat currencies worldwide is intact, and one should protect him or herself against inflation and devaluation by owning gold and some silver. Gold has been used as money for over 5000 years and it has stood test of time as an inflation hedge and a safe haven.

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