Gold is on a tear this year. The precious metal is up 19%. That’s great! Those holding gold should be happy with their gains. If they take their coins to the grocery store they can buy, well, absolutely nothing. But they can sell their gold to someone else for some printed pieces of cotton (our noble currency) before making their way to the local Whole Foods.
To be fair, some gold coins were actual money many years ago, like the $20 gold piece. In some states it is legal to use these coins today as money, but only for face value, which would be stupid. For all intents and purposes, gold is not money today.
In fact, gold is not identified as “money,” or currency, in any major country.
Sea shells can be money. So can acorns, for that matter. Anything that can be divided in discrete units and that everyone agrees is a storehouse of value can act as money.
But just because doorknobs and coat hangers could be used as cash, doesn’t make them so.
The second part of the equation – general agreement of a store of value – is essential. If my neighbors don’t think that my coat hangers are worth trading for goods and services, then I have a problem.
But guess what? My coat hangers still have value, even though they’re not money.
If I have enough of them, I can sell them as scrap, trading them for some printed pieces of cotton and then use that cotton in the U.S. to buy whatever I want.
But the integral step of trading the coat hangers for dollars is still key. Just because the market value of the metal in my coat hangers goes up and down, doesn’t mean my coat hangers are now a substitute for cash. It simply means that commodity values fluctuate.
Welcome to the gold conversation.
None of this means that gold is not valuable. The same countries that do not allow gold as a currency also keep gold in their vaults. Go figure. But the amount of things you can buy with gold fluctuates dramatically, which reflects the true nature of the metal.
It’s a commodity.
If gold were a currency, then we would discuss it in terms of stable valuation. A piece of eight (one-eighth of a gold coin) would buy a good meal, including wine. Or, it might buy 10 hours of labor, or represent half a car payment.
These values would not change very much, if at all, over the course of a year. Gold would be the basic measure we used to establish value for the everyday things in our lives, like food, labor, and shelter.
But we don’t. Instead, gold is free to gyrate wildly, up and down, or not at all. We talk about this movement in dollars, which brings us to the other side of the conversation – greenbacks.
The value of a dollar changes over time, but usually very slowly, as do our payments for labor and shelter. But it does change, and can be affected by many things, including the U.S. deficit and central bank actions.
If we collectively believe the value of the dollar is falling, then we’ll demand more of them as payment for goods and services. We’ll also have to shell out more dollars when we buy commodities, like oil and copper. Since gold is a commodity, we’ll have to pay more for that as well.
But none of this changes the fact that gold is not money today.
Instead, it is a commodity with very special properties. It is concentrated (a high value by weight), doesn’t disintegrate, rot, or go bad, can be molded into any form, and exists in limited quantities. These are some of the reasons why many people around the world think of gold as valuable.
But beyond all of its physical qualities, gold’s most valuable quality is the fact that so many people put their faith in it, which is something that cannot be fully explained. Why is this metal, which has few uses beyond decoration, considered a standard of value around the world and across thousands of years?
I don’t have the answer, and luckily I don’t need it.
Instead, I can rest easy in the knowledge that gold moves like other commodities, just easier to haul around in small quantities. The value of the metal is simply the flip side of our common view of the currency in question. It’s not because gold is money.
Follow me on Twitter @RJHSDent